The Independent Market Observer

Monday Update: Housing Market Remains Healthy

Posted by Sam Millette

This entry was posted on Feb 24, 2020 11:52:59 AM

and tagged In the News

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In his Monday Update, Commonwealth’s Sam Millette looks ahead to important releases on consumers, housing, GDP growth, and durable goods.Last week’s economic updates highlighted the housing sector, which continues to hum along at a healthy rate. This week’s reports will cover broader territory, as we wrap up the month with important releases that hit on most major areas of the economy.

Last week’s news

We started the week with Tuesday’s release of the National Association of Home Builders Housing Market Index for February. This measure of home builder confidence slid from 75 in January to 74 in February, against expectations to remain flat. The index sits two points below the 20-year high of 76 set in December, so this modest decline is nothing to worry about. Results were mixed geographically, with confidence reaching new highs in the South and Northeast and decreasing slightly in the West and Midwest. Mortgage rates sit near three-year lows that are driving prospective buyers into the market. Home builder confidence has rebounded from a three-year low of 58 in December 2018, as demonstrated by the home construction boom beginning at the end of 2019. The high confidence exhibited in 2020 bodes well for continued construction growth.

We didn’t have to wait long to see the positive impact of high home builder confidence, as the building permits and housing starts reports for January, released on Wednesday, came in better than expected. Permits increased by 9.2 percent, against expectations for a 2.1 percent increase. Starts declined by 3.6 percent, a far better result than the 11.2 percent drop expected by economists. These two data points can be very volatile on a month-to-month basis, but they’ve showed a clear, continuing upwards trend since the second half of 2019. Permits now sit at their highest monthly level since 2007, while starts are at their second-highest monthly level over the same time period. Given this strength, the monthly volatility is nothing to worry about.

Wednesday also saw the release of January’s Producer Price Index, which provided a surprise to the upside. Headline prices increased by 0.5 percent during the month, against expectations for a 0.1 percent rise. Year-over-year producer inflation went up to 2.1 percent, a figure well above December’s year-over-year rate of 1.3 percent. Core producer inflation, which strips out the effect of volatile food and energy prices, showed similar growth, going up 0.5 percent monthly and 1.7 percent year-over-year. Most of these increases can be attributed to higher costs for services. These costs, which make up roughly 65 percent of the headline figure, increased by 0.7 percent during January. Despite the unexpected growth, year-over-year inflation remains below recent highs set in 2018 and 2019. Notably, the Fed has indicated a willingness to let inflation run above its stated 2 percent target for the time being.

Speaking of the Fed, the minutes from the January FOMC meeting were released on Wednesday. They revealed a unanimous vote to keep the federal funds rate unchanged. Fed members appeared to be a bit more optimistic about the economic expansion than they were at their December meeting, despite some concern about the spread of the coronavirus and its potential effect on global growth. Plans for the winding down of the Fed’s involvement in the repurchase market in the second quarter were also discussed. Overall, the impact of this release was minimal. It echoed much of Fed Chairman Jerome Powell’s statements during his semiannual Monetary Policy Report to Congress earlier in the month.  

We finished the week with Friday’s release of the existing home sales report for January. Sales declined by 1.3 percent during the month, a better result than the expected 1.8 percent decline. Despite this drop, year-over-year sales are up nearly 10 percent. This result marks seven straight months with year-over-year growth for existing home sales, continuing the strong turnaround from the prolonged slowdown seen throughout 2018 and the start of 2019. Housing’s rebound has been one of the bright spots of the economic expansion over the past few quarters. The January numbers indicate that prospective home buyers are continuing to drive this sector.

What to look forward to

On Tuesday, the Conference Board Consumer Confidence Index for February will be released. Economists are forecasting a modest increase, from 131.6 in January to 132.1 in February. This result would match the month’s gains in the University of Michigan consumer sentiment survey. Consumer confidence hit a five-month high in January, after remaining rangebound for the fourth quarter. Higher confidence levels support additional spending growth, so an increase would certainly be regarded as a tailwind for future growth. 

On Wednesday, January’s new home sales report is scheduled for release. Sales are expected to increase by 2.3 percent during the month, up from a modest 0.4 percent decrease in December. Compared with existing home sales, new home sales are a smaller and more volatile portion of the housing market. Still, they showed a notable uptick in the second half of 2019. If the January estimate proves accurate, it would represent the fastest pace of new home sales since 2007, providing another example of the housing sector’s strength.

On Thursday, we’ll get the second estimate of fourth-quarter GDP growth. Economists believe that the annualized pace of economic growth in the fourth quarter will be revised up from 2.1 percent to 2.2 percent. Personal consumption is expected to remain flat at a 1.8 percent annualized growth rate. If the estimates hold, they would mark an acceleration from the 2.1 percent growth rate achieved in the third quarter. Economists had previously forecasted a 2 percent growth rate for the fourth quarter, so any additional improvements from the early estimate would certainly be positive.

Thursday will also see the release of the preliminary durable goods orders report for January. Orders are set to decline by 1.5 percent, following a much-better-than-expected 2.4 percent increase in December. Headline durable goods orders experienced a high level of monthly volatility during the fourth quarter, primarily driven by swings in defensive aircraft orders. Core durable goods orders, which strip out the effect of volatile transportation orders, are set to increase by 0.2 percent, up from a 0.1 percent decline in December. Core durable goods orders are often used as a proxy for business investment, so this anticipated increase would be quite welcome, especially given the decrease in core orders in November and December. Previously released surveys showed business confidence picking up in January, so there’s reason to believe that investment will also increase. This would be a good sign for overall growth, given the lack of business investment throughout much of 2019.

On Friday, January’s personal income and personal spending reports will be released. Both are expected to show 0.3 percent monthly growth. These results would be a solid start to the year for consumers, who were the major drivers of the economic expansion in 2019. Income and spending grew at similar rates throughout 2019, indicating that spending growth will be sustainable. As long as consumers are earning more and willing to spend more, the prospects for continued growth remain strong.

Finally, we’ll finish the week with the second and final reading of the University of Michigan consumer sentiment survey for February. Economists expect to see a slight pullback for the index from the midmonth reading of 100.9 to 100.6 at month-end. The first midmonth estimate came in above economist forecasts of 99.5, so this anticipated decline would still leave the survey above initial estimates for the month. Consumer sentiment has so far remained impressively resilient despite the continued spread of the coronavirus from China. It will be important to keep monitoring this sector, however, given the relationship between rising confidence and spending growth.

That’s it for this week—thanks for reading!

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