Overall, the data this past week was somewhat discouraging for housing, as a slowdown appears more likely, but encouraging in that manufacturing seems to be stabilizing.
Housing. On Tuesday, the monthly survey of the National Association of Home Builders came in at 58, a strong level but down from the previous figure of 61 and well below expectations of 60. This was the third decline in the past four months, with the index now at the lowest level since last May, and it was felt across the country. Although sentiment remains strong, the decline may be a sign that housing is starting to slow.
Housing starts also disappointed, down to 1.099 million from 1.143 million the previous month, and well below expectations of 1.173 million. As with the NAHB decline, it was the third drop in the past four months and was felt nationwide. Single-family starts declined by the most in eight months. Building permits came in at 1.202 million, in line with expectations, but the previous month was revised downward. Again, while activity is strong, signs of slowing are mounting.
Industry. Unlike housing, industrial production data significantly beat expectations. After a series of weak months, caused in part by warmer-than-usual weather depressing utility production, industrial production increased by 0.9 percent—the most since November 2014 and only the second increase in the past 13 months. The strong gain was largely due to increases in utility production, but it also included a 0.5-percent gain in manufacturing output, the most in six months. Shorter-term trends indicate that manufacturing is stabilizing, which is a positive sign moving forward.
The Fed and inflation. The minutes of the most recent Federal Open Market Committee meeting, from last month, were released on Wednesday. As expected, they contained hints of heightened uncertainty but nothing substantial. The Fed’s concerns remained primarily about lower-than-desired inflation.
Consumer price data, released the next day, showed headline inflation as flat for the month and up 1.4 percent for the year. Core inflation, excluding energy and food, on the other hand, increased by a greater-than-expected 0.3 percent for the month, on top of an upward revision to the previous month, from 0.1 percent to 0.2 percent. Core inflation year-on-year ticked up to 2.2 percent, a three-and-a-half-year high.
The rising core inflation figure suggests that inflationary pressures are growing, despite the headline number remaining low due to energy price declines. Although high inflation isn’t a concern, these numbers do suggest that the Fed’s worries about low inflation are likely to disappear in the near future, and rates may become more likely to rise toward the end of this year.
This week's data will offer a more detailed view of consumers, housing activity, and industry.
On Tuesday, the Conference Board’s Consumer Confidence Index is expected to decline slightly, from 98.1 to 97.5. Such a minor decline is not particularly worrying, as the absolute level remains reasonably strong. Continued declines in gas prices are being offset by turbulence in the stock market, leaving confidence essentially unchanged.
Existing home sales will be released on Tuesday, and new home sales come out on Wednesday. Both are expected to decline, existing from 5.46 million to 5.35 million and new from 544,000 to 520,000. The anticipated decline, however, comes after a 10-percent jump in December, which was due to a rule change rather than a real change in demand. The absolute level of sales remains strong, and any decline shouldn’t be a cause for concern.
On Thursday, the durable goods orders figure is expected to swing from a 5-percent decline the previous month to a gain of 2.5 percent, thanks to a sharp rebound in transportation orders. The strong gain, however, is largely due to volatile adjustments in aircraft. The more representative core orders, which exclude transportation, are expected to move more modestly, from a decline of 1 percent to a gain of 0.1 percent. As with the industrial production figure from last week, this suggests that the manufacturing sector is stabilizing, which is encouraging.
Finally, on Friday, personal income and spending data will be released. Personal income growth is expected to increase from a strong 0.3 percent to a very strong 0.4 percent, while spending growth is expected to increase from flat to 0.3 percent. Both of these figures suggest that the consumer continues to be extremely healthy, and there appears to be the possibility of a surprise on the upside.
Have a great week!