Monday Update (on Tuesday): Housing Strong, Business Slow

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 31, 2016 4:33:59 PM

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monday updateLast week’s data was more mixed than in recent weeks, with continued positive news in the housing market offset by weaker-than-expected results in business investment. On balance, both the strong trends in consumer demand and the relative weakness in business continue, and the economy was shown to have done better in the first quarter than was originally thought.

A look at last week’s data

New home sales were the bright spot, with a surprising 16.6-percent increase month-on-month. Sales in April rose by more than 100,000, from 511,000 to 619,000, and substantially beat expectations for a 2.4-percent increase—the biggest jump since January 1992 and the highest level since January 2008. With upward revisions to the previous two months, sales are now up by 23.8 percent year-on-year, suggesting strengthening momentum in the housing market.

Durable goods orders, on the other hand, continued to disappoint. Although the headline number looked terrific, up by 3.4 percent, the gain was largely due to aircraft orders, which do not reflect the economy as a whole. The core orders figure, which excludes transportation and is therefore more meaningful, did improve, from a small 0.1-percent gain last month (which was revised up from a decline of 0.2 percent) to a gain of 0.4 percent, suggesting ongoing slow improvement. Capital and business investment figures continued to lag, however, with non-defense capital goods orders down 0.8 percent and machinery orders down 1.9 percent. On a year-to-year basis, durable goods orders are up only 0.1 percent while core business orders are down 4.4 percent, showing that growth in business demand continues to lag the consumer.

Finally, first-quarter economic growth was revised up to 0.8 percent from the disappointing initial estimate of 0.5 percent, consistent with the better-than-expected numbers we have been seeing. Although this figure is backward looking, it does provide further support for the continued recovery and expected faster growth in the second quarter.

The week ahead

This week’s data releases include more detailed looks at both the consumer and business. Here's what's on tap:

  • Monday: The personal income and spending report and the Conference Board’s survey of consumer confidence
  • Wednesday: The Institute for Supply Management’s survey of manufacturing
  • Friday: The ISM non-manufacturing survey, the international trade report, and the most important release of the week, the employment report for May

The personal income and spending report, released this morning, showed income growth in line with expectations at 0.4 percent, the same as last month. This strong number was helped by a likely rebound in hours worked and continued wage growth. Spending growth surprised substantially to the upside, with a 1-percent increase, up from the prior month’s flat result. With this strong growth, even if spending is flat for the next two months, which doesn’t seem likely, quarterly growth should still be strong.

The strong income and spending numbers were inconsistent with the consumer confidence survey, which dropped from 94.2 to 92.6, against expectations of an increase to 96.0. Much of the decrease came from current conditions, with future expectations dropping by much less, suggesting that the increase in gas prices hit current confidence. On an absolute basis, the confidence level remains healthy, despite the decrease, and consistent with continued growth.

The ISM business surveys are also expected to be mixed. The manufacturing survey is projected to drop slightly, from 50.8 to 50.5, which would still leave it in expansion territory, but there is downside risk here as several regional manufacturing surveys have deteriorated further since the last release. The non-manufacturing survey is also expected to decline slightly, from 55.7 to 55.3, but to remain firmly in expansion territory. Here, though, there is upside risk, thanks to strong retail sales and an expanding housing sector.

The news on the trade balance, by contrast, is expected to be positive. We already know that the expected increase in imports has been much less than anticipated. So second-quarter export growth should substantially exceed import growth, for a much smaller increase in the deficit than anticipated, from $40.4 billion to $41.9 million, which should help accelerate second-quarter growth for the economy as a whole.

Finally, the employment report on Friday is expected to show job growth at the same level as last month, at 160,000, with the unemployment rate declining slightly from 5.0 percent to 4.9 percent, hourly wage growth dropping to 0.2 percent from 0.3 percent, and hours worked remaining stable at 34.5, all of which would be reasonably healthy. The real risk to this report, however, is the Verizon strike, which could knock the jobs created number down to as low as 120,000, as we saw in the last strike, in 2011. If this does happen, it should only be a one-time hit, not indicative of a substantial slowdown.

Have a great week!

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