January Existing Home Sales

KEY DATA:  Sales: -1.3%; Over-Year: +9.6%; Median Prices (Over-Year): +6.8%

IN A NUTSHELL:  “The scarcity of existing homes on the market continues to limit sales.”

WHAT IT MEANS:   The meek have been leading way in the economy as housing has gone from okay to Tony the Tiger land: Grrrrrrrreat!  Existing home demand is generally following the pattern set by new homes and starts. Sales eased in January, which is not what I had expected.  I thought we would see a bit of a rise.  The drop was pretty much equal in both single-family and condos.  But remember, these are closings, compared to contract for new homes, so we may see a major pick up over the next couple of months.  Three of the four regions posted gains or were flat.  Only a sharp decline West kept the sales pace down.   Compared to January 2019, though, demand surged.  As for prices, they were still up pretty sharply over the year.  The key for both prices and sales is the inventory number.  It stands at 3.1 months.  That is, at the current selling pace, the number of homes listed would be depleted in a little over three months.  That is up slightly from the historic low set in December.  In other words, there are few homes to be bought so there are few sales to be made and with demand still decent, prices should be rising solidly.   

MARKETS AND FED POLICY IMPLICATIONS:  Existing home sales are a lagging indicator in that they represent purchase decisions made a month or more in the past.  That they are holding up pretty well is an indication that the sector is strong.  The level of home construction (housing starts) this quarter started off over 8% above the average in the fourth quarter and there is little reason to think that gain will tail off significantly.  So expect housing investment to be a key factor in growth this quarter.  But it would be nice if sales rose faster.  Home purchases translate into consumer demand for housing related goods, usually within about six month after the rise in demand.  We need something to offset the slowing in vehicle purchases if growth is to be sustained at 2% and fixing up a newly-purchased housing unit would be one source of that demand.  But homeowners seem to be entrenched and are unwilling to put their places up for sale, so don’t expect demand to rise sharply anytime soon.  Should investors worry about that?  Only if they care about economic fundamentals and I am not really sure where they stand on that.  Actually, I am not sure they really care that much.  But the Fed does and while no Fed member is out there saying there is irrational exuberance in the markets, they have to be wondering if the disconnect between economics, earnings and stock prices could create some real issues going forward.  Indeed, I think the recent spate of comments about how to manage in an environment of low interest rates is a warning that there is not much rate-cut ammunition left.  That, of course, is a problem created in part by last year’s rate reductions, which we know did nothing but hype the markets even more.  It should be an interesting spring and summer, when the full impacts of the coronavirus start showing up.      

January Leading Indicators, February Philadelphia and New York Fed Manufacturing Indices and Weekly Jobless Claims

KEY DATA:  LEI: +0.8%/ Phila. Fed (Manufacturing): +19.7 points/ Empire State Survey: +8.1 points/ Claims: +4,000

IN A NUTSHELL:  “More good economic data, but again, they seem to be powered by mild weather.”

WHAT IT MEANS:  My decision to buy snow insurance (a snow blower that is now collecting dust) is working out quite well.  It looks like we will not have any snow in Philadelphia this month and we have had less than one inch so far this season.  I love it!  My insurance plan is even helping drive what on the surface looks like a rebound in the economy.  Housing is having a great winter and that, at least in part, powered a sharp rise in the Conference Board’s January Leading Economic Indicators index.  The huge decline in jobless claims, which is slowly unwinding, also played a major role and most of the components were upThe LEI had declined in December and was up minimally in November, which is why I raise doubts about the sustainability of the increase.  What the seasonal factors giveth, they ultimately taketh away.

Still, I will take the strong numbers while we have them, especially given the problems that China, Europe and the developing nations are having given the coronavirus.  It hasn’t just been housing that has benefitted from the winter.  It looks like the manufacturing sector is improving as well.  Both the New York Fed’s Empire State Index and the Philadelphia Fed’s Business Outlook Survey jumped in February.  Orders soared and backlogs went from shrinking to increasing in both manufacturing surveys.  But while optimism rose in the Mid-Atlantic region, respondents were slightly less positive about the future in New York. 

The historic low jobless claims numbers are slowly moving back up to what was the “normal” level we saw during most of last year.  I say “normal” because they remain incredibly low.      

MARKETS AND FED POLICY IMPLICATIONS:It is hard to take the strong economic data as clear indicators of an economic rebound given the confounding factors of warm weather and the coronavirus.  Yes, builders are having a great time, but it is likely they are simply bringing forward some construction that they would normally due during the spring.  If that is the case, and I suspect it is, we could see some pretty ugly data during the March through June period. As for manufacturing, it is hard to know where all this new demand is coming from.  Firms are not likely seeing stronger foreign demand in this epidemic restrained environment.  Indeed, we are already seeing signs that the world economy has slowed and who knows what is the true condition of the world’s second largest economy, China. And there are no major indications that households are suddenly spending a lot more.  Thus, investors may want to operate in a vacuum and hope that the coronavirus goes away quickly, but that is a risky approach.  The Fed sees the virus risks as real, but has no idea at this point the extent of the potential damage.  For now, I will enjoy being outside when I am usually bundled up in my house and hope that the virus gets brought under control quickly and the “see no evil” investor is right in continuing to pile into the markets.

January Housing Starts and Wholesale Prices

KEY DATA:  Starts: -3.6%; 1-Family: -5.9%; Permits: +9.2%; 1-Family: +6.4%/ PPI: +0.5%; Goods: +0.1%; Services: +0.7%

IN A NUTSHELL:  “The strength in housing is a positive sign but let’s wait until the spring to see if it is real or weather-related.”

WHAT IT MEANS:  Housing had been improving at a nice, steady pace for a number of years but it suddenly broke out at the end of last year.  The January numbers seem to be supporting that stronger performance as housing starts fell relatively modestly.  There was a huge jump in December that was expected to be unwound by a sharp decline in January, but that was not quite the case.  To put things in perspective, construction activity was up by 21.6% over the January 2019 rate despite the decline.  That shows how out of control things are.  But there is an explanation: Warm weather.  Let’s wait until the spring, when new home starts would normally jump, before getting too pumped up about a potential home construction boom.  As for the details, there was a sharp decline in the Midwest, a moderate drop in the South and modest increases in the Northeast and West.  Looking forward, permit requests were up solidly across the entire nation.  The level was the highest in nearly thirteen years.  Given the really warm weather in February, we could see another pop in starts when we get the February data.

On the inflation front, producer prices jumped in January, led by a surge in services costs.   These include trade services (wholesalers and retailers) as well as hotels and financial services.  Energy and transportation prices were down.  On the goods side, besides energy, the pressures tended to be on the downside, with most components reporting declines.  Food costs were up moderately.  Looking outward, the coronavirus is slowing world demand and commodity prices are falling as a consequence.  Thus, expect wholesale costs to be soft as long as the epidemic persists. 

MARKETS AND FED POLICY IMPLICATIONS:  It looks like housing will form a base for growth in the first quarter.  But if, as I suspect, most of that increase was due to unseasonably warm weather, payback could be substantial in the spring.  I expect GDP to expand by somewhere between 1.5% and 1.75% this quarter even with a strong housing sector but if it makes it back to 2%, then we are likely looking at a really weak second quarter.  Indeed, the impacts from the coronavirus are likely to ramp up over the next few months as it will take time for China to ramp back up its manufacturing sector, when it actually can do that.  Supply chains have been disrupted and companies around the world are slowing production and sales due to the lack of supplies.  Industrial production is likely to be pretty weak across the globe and while the equity market investors may not realize it, what happens everywhere else actually does affect what happens here.  We don’t know how long this will last but the longer this goes on, the broader and deeper the effects.  The energy sector is retrenching and the last time that happened investment cratered and U.S. growth decelerated sharply.  We are not facing the same price collapse, but business investment has been weak and cut backs in the energy sector cannot help.  Thus, the first half of this year is setting up to be soft and if the epidemic lasts through the spring, don’t be surprised if there is a flat or even negative second quarter.       

January Retail Sales, Industrial Production and Import and Export Prices

KEY DATA:  Sales: +0.3%; Ex-Vehicles and Gasoline: +0.4%/ IP: -0.3%; Manufacturing: -0.1%/ Import Prices: 0%; NonFuel: +0.2%; Exports: +0.7%; Farm: +2%

IN A NUTSHELL:  “The start to the year was pretty mediocre for consumers and manufacturing.”

WHAT IT MEANS:  With the coronavirus and Boeing leading the way, the first quarter of this year is expected to be pretty slow and the first set of data seem to point to that being the case.  Take consumer spending, please.  Retail sales were mediocre in January and they reached that disappointing level only because people were able to get out and do some work around the home and visit their favorite restaurant.  Building materials and food services were up strongly.  There was a pick up in furniture demand but electronics and appliance stores did not do well.  Gasoline sales fell, but so did prices a little, so don’t look into that too much.  Clothing purchases, which had soared in December, came crashing back to earth in January.  There was really nothing pretty in this report.  The one thing that is keeping consumer demand strong is consumer confidence and the University of Michigan’s mid-month February estimate posted a gain. 

Industrial output fell sharply in January as both weather and Boeing did a number on production.  The warm weather (you notice I didn’t say global warming because we know that doesn’t exist) led to a sharp drop in utility production.  Boeing’s 737 Max assembly line halt created an equally massive decline in aerospace output.  The saving graces for this report were strong increases in vehicle, petroleum, plastics and computer production.  That kept the manufacturing decline from being really ugly. 

On the inflation front, there isn’t much.  Import prices were flat in January, though there was a moderate uptick in nonfuel costs.  Food import prices were up as were imported vehicle costs.  On the export side, agricultural prices jumped.  Chinese demand for pork is surging due to the swine flu and that is helping farmers.  It is unclear what the coronavirus will do to agricultural sales to China over the course of the year, but it is not helpful right now and that may wind up depressing U.S. food costs this spring.       MARKETS AND FED POLICY IMPLICATIONS:Estimates for the first quarter are running well below 2% and today’s data do nothing to change expectations.  The coronavirus impacts are just starting to show up and the longer this problem goes, the greater the impact.  Don’t forget that China is critical to large segments of the world economy including many non-industrialized and industrializing nations as well as the EU.  There are many countries that will be hurt significantly if this doesn’t end soon and there is little reason to expect it to do so.  The same can be said of the Boeing shut down.  The company wants to start back up before getting final approval but no one knows when that will be.  The first quarter for Boeing and their suppliers is lost and it is likely the same will happen in the second quarter.  Right now, most economists have not included a significant impact of the coronavirus in the second quarter (I am one of them), so there are hopes conditions will be a little better in the spring.  The best I can say about that is maybe.  With that in mind, it is hard to rationalize the exuberance in the equity markets, at least if you believe the economy actually matters.  The latest Blue Chip consensus has growth at or below 2% for every quarter in both 2020 and 2021.  That is not a forecast that says happy days are here again and that investors should go all in.  But they seem to be doing that so it should be interesting to see what happens if growth does disappoint.  Or, maybe investors actually like 2% growth.  Economists do, but that level of growth is hardly a prescription for strong earnings growth.

January Private Sector Jobs, NonManufacturing Activity and December Trade Deficit

KEY DATA:  ADP: +291,000; ISM (NonMan.): +0.6 point; Activity: +3.9 points; Employment: -1.7 points/ Deficit: $48.9 billion (11.9% wider)

IN A NUTSHELL:  “When winter doesn’t strike, the data can become weird.”

WHAT IT MEANS:  It’s Employment Friday week and that makes it ADP Wednesday, the day when we get a rough estimate of private sector job gains.  ADP, an employment services company, thinks businesses went crazy hiring people in January.  The estimate was for robust job gains, well above consensus.  But the details should be viewed carefully as there was a very mild month for winter weather.  For example, two sectors that are sensitive to climate quirks, construction and leisure and hospitality, added a total of 113,000 new workers.  That is way above anything that would be considered reasonable.  Indeed, Mark Zandi, chief economist of Moody’s Analytics, noted that: “Mild winter weather provided a significant boost to the January employment gain. … Abstracting from the vagaries of the data underlying job growth is close to 125,000 per month…That doesn’t mean that Friday’s job number will not be good: Just don’t assume it would be a good idea to bet the farm on a blockbuster number.

The nonmanufacturing sector accelerated in January, which really should not have been a surprise.  This segment of the economy is very sensitive to weather conditions and they were pretty good last month.  The Institute for Supply Management’s index rose a touch as activity improved solidly.  Still, the details were mixed.  Hiring moderated, orders increased a bit faster and backlogs thinned more rapidly.  The big change was in imports, which surged.  Got me why that happened. 

Remember how the trade deficit shrank dramatically in November and hopes were that things were turning around?  Well, never mind.  The shortfall rebounded sharply in December, led by a sharp increase in imports.  We bought a lot more energy products, consumer goods and technology.  Export growth was decent, but hardly as strong as the demand for foreign products.  But the only really solid segment was energy, so we are really not seeing any great demand for our products.  As for the China situation, the monthly deficit continues to narrow and the total for 2019 was $74 billion, or 17.6% less than in 2018.  That’s a big change.  Overall, the deficit narrowed modestly, less than 2% as a solid decline in the goods shortfall was partially offset by a drop in the services surplus.  Still, that was the first decline in six years.  Since that entire drop came from the huge change in the China deficit, don’t expect further declines in the years to come.  

MARKETS AND FED POLICY IMPLICATIONS:  The economy is fine and the labor market is strong, but we need to get past this warm winter.  If the better than expected economic numbers have been weather driven, we will pay for it when normal weather returns.  That’s what seasonal factors are designed to do: If you get unseasonal conditions for some months, the more typical months get killed.  So wait a few months to determine the strength of the economy.  As for Friday, the consensus is for roughly 165,000, though I am a little lower.  The ADP report argues for a number above 200,000.  Watch the details.  If this is a strong report but the major gains were in the weather-sensitive sectors, dismiss it.  As for the markets, happy days are here again, the world is great and earnings are going to skyrocket.  And if you believe that, let’s discuss my investment opportunity in a Broadway musical.  First quarter growth is still likely to be below 2%, which hardly supports the rally we are seeing in the markets.  

January Manufacturing Activity and December Construction

KEY DATA:  ISM (Man.): +3.1 points; Orders: +4.4 points; Production: +9.5 points/ Construction: -0.2; Private: -0.1%

IN A NUTSHELL:  “The manufacturing sector started expanding again in January, but it isn’t clear why that happened.”

WHAT IT MEANS:  Manufacturing had been faltering for much of 2019 and then the GM strike hit.  We got over that impediment but Boeing then shut part of its production.  Despite the chaos, the Institute for Supply Management’s manufacturing activity index jumped in January.  This was the first time since July 2019 that the measure was above fifty, which means the sector is growing.  The consensus was for the number to show activity still slowing, though at a lesser pace.  The details backed up the rise.  New orders, including exports and imports, were strong and production soared.  But hiring was still contracting and order books thinning.  We have not seen any surge in durable goods orders and while some of the trade concerns have dissipated, the solid improvement in manufacturing implied by this report is not backed by other data.  I will take the rise as a positive sign, but it would be nice to have supporting figures and a better understanding why this happened.  I will wait a couple of months before I can believe the weakness in manufacturing is behind us.

As for construction, it is largely going nowhere.  Private sector spending faded in December as a large drop in nonresidential activity overcame a solid rise in home building.  Public sector construction spending was also down, though public housing activity improved.   For all of 2019, private construction spending declined, which is a real disappointment.     MARKETS AND FED POLICY IMPLICATIONS:Let’s hope the supply managers’ measure does indeed point to better times for the manufacturing sector.  This has become a real weak link, but part of that was due to the GM strike and the problems with the 737 Max.  We don’t know how much Boeing’s assembly line shutdown will take out of growth this quarter, but it is likely to be fairly large.  And who knows how the coronavirus will affect not only the Chinese economy, but also the U.S., EU and especially the developing nations that depend upon China to buy materials.  That is why I am reticent to declare that happy days are here again.  Still, you take the good news while you can.  But it isn’t the economic data that are driving equity prices.  The ebb and flow of coronavirus news is the focus of attention.  China seems to be acting much more forcibly, but an awful lot of cats have been let out of the bag and they are hard to herd – something we cat “owners” know so well.  With no real understanding of the extent of the problem, the huge movements in the markets are both understandable and disturbing.  But until we know more, look for the wild ride to continue.

December Income and Spending, Fourth Quarter Employment Costs and January Consumer Confidence

KEY DATA:  Consumption: +0.3%; Real: +0.1%; Income: +0.2%; Real: -0.1%/ ECI (Over-Year): +2.7%; Wages: 2.9%; Benefits: +2.2%/ Confidence: +0.5 point

IN A NUTSHELL:  “Rising consumer confidence can take the economy only so far given the relatively modest gains in income.”

WHAT IT MEANS:  Yesterday’s GDP report gave us a full view of where household spending stood at the end of last year, so the December numbers only provide some additional detail.  That said, it looks like household spending is decent but there are questions about the sustainability of the pace reached last year.  On the surface, it looks like household did spend money moderately in December.  But when inflation is factored in, real consumption gains were unexceptional.  Vehicle sales, which peaked in 2016, continued to slowly tail off, while demand for nondurable products and services, when inflation-adjusted rose somewhat modestly.  The reason is simple: Income is just not growing fast enough to support even the modest to moderate spending increases.  Real disposable income, which adjusts for both inflation and taxes, declined in December, the second month in the past three that happened.  As a consequence, households had to save less and the savings rate declined.  The level is still fairly high, so households should be able to draw from their savings more to sustain the spending pace.  However, it could become more difficult for consumption to accelerate if the income gains remain tepid.

And there are few indications that businesses are willing to pay more to their workers.  The fourth quarter Employment Cost Index, which includes both wages and benefits, rose at a moderate pace.  Wage gains were solid, but benefits were up modestly over the year.  The year-over-year increase in wages and salaries peaked in 2014 and since the third quarter of 2017, it has steadily decelerated.  Firms may have switched to providing non-pecuniary benefits, which many employees prefer, but that does nothing to spending power.  The opposite is true for government, which has minimal power to provide certain types of perks.  Benefit costs are rising faster in that part of the economy but wage gains are slower. 

With jobs plentiful and the unemployment rate at historic lows, it should not be a surprise that consumer confidence remains high.  The University of Michigan’s Consumer Sentiment Index rose modestly in January, but the level is only slightly below the peak in this cycle that was reached in March 2018.  The current conditions measure edged down while expectations improved.  Both are at quite high levels as well.  MARKETS AND FED POLICY IMPLICATIONS:The administration continues to insist that the economy will grow at a 3% pace or even more.  We could get a quarter here and a quarter there of stronger growth, but over an extended period, there are no factors out there that suggest that will will happen.And there is nothing wrong with 2% growth.  Yes, it is back to the future in that the “dreaded Obama growth rate” (similar to the Dread Pirate Roberts) has returned.  But as I and many other economists have argued, that is trend growth.Given the tight labor markets, growth well in excess of trend could put a major strain on labor markets and the ability to restrain wages could dissipate rapidly.  Which means we don’t even want 3% growth, unless rising inflation and interest rates is your preferred goal.  It appears that trend growth can be sustained for a while longer without creating major bubbles, so let’s embrace it not attack it.

December Durable Goods Orders, January Consumer Confidence and November Home Prices

KEY DATA: Orders: +2.4%; Ex-Transportation: -0.1%; Core Capital Goods: -0.9%/ Confidence: +3.4 points/ Case-Shiller National: +0.5%; Over-Year: +3.5%

IN A NUTSHELL:  “Businesses remain cautious about investing and as long as that continues, the economy will only muddle along. ”

WHAT IT MEANS:  I keep saying that the consumer needs some help and I keep reporting that businesses are not willing to provide that support.  That was true again in December.  Yes, durable goods orders did surge during the month, but two-thirds of the gain came from defense aircraft orders.  Now if you consider it absolutely fine that government spending drives the economy, well that should not be an issue.  But for those of us who think businesses should invest, especially given the massive tax breaks they received, the durable goods report was another disappointment.  For all of 2019 compared to 2018, core capital spending (nondefense, nonaircraft) increased by less than one percent.  That is not good. The weakness in the latest report was essentially across the board as there were order declines in the primary metals, machinery, electrical equipment, computers, motor vehicles and nondefense aircraft sectors.  Backlogs are shrinking and with inventories rising, it doesn’t look good for industrial production.

Meanwhile, consumers remain really happy.  The Conference Board’s Consumer Confidence Index rose solidly in December led by a jump in the Present Situation component.  Views on current business conditions and the labor market improved.  Optimism about the future also picked up, especially when it came to expectations of future employment opportunities. 

As for the housing market, there are growing signs that conditions are getting a little better, at least when it comes to prices.  The S&P CoreLogic Case-Shiller U.S. National Home Price Index increased strongly in November and the year-over-year gain accelerated.  On a seasonally adjusted basis, every one of the major metro areas posted a rise in values, something that has not been seen often lately.   MARKETS AND FED POLICY IMPLICATIONS:Jobs are plentiful and consumer confidence is high, so why isn’t the economy growing strongly?  The problem remains the cautiousness of the business community and the ebbing gains in household income.  Capital spending is moribund and the major impacts of the 727 Max debacle are still to be felt.  Boeing’s assembly line shut down is just starting to filter through the system.  But it isn’t just aircraft.  There are few sectors where investment spending is strong.  Indeed, for all of 2019, total durable goods orders were down 1.5% compared to 2018.  Yes, taxes matter, but so do expected returns.  Uncertainty lowers the projections and as we saw last year, reduces capital spending.  In addition, while restraining wage gains may be a goal of businesses, it also limits consumer spending capacity.  So, it may be fun to say the economy will soar this year, but you also have to say where that added demand will come from and right now, that doesn’t look like it is coming from anywhere.  Which brings us to the Fed, the coronavirus, equity prices and interest rates.  Mr. Powell showed at the end of 2018 that equity markets are critical to Fed policy.  The only major risk to growth right now is the possibility of an epidemic that harms trade and the Chinese economy.  If that happens, we could see a consistent decline in the markets.  Given the 2018 experience, calls would be coming for the Fed to cut rates, even if Mr. Powell knows that the economic impacts of the epidemic would disappear with the problem being brought under control.  But Mr. Powell used much of his ammunition last year fighting a phantom problem.  The economy didn’t fall apart and the interest sensitive sectors didn’t respond to the rate cuts.   Will he fight another war against a phantom enemy?  Who knows?  But if he does, he will likely have to use up the rest of his interest rate bullets.  How many pyrrhic victories can the Fed afford?

December New Home Sales

KEY DATA:  Sales (Month): -0.4%; 2019 vs. 2018: +10.3%

IN A NUTSHELL:  “Builders had a good 2019, but sales look like they plateaued at the end of the year.”

WHAT IT MEANS:  If the economy is going to pick up any steam, the housing sector needs to play a key role.  While the existing market did fine at the end of the year, sales of new homes were down modestly in December.  That was the third consecutive monthly drop.  Comparing 2019 to 2018, sales soared.  But even there, we have to read the data carefully.  The East and Midwest posted sharp declines in annual sales. However, double-digit gains in the South and West overwhelmed those cut backs.  But there was some question about those increases, especially in the West.  In December 2018, sales in the West were the lowest in over three years.  However, they doubled – yes doubled – from that pace in December 2019.   That makes no sense.  So, you have to conclude that the large increase in annual sales was somewhat overstated.  Stepping back from the data anomalies, it is likely that demand is improving somewhat, but it is hard to believe there will be any major increases going forward, especially given the limited supply of homes on the market. 

The Dallas Fed’s Texas Manufacturing Outlook Index rose a touch in January, though the details were better than the headline number.  New orders and production levels jumped, while wage gains continued to accelerate somewhat.  What kept the overall index down was weakness in hiring, hours worked and capital expenditures.  In addition, order books continued to thin, though not quite as quickly as they had been.  Expectations did improve.  At least for one part of the country, manufacturing is improving.  MARKETS AND FED POLICY IMPLICATIONS:Clearly, investors are concerned about the potential impacts of the coronavirus.  Given China’s lockdown of millions of people, there is reason to worry about how much further it will spread and what the short-term impacts will be on Chinese and world economic growth. It is easy to say that in past health crises similar to this, the actual effects were a lot less than what were feared and we can hope that is the case once again. Unfortunately, we just don’t know and uncertainty is never good for the economy or the markets.  Given the U.S. is expanding at a modest to moderate pace and there are few if any indicators pointing to a major acceleration in growth, any negative impact could push the pace of activity toward quite low levels.  But, we just don’t know.  Thus, the monthly data should take on added importance, as it would be nice to know we have a buffer just in case the health issues do have a negative impact on the economy.  But for now, the only thing that can be concluded is that the economy is in decent shape.  That should keep Fed Chair Powell from panicking again if the markets decline, but who knows what he is trying to accomplish.

December Housing Starts and Permits, Industrial Production and November Job Openings

KEY DATA:  Starts: +16.9%; 1-Family: +11.2%; Permits: -3.9%; 1-Family: -0.5%/ IP: -0.3%; Manufacturing: +0.2%/ Openings: -561,000; Hires: +39,000

IN A NUTSHELL:  “The surge in home construction was an eye-opener, but outsized gains are usually aberrations so don’t get too excited.”

WHAT IT MEANS:  Wow, what a housing number.  At least that was the initial reaction to the huge rise in housing starts.  Indeed, the level of activity reached a thirteen-year high.  Gains were not just in the volatile multi-family segment, which posted a nearly thirty percent rise, but they were in single-family as well.  The increases were spread across the entire nation and the only negative was a decline in single-family construction in the West.  On other hand, permit requests dropped.  They were down in the Northeast and the South but improved somewhat modestly in the Midwest and West.  When you see this type of outsized rise, the initial reaction is to think that conditions may be changing.  But the reality is that huge, unexpected increases are typically created by temporary factors.  December’s weather was warmer than usual with close to average precipitation.  Last December, the opposite was the case as temperatures were well below average and precipitation was above average.  There was likely a solid increase in construction, but much of the rise may have been due to seasonal factors.  We will know better when the January numbers come out, which I expect to be awful, so don’t rush to judgment about the housing recovery just yet.

While industrial production declined in December, largely due to the warm weather cutting utility output, manufacturing activity increased.  Despite the end of the GM strike, which aided the November numbers, the vehicle segment was still quite soft.  Assemblies were down sharply in December.  The good news was that computer, electronic and electrical equipment production is picking up steam.  Still, the outlook is uncertain.  Vehicle sales are slowly declining and Boeing is shutting it 737Max line and together, those negative as likely to lead to some pretty bleak manufacturing numbers in the first part of this year.

Job openings continue to fade, even as hiring remains solid.  Compared to November 2018, available positions were off by over eight hundred thousand.  The level was the lowest in nearly two years.  That said, there are still an awful lot of unfilled jobs waiting to be filled.  As for hiring, it has become more volatile and the trend is flattening out.  MARKETS AND FED POLICY IMPLICATIONS:The data for the final month of the year are flowing in and they are about as mixed as you can get. Yesterday’s December retail sales numbers were okay, but nothing special.  They indicated that fourth quarter consumption is not likely to be significantly below what we saw in the third quarter, which is good given that vehicle demand faded at the end of last year.  Today’s data muddy the waters a bit.  The shockingly large rise in home construction is likely to provide an unexpected boost to growth.As for the manufacturing sector, production was off compared to the third quarter.  But offsetting that could be a narrowing in the trade deficit.So, when you put things together, it looks like fourth quarter growth is coming in around 2%.  However, the first quarter of 2020 it might be a lot softer.  Decelerating wage gains and Boeing’s cut backs could restrain growth sharply.  While the phase one trade agreement might provide some temporary help to the agricultural sector, it is not clear when the additional sales will occur.  Which means that growth is likely to be at a pace that the Fed will be holding rates low for quite a while.  As for investors, sub-2% growth should be a red flag, but I have yet to see much that sways the markets from its seemingly never-ending upward drive.Economic fundamentals should matter, but I will believe that when I see it.

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