Monday Update: Housing Slows Further but Growth Strong Overall

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Jul 30, 2018 1:16:26 PM

and tagged In the News

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Monday updateLast week gave us a look at a wide range of data, starting with housing. This week will be just as busy, concluding with an always important look at employment.

Last week’s news

Last Monday’s existing home sales report extended the weak housing news we’ve seen recently. Sales dropped for the third straight month—from a downwardly revised 5.41 million, annualized, in May to 5.38 million in June. Sales are also down on a year-to-year basis. Supply continues to be a constraint, and affordability is declining, which may be starting to affect demand.

The new home sales report, released last Wednesday, also showed a decline. Here, sales were down from 689,000 in May to 631,000 in June. This was well below expectations of 668,000 and the lowest level since last October. Supply is less of a concern in this sector—it’s at its highest level since March 2009—and sales are still up year-on-year, so this market is healthier than the existing homes market. Nevertheless, the positive trend is weakening.

On Thursday, the durable goods orders report gave us a look at business investment. The headline index showed a positive swing, rising from a decline of 0.4 percent in May to a gain of 1 percent in June. Despite the improvement, this was below expectations for a 2-percent gain. Further, the gain was due primarily to a surge in aircraft orders; as such, it is not the most reliable economic indicator. The core index, however, which excludes transportation, also improved. May growth was revised up from flat to 0.3 percent, and it was followed by 0.4-percent growth in June. After a first-quarter slowdown, business investment may be picking up, and manufacturing and industrial companies continue to benefit from both business investment here in the U.S. and stronger demand abroad.

Finally, on Friday, the first official estimate of GDP growth for the second quarter showed faster growth. Growth for the first quarter was revised up from 2 percent to 2.2 percent, and second-quarter growth came in at 4.1 percent, which was slightly below expectations for 4.2 percent. The acceleration came from increased consumer spending and exports, particularly a surge in soybean exports to China. The report also incorporated benchmark revisions, which happen every five years, but they made no significant difference in overall results. This quarter’s strong growth benefited from several one-time factors, so it is expected to slow through the remainder of 2018.

What to look forward to

This will be a very busy week for economic news.

On Tuesday, the personal income report is expected to show steady income growth of 0.4 percent for June, just as it did in May. Personal spending growth is expected to rise from 0.2-percent growth in May to 0.4-percent growth in June. While the income numbers look reasonable, there may be some downside risk on spending due to weak retail sales growth. In any case, these numbers would indicate continued expansion.

Also on Tuesday, the Conference Board’s survey of consumer confidence is expected to show a slight pullback from 126.4 to 126. This marginal change would not be cause for concern, as the index would still be coming in at a historically high level.

On Wednesday, the Institute for Supply Management (ISM) Manufacturing index is expected to pull back from 60.2 in June to 59.2 in July. As this is a diffusion index with values greater than 50 indicating expansion, this decline would still be a strong result. Manufacturing has been supported by high international demand and a weak dollar. While these factors are changing, the effects persist.

Also on Wednesday, the Federal Open Market Committee (FOMC) will complete its regular meeting with a public statement. The FOMC is not expected to take any action at this meeting, and there will not be a press conference, so the markets will simply be looking for guidance on whether a September rate hike is coming.

On Friday, the international trade report is expected to show an increase in the trade deficit from $43.1 billion in May to $44.6 billion in June. There may be some downside risk here, as the advance goods trade deficit widened and the tariff-driven boost from Chinese purchases of soybeans will drop off. The dollar’s recent appreciation will also weigh on trade. This report would suggest that the second quarter’s improved trade balance is not likely to last.

Also on Friday, the ISM Nonmanufacturing index is expected to stay steady at a nine-month high of 59.1 for July. This result would indicate continued strong growth.

Finally, Friday’s employment report should continue to show solid growth. Job gains are expected to drop from 213,000 in June to a still strong 190,000 in July. The unemployment rate is likely to drop from 4 percent to 3.9 percent, and the average workweek should stay steady at 34.5 hours. Wage growth is also expected to remain at 0.3 percent for the month and 2.7 percent for the year. This result would add to the current string of strong reports and point to continued economic growth.

Have a great week!

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