Monday Update: Housing Moderates, Business Investment Disappoints

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Nov 26, 2018 1:56:05 PM

and tagged In the News

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Monday updateLast week was a short but busy one on the economic front, with several reports on housing and a look at durable goods demand. This week, we’ll see a wide range of information on where the economy is going.

Last week’s news

On Monday, the National Association of Home Builders (NAHB) survey was released. It came in well below expectations, going from 68 for October (after a surprise tick up) to 60 for November. This decline came despite the fact that the industry is reporting strong prospective buyer numbers and that lumber prices have dropped to a recent low. It suggests that developers expect the housing slowdown to continue. This disappointing result also called into question the expectations around other housing reports. But, despite that, they came in at healthy levels.

The housing starts report, released on Tuesday, was in line with expectations. There was a small increase after a decline last month, rising from 1.20 million in September to 1.228 million (annualized) in October. On Wednesday, the existing home sales report also showed sales increasing slightly, from 5.15 million in September to 5.22 million in October. This result was slightly ahead of expectations. Housing in general appears to be in a slowing trend. But this data suggests that the slowdown might be moderating and that the NAHB survey results might be overdone.

The durable goods orders report was released on Wednesday. Here, the headline index disappointed significantly. The September gain of 0.7 percent was revised down to a decline of 0.1 percent, with an additional 4.4-percent decline in October. This result was well below the expected 2.6-percent decline, on a decrease in aircraft orders. This headline index is notoriously volatile, as we can see. The core index, which excludes transportation and is a much better economic indicator, also did worse than expected, however. September’s flat result was revised downward to a decline of 0.6 percent, while October growth came in at 0.1 percent, well below the expected 0.4-percent growth. This is a weak report across the board, suggesting business investment may continue to slow for the remainder of the year, which would be a headwind into 2019.

What to look forward to

On Tuesday, the Conference Board Consumer Confidence Index is expected to pull back slightly, from an almost two-decade high of 137.9 to a still very high 136.2. This pullback would be due to rising gas prices and recent stock market turbulence. Even with the pullback, confidence would remain close to its highest level in the past 20 years and would be supportive of continued growth.

On Wednesday, the second estimate of third-quarter gross domestic product growth is expected to be slightly better than the previous estimate, coming in at 3.6 percent. This number would indicate continued healthy growth, but it would also suggest that growth at the level of the first quarter may not be sustainable.

Also on Wednesday, the new home sales report is expected to improve, from 553,000 to 583,000, after a disappointing result last month. If the number comes in as expected, it will signal that while housing growth continues to slow, the downtrend may not be quite as bad as last month’s data suggested.

On Thursday, the personal income and spending report will be released. It is likely to show that personal income rose by 0.4 percent in October, up from 0.2 percent in September, due to faster job and wage growth. There may be some upside risk here, as hours worked also likely rose last month. Personal spending is expected to stay steady at 0.4 percent in October, the same as in September, due to a rebound in services spending. This result would indicate that spending growth remains at a healthy level and would be well supported by income growth.

Finally, on Friday, the minutes from the November Fed meeting will be released. Markets are looking for confirmation that a rate hike is on the way in December and for the Fed’s reaction to weaker business investment. They will also be looking, probably in vain, for any hints that the Fed may slow or delay the rate increase process.

Thanks for reading and have a great week!

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