September Existing Home Sales and Leading Indicators and October Philadelphia Fed Manufacturing Index

KEY DATA:  Sales: +7%; Over-Year: -2.3%; Prices (Over-Year): 13.3%/ LEI: +0.2%/ Phila. Fed (Manufacturing): -6.9 points; Orders: +14.9 points

IN A NUTSHELL: “There may not be a lot of homes for sale, but those that are on the market are getting purchased quickly and at high prices.”

WHAT IT MEANS: The housing market remains in good shape, even if the insanity of last year is fading.  The National Association of Realtors reported that existing home demand rebounded sharply in September, with gains spread fairly evenly across the entire nation.  The sales pace was the highest since January, which given the lack of inventory, is amazing.  Median prices have receded from the record set in June, but they are still up double-digits over the year. 

That growth is slowing is not a surprise and the moderation should continue.  The Conference Board’s Leading Economic Index rose modestly in September, after having surged in July and August.  So yes, conditions are cooling, but just a touch.  The Conference Board noted that it “continues to forecast strong growth ahead: 5.7 percent year-over-year for 2021 and 3.8 percent for 2022.”  Hard to complain about those numbers.

The manufacturing sector has been battered by the messed up global supply chain, but conditions are not terrible.  The Philadelphia Fed’s reading of manufacturing activity in the Mid-Atlantic region was that activity expanded at a somewhat more moderate pace in early October.  Yet orders surged, backlogs built faster, hiring increased and expectations improved.  The big issue is prices.  Over seventy percent of the firms reported paying more for their inputs, while nearly sixty percent were able to raise their prices.  With pricing power nearly universal, it is hard to argue, as Fed Chair Powell continues to do, that high inflation is transitory.   

IMPLICATIONS:  There are all sorts of worries about inflation, supply chain snafus and labor shortages, but the economy continues to chug along quite solidly.  Yes, the supply shortages are slowing growth, but activity is hardly collapsing.  People are buying houses, it seems that every time a vehicle shows up on the lot, it is purchased, and incomes are increasing.  It’s unrealistic to believe that growth above 5%, 4% or even 3% is sustainable for an extended period.  It’s nice to dream big, but when it comes to potential growth, you can exceed 2% greatly for only so long.  Right now, we are doing that, so let’s enjoy it.  Without a steady easing in growth, the bottlenecks we are seeing could last significantly longer than currently expected, raising serious concerns about how long inflation will remain elevated.  When large firms are talking $21 per hour wages, which will rise to $25 per hour, it is clear they believe there has been a shift in the supply of labor and that labor shortages are not going away anytime soon.