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Last week saw a number of important economic updates, with a focus on the housing sector and the FOMC rate decision from the Fed’s September meeting. The housing market showed signs of continued growth, as both housing starts and building permits increased by more than expected in August. This will be another busy week for updates. Highlights will include reports on durable goods orders, consumer and manufacturer confidence, and August personal income and spending.
Last Week’s News
On Monday, the National Association of Home Builders Housing Market Index for September was released. This gauge of home builder confidence increased modestly from 75 in August to 76 in September, against calls for a decline to 74. This is a diffusion index, where values above 50 indicate expansion, so this better-than-expected result signals the continued growth of home builder confidence. Last year, this index rebounded swiftly once initial lockdowns were lifted, as record low mortgage rates, high levels of home buyer demand, and limited existing homes for sale supported a surge in home construction. Since then, home builder confidence has declined from the record highs we saw at the end of 2020, due largely to rising costs for materials and labor. Now, although lumber prices have started to normalize, input costs for home builders remain high due to supply chain disruptions and labor shortages. Looking forward, continued high levels of home buyer demand should keep home builder confidence in expansionary territory. In the short term, however, high costs are expected to remain as a headwind for home builders.
On Tuesday, the August building permits and housing starts reports were released. Both measures of new home construction increased by more than expected during the month. Permits went up by 6 percent against calls for a 1.8 percent decline, and starts rose by 3.9 percent against calls for a 1 percent increase. On a month-to-month basis, permits and starts can be volatile, but these results kept both indicators at levels signaling a healthy pace of new home construction. The result for starts was largely driven by a 20.6 percent increase in multifamily homes, as single-family starts declined during the month. The increase in permits was also due to increased builder interest in multifamily units. Over the months ahead, rising housing costs and a return to more normal economic conditions are expected to support continued new home construction. We may be set to see additional growth in multifamily construction, due to recovering demand and rising rents.
On Wednesday, the August existing home sales report was released. Sales of existing homes fell by 2 percent during the month, in a result slightly above the 1.7 percent decline expected. Notably, existing home sales increased at the end of 2020, but this year we’ve seen the pace of sales pull back slightly. With that said, sales remain above pre-pandemic levels, as low mortgage rates and high levels of buyer demand continue to support them. The major headwind for the housing market is a lack of homes available for sale—in August, the supply was 13.4 percent lower than a year ago. In addition, the high demand has caused housing prices to rise throughout the year, serving as another headwind for sales growth. Looking forward, a notable increase in the homes for sale will likely be needed to spur faster growth. Nonetheless, sales at current levels continue to signal a strong market.
Wednesday also saw the release of the FOMC rate decision from the Fed’s September meeting. The Fed cut interest rates to virtually zero at the start of the pandemic, and, as expected, no changes to interest rates were made at this meeting. Instead, the major focus was on the Fed’s asset purchase program, which currently consists of $120 billion a month in purchases of Treasury and mortgage-backed securities. These quantitative easing measures supported the markets throughout the worst of the pandemic. Recently, however, some board members have started to discuss the future tapering of asset purchases. The press release from the meeting indicated that the Fed may announce tapering plans as soon as the November meeting, as long as the economic recovery remains on track. The details regarding timing of these plans are still unknown. Nonetheless, this strong hint that we may see asset purchases decline by the end of the year signals that Fed members believe the economy is continuing to recover. Accordingly, a gradual return to more normal monetary policy may be appropriate.
We finished the week with Thursday’s release of the initial jobless claims report for the week ending September 18. During the week, 351,000 initial unemployment claims were filed. This result was up from the upwardly revised 335,000 initial claims filed the week before and higher than economist estimates for 320,000 claims. Despite this report marking two weeks a row with rising claims, the overall pace of claims remains well below the high of more than 900,000 we saw earlier in the year. Claims can be volatile week-to-week basis, but the four-week moving average for claims remains near the post-pandemic low and close to historically normal levels. There was some speculation that the expiration of enhanced federal unemployment payments at the start of September would further accelerate the labor force recovery, but we’ve yet to see signs of significantly faster hiring.
What to Look Forward To
On Monday, the August durable goods orders report was released. Headline durable goods orders increased by more than expected, going up by 1.8 percent against calls for a 0.7 percent increase. This result was largely driven by a rise in volatile commercial aircraft orders during the month. Core durable goods orders, which strip out the impact of transportation orders, increased by 0.2 percent against forecasts for a 0.5 percent gain. Core durable goods orders are often viewed as a proxy for business investment, so the continued growth in August was welcome despite the miss against expectations. Furthermore, following the 0.8 percent increase in core durable goods orders seen in July, this report marks six consecutive months with core orders growth. Overall, the August report was relatively encouraging. It showed that businesses continue to spend and invest, which is a good sign for overall economic growth in the month and quarter.
On Tuesday, the Conference Board Consumer Confidence Index for September is scheduled for release. Consumer confidence is expected to increase modestly, with the index set to rise from 113.8 to 114.2. If estimates hold, the index would remain well above the lockdown-induced lows of last year, signaling healthy levels of consumer confidence. That said, we saw confidence decline in August due to concerns about rising medical risks and a slowdown in hiring. Rising inflationary pressure was another source of consumer concern. Still, there is some evidence that consumer inflation started to cool in August—for example, the month’s slowdown in the Consumer Price Index. Historically, higher levels of consumer confidence have supported faster spending growth. So, any improvement for the index would be welcome, even if it’s only the modest uptick expected by economists.
Thursday will see the release of the initial jobless claims report for the week ending September 25. Economists expect to see 330,000 initial claims filed during the week. This result would be an improvement from the 351,000 initial claims filed the week before, but slightly higher than the low of 310,000 initial claims recorded earlier in the month. Soon, although we’ve made solid progress in getting initial claims down this year, the labor market recovery may be tested by less-supportive Fed policy. With many economists expecting the Fed to start tapering its asset purchases by year-end, the tailwinds from supportive Fed policies are set to diminish over the months ahead. Given the large number of folks still out of the labor force and the relatively high unemployment rate compared with pre-pandemic levels, employment and initial claims reports will continue to be closely monitored.
Friday will see the release of the August personal income and spending reports. Spending is expected to increase by 0.7 percent, following a surprise 0.3 percent increase in July. The previously released August retail sales report showed that spending on goods beat expectations, which helps explain the anticipated acceleration in spending growth. Personal income is expected to increase by 0.2 percent in August, following a 1.1 percent rise in July. Throughout the pandemic, personal income growth has been highly volatile, as shifting federal government payments caused large monthly income swings. Strong wage growth is expected to offset the impact of more states pulling out from federal unemployment programs in August. Looking forward, labor shortages and high levels of job openings should support continued wage growth, as well as increased spending.
We’ll finish the week with Friday’s release of the ISM Manufacturing index for September. This widely monitored gauge of manufacturer confidence is expected to decline from 59.9 in August to 59.5 in September. This is a diffusion index, where values above 50 indicate expansion, so this result would signal continued growth for the manufacturing industry. Last year, manufacturer confidence rebounded swiftly once initial lockdowns were lifted, so, even with a modest decline in September, the index should remain well above pre-pandemic levels. High levels of buyer demand supported manufacturing confidence throughout the year, despite the headwinds raised by supply shortages and higher prices. Ultimately, if estimates hold, this release would represent an encouraging signal that manufacturers remain confident despite the industry headwinds. As is the case with consumer confidence, higher levels of business confidence have historically supported spending growth. So, if we get the high level of manufacturer confidence expected in September, this result would signal that the manufacturing recovery remains on track.
That’s it for this week—thanks for reading!
