Monday Update: Housing Data Weak But Momentum Still Positive

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Apr 25, 2016 3:47:28 PM

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monday updateLast week’s economic reports were, once again, weaker than expected. Housing news was mixed, with industry sentiment remaining healthy but failing to improve while starts pulled back. On the other hand, sales of existing homes jumped, reversing a decline in the previous month.

This week’s data should give us a bigger-picture view, with looks at business orders; consumer confidence, income, and spending; the first estimate of first-quarter economic growth; and the minutes from the Fed's April meeting.

Last week: all about housing

Last week’s data revolved around housing, both the industry and the market:

  • The National Association of Home Builders survey was stable, at 58, against an expected increase to 59. Despite falling short of expectations, it remains at a reasonably healthy level associated with consistent but slow growth.
  • Housing starts also disappointed, with a decline of 8.8 percent in March, from 1.178 million to 1.089 million—more than reversing the previous month’s gain of 5.2 percent and falling below expectations of a smaller decline to 1.166 million.
  • Building permits showed a similar drop, down 7.7 percent to 1.086 million.

Despite recent weak data, however, the long-term trends remain positive, with the 12-month average growth rate for single-family homes reaching the highest level since July 2008. On a year-to-year basis, starts are up 14.2 percent and permits are up 4.2 percent. Even with higher monthly volatility, there is still positive momentum.

That momentum showed up in sales of existing homes, which surprised to the upside, rising to 5.33 million from 5.08 million, an increase of 5.1 percent, and beating expectations of an increase to 5.28 million. The March report reversed a decline in the previous month and brought the 12-month average to the highest level since October 2007. Prices also continue to rise, up by 5.7 percent year-on-year.

A busy week ahead

New home sales disappoint. The stream of housing data continues this week with today’s release of new home sales. These figures also disappointed, down 1.5 percent to 511,000, following the prior month’s increase of 2 percent. In context, this is a relatively small miss (9,000 out of 520,000) and absolute sales levels remain healthy, but the lack of improvement validates the weak starts and permits data from last week.

Business orders expected to improve. Durable goods orders data will be released on Tuesday. After a weak result last month, substantial improvements are expected.

  • The volatile headline figure, which includes aircraft, is expected to rebound from a loss of 3 percent to a gain of 1.9 percent on an increase in Boeing orders, from 2 planes to 69.
  • The more representative core durable goods orders, which exclude transportation, are also expected to rebound, although more modestly, from a loss of 1.3 percent to a gain of 0.5 percent, thanks in part to an increase in orders from the defense sector.

Both numbers would suggest that the manufacturing sector continues to stabilize, and that would be very good news.

Consumer income expected to rise; confidence and spending weaker. Also on Tuesday, the latest reading of the Conference Board’s Consumer Confidence Index will be announced. It is expected to drop mildly, from 96.2 to 95.6, but to remain at a level consistent with continued spending growth. There is downside risk with this number, as gasoline prices have risen by more than 6 percent over the past months, and the University of Michigan confidence survey dropped by more. Even with a larger decline, however, this figure would still remain at growth levels.

For another look at consumers, the personal income and spending report will be released on Friday. Income growth is expected to increase from 0.2 percent to 0.3 percent on an increase in hours worked. There may be some upside risk with this number, but even matching expectations would be a very positive result.

Spending is expected to be less positive, but still to post an increase, from growth of 0.1 percent to 0.2 percent, driven largely by declines in motor vehicle sales and in utility spending. The trend of income rising faster than spending should continue to both slow current growth and make the growth we do get more secure—brightening the prospects for future sustainable growth. For the moment, however, the expected results suggest more of the same.

GDP growth expected to drop. The economic slowdown we've seen this year is expected to be confirmed on Thursday, with the release of the first estimate of gross domestic product for the first quarter. Growth is expected to have declined from 1.4 percent to 0.7 percent on an annualized quarterly basis, held back by slower consumption growth and weak trade performance, as exports dropped by around 2 percent while imports grew by 5 percent on an annualized basis.

On the positive side, it's expected that investment continued to grow and government spending contributed to growth as well. Keep in mind that this is a backward-looking indicator, incorporating data we already knew, and growth is expected to accelerate in the remainder of the year.

Fed not expected to act. The last event to watch is the April meeting of the Federal Open Market Committee, which sets interest rates. Although there is a possibility of an interest rate increase, neither the markets nor the commentators are expecting one. The key question will be whether or not the meeting minutes signal that a rate increase is likely in June. With international risks receding, June may be back in play; if so, the minutes should give a hint of that.

Have a great week!

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