The Independent Market Observer

Monday Update: Economy Solid, But Housing Continues to Weaken

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Jul 23, 2018 1:46:01 PM

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Monday updateLast week was a busy one for economic news, with wide-ranging reports including retail sales, industrial production, and manufacturing. We also got testimony before Congress from Fed Chair Jerome Powell, which shed some light on how the Fed is likely to react to rising inflation. This week, we will also cover a lot of data, starting with housing.

Last week’s news

On Monday, the retail sales report showed growth of 0.5 percent for June, down somewhat from 0.8 percent in May. Still, this is a very strong level, supported by a recovery in auto sales growth and in line with expectations. Core retail sales, which exclude autos, also showed slower growth. They were down from 0.9 percent in May to 0.4 percent in June, although slightly above expectations of 0.3-percent growth. Earlier months were also revised upward significantly. After a strong series of gains, these numbers represent healthy growth and a confident consumer who continues to be willing to spend.

On Tuesday, the industrial production report bounced even more significantly than expected. It went from a downwardly revised decline of 0.5 percent in May to a gain of 0.6 percent for June on an increase in oil drilling as prices rise. Manufacturing also showed a larger-than-expected improvement. It went from a downwardly revised 1-percent decline in May (largely caused by a fire that disrupted auto industry supply chains) to a gain of 0.8 percent for June on a rebound combined with continued expansion. As with retail sales, the numbers signal continued economic growth.

We also got a look at the housing sector on Tuesday when the National Association of Home Builders (NAHB) survey was released and on Wednesday when the housing starts report was released. The NAHB survey stayed steady at 68 for July, the same as in June. This result came against an expected small increase to 69 and after a pullback last month on a drop in lumber prices. Housing starts also underperformed. They dropped from 1.35 million (annualized) in May to 1.173 million in June, well below the expected 1.33 million. Building permits also came in well below expectations, declining from 1.301 million to 1.273 million.

Finally, Chair Powell testified before Congress last week in the regular semiannual session. He was confident in both the economy and the inflation outlook, suggesting that the current interest rate increase expectations remain in place. He made little note of trade policy risks and did not appear to be overly concerned. Markets reacted positively to the combination of economic optimism and the suggestion of steady interest rate policy.

What to look forward to

On Monday, the existing home sales report came in weak. Sales dropped from a downwardly revised 5.41 million (annualized) in May to 5.38 million in June, well below the expected 5.48 million. Affordability is declining, which may be starting to affect demand. On Wednesday, the new home sales report is expected to show a decrease from 689,000 in May to 670,000 in June (annualized) on continued shortages of supply. After the sector’s weak report last week, these releases will provide a further look into whether housing is, in fact, rolling over.

On Thursday, the durable goods orders report is expected to show a swing from a decline of 0.4 percent in May to a gain of 2 percent in June. While this result would be positive, it would be primarily due to a surge in aircraft orders, making it less reliable as an economic indicator. The core orders, however, which exclude transportation, should also improve; a gain of 0.4 percent in June is expected, after a flat report in May. Manufacturing and industrial companies continue to benefit from both business investment here in the U.S. and stronger demand abroad.

On Friday, the first official estimate of second-quarter gross domestic product is expected to show rising growth, from 2 percent in the first quarter to 4 percent in the second quarter. This result would be due to increased consumer spending and exports, particularly from a surge in soybean exports to China. There may be some upside here as well, depending on the growth of imports. A strong second quarter has been anticipated for some time. So if the report comes in solid, it will simply meet expectations.

Have a great week!

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