Monday Update: Housing and Industry Look Strong

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 22, 2017 4:01:44 PM

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Monday updateLast week’s data was generally positive, with housing sentiment rising even further and industrial production posting a surprisingly large gain. Although there were weak points—multifamily construction is slowing—growth is broad based and may be accelerating. Overall, the results remain positive looking forward.

Last week’s data

On Monday, the National Association of Home Builders survey, which measures industry confidence, rose to 70. This result beat expectations that it would remain steady at an already strong 68. It also took the survey to the second highest level since 2005, leaving it close to the 12-year high reached in March. The rise is particularly impressive given recent increases in costs and shortages of lots and labor.

Despite the strong industry sentiment, however, actual results for April were disappointing. Housing starts, released Tuesday, were down to 1.172 million from 1.215 million and well below expectations of 1.26 million. This is the third decline in the past four months. The decline, however, was all in the multifamily sector—as apartment markets soften and single-family starts rose. Building permits were also down, suggesting higher industry confidence is not yet supported by the facts on the ground.

We saw better results from industrial production, also released on Tuesday. The industrial production report jumped 1.0 percent, the most since February 2014. This is well above expectations for a 0.4-percent gain and up from a 0.5-percent gain the previous month. Solid gains in manufacturing, at 1.0 percent, and in mining, at 1.2 percent, were supported by an unexpected gain in utilities output. Growth was broad based, with more than 70 percent of industries reporting, and year-on-year growth rose to 2.2 percent. Overall, this was much better than expected and supports accelerating growth going forward.

What to look forward to

This week offers a look at the housing market, what the Fed was thinking at its last meeting, and whether businesses are continuing to invest.

First up on Tuesday is the New Home Sales report. The report is expected to show a slight drop, from 621,000 sales in March to 615,000 in April, due to a limited supply of less expensive homes, which sell more quickly. Such a small decline, after strong gains in February and March, would not be a concern.

The Existing Home Sales report, released on Wednesday, is also expected to show a slight decline, from 5.71 million sales in March to 5.65 million in April. In this case, any decline would be due to a lack of supply. On a seasonally adjusted basis, the number of single-family homes for sale is at its lowest level since records started in 1982. There simply are not enough homes available for sale, despite strong demand. Here again, though, such a small decline would be nothing to worry about.

Also on Wednesday, the minutes from the Federal Open Market Committee’s last meeting will be released. Although these minutes are often out of date by the time they are released, there has been little public comment since the meeting, so they might provide useful guidance on the prospect of a June rate hike. In particular, we may learn whether officials are more concerned about the low unemployment rate or the drop in core inflation.

Finally, on Friday, we’ll see the Durable Goods Orders report for April. It is expected to show a 1.8-percent decline, after gaining 0.9 percent in March, on a sharp drop in commercial aircraft orders. Such orders are extremely volatile, so even if they decline, it will not necessarily be a bad indicator. Core orders, which exclude transportation, are expected to increase by 0.4 percent in April after a flat result in March. This is slower growth than in past months, but it would still be a healthy result.

Have a great week!

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