Last week, the economic data was all about housing. While disappointing overall, there were signs of future improvement. Plus, the potential effects of the hurricanes make it hard to determine if there is real decay or only passing damage. The Fed remains confident, which suggests that the weakness might be short term, rather than something worse.
Last week’s news
On Monday, the National Association of Home Builders survey disappointed with a decline from a downwardly revised 67 (from 68) to a surprising 64—well below expectations for 67. Much of this result, however, appears to be tied indirectly to hurricanes Harvey and Irma. Extensive damage will worsen an already tight market for both labor and materials, especially lumber, rather than weakening demand. As I mentioned in last week’s Monday update, this was somewhat expected, but it still represents a weak report. This survey will be worth watching as the hurricane damage is better understood and reconstruction starts.
Housing starts, released on Tuesday, came in generally as expected, ticking up from 1.155 million in July to 1.18 million in August. This is a rebound from a surprise July decline and suggests that activity remains robust, despite the weakening sentiment in the industry. Another positive sign came from building permits. They beat expectations substantially, up by 5.7 percent in August from a 4.1-percent decline in July; they had been forecast to decline by 0.8 percent. Strong demand and limited supply for single-family homes have kept that sector increasing.
On Wednesday, existing home sales were down from 5.44 million in July to 5.35 million in August, against expectations for an increase to 5.45 million. Once again, despite strong demand, a limited amount of homes available constrained sales. Housing inventory continued to shrink, down 6.5 percent from a year ago. Also significant here is suppressed demand from the hurricanes, as buyers waited until they passed. This is another weak report, but that may be due at least in part to hurricane effects and, therefore, temporary.
Finally, on Wednesday came the close of the Federal Open Market Committee’s meeting. As expected, the Fed kept interest rates the same and continues to view the economy positively. But the statement was surprisingly hawkish. Despite uncertainty around inflation, as well as the unknown impacts of the hurricanes, the Fed still intends to increase rates again this year. This decision was more aggressive than markets had been thinking. The Fed also started the slow process of reducing the balance sheet, by slowing the reinvestment of maturing securities and payments; as expected, market reaction was minimal. Overall, there was little economic impact, but the changed tone of the statement suggests the Fed may be more active going forward.
What to look forward to
This week will give us a broad look at the economy, with housing, consumer confidence, business investment, and personal income and spending reports lined up. Some weakness is expected, but it would be due to the effects of hurricanes Harvey and Irma and should be short lived. Overall, although the data this week will be worth watching, given the storm effects, we shouldn’t give excessive weight to it.
The new home sales report, due on Tuesday, is expected to rise from 571,000 in July to 590,000 in August, with significant upside potential. This would be a rebound from a surprise decline in July, which brought sales down by almost 10 percent. Should this number come in as expected or higher, it would suggest that last week’s disappointing existing homes data was due more to supply constraints than lack of demand.
Also on Tuesday, the Conference Board’s consumer confidence survey will be released. Expectations are for a small decline—from a very strong 122.5 in August to 119.5 in September—but there is some downside risk. A substantial rise in gas prices, due to the hurricanes, may give confidence a knock this month. If so, the drop may be temporary, as price gains are starting to reverse. In any event, even with a decline, this would keep confidence at a healthy level.
On Wednesday, durable goods orders are expected to bounce back at the headline level, from a drop of 6.8 percent in July to a gain of 0.9 percent in August, on a rebound in commercial aircraft orders. Core orders, which exclude transportation, are expected to rise 0.2 percent in September, after rising 0.6 percent in August. These results would suggest that business investment continues to improve.
Finally, on Friday, we’ll see personal income and spending figures. Personal income is expected to show a 0.3-percent gain in August, down from 0.4 percent in July. Spending is expected to show more of a slowdown, from 0.3 percent in July to 0.1 percent in August. These declines would be due largely to the hurricanes, as employment and wages, as well as retail sales, were directly affected. There may be some downside risk here as well, depending on how substantial the hurricane effects turn out to be. Although this would be something to watch, any weakness would be likely to reverse in subsequent months.
Have a great week!