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Housing warms up
Simply Economics - June 23, 2017
By Mark Pender, Senior Editor



It's been a long couple of months of cold economic data until the latest week when housing, which cooled in the early Spring, warmed back up in May. The week's wider indications on the economy are also positive, at least mildly so. Those who were getting the chills need not give up on the second-quarter economy.


The economy

The week's best news is a big bounce for new home sales, up nearly 3 percent in May to a 610,000 annualized rate to hit the top end of Econoday's consensus range. The report, always volatile, included a big upward revision to April which however, at 593,000, is still the year's low. Existing home sales also proved better than expected, up more than 1 percent to a 5.620 million rate. Low unemployment and low mortgage rates are major pluses for housing.


Yet high home prices, which are out of reach especially for many first-time buyers, are limiting sales and are raising demand for condos. Sales of existing condos rose 1.6 percent in May to a 640,000 annualized rate and are leading the existing home sales report. Yet sales of single-family homes are also positive, up 1 percent to a 5.260 million rate. May sales hopefully hint at a lift ahead for building permits which, in the prior week, posted across-the-board declines.


Both existing home sales and especially new home sales show increasing price traction, at a median $252,800 for resales and $345,800 for new homes. The FHFA house price index is another of the week's highlights, up sharply in lagging data for April to a year-on-year rate of 6.8 percent. This is the strongest appreciation since early 2014 and is a plus for household wealth. Case-Shiller's price data, which have also been climbing, will be a highlight of the coming week.


Not such good news in the latest week comes from Markit's service sample where the June flash eased to 53.0. This is still over the breakeven 50 line to indicate monthly growth in composite activity, but it does indicate that growth is slowing. Yet orders were up which is a plus for future reports and hiring was solid which is a positive signal for June payrolls. This report is running below ISM's non-manufacturing report which has been getting a special lift from mining.


Both Markit and ISM are private data based on small sample sizes and dependent on voluntary reponses. They are used best for directional signals, that is whether general activity is moving up or down or sideways. Since the election, these reports have been signaling outsized strength that has yet to appear in government data. Markit's report has been showing less strength than the other private data though it still well exceeds the trend for consumer service spending.


Perhaps the strongest data over the past year have been jobless claims. They are at historic lows reflecting an unusual absence of layoffs in the labor market. The June 17 week was the sample week for the coming June employment report and a look at the week's initial claims is, if not exactly favorable, certainty not unfavorable. Claims did edge up from the sample week of the May employment report but not very much, to 241,000 and 244,750 for the 4-week average.


Markets: Oil, oil, toil and trouble

The hangman is in play right now for the energy sector specifically and inflation overall, and that's the drop underway in the price of oil. Sure Fed officials focus on core inflation, which excludes oil, but weakness in energy prices has a stunting effect on overall prices. With core PCE inflation running at only 1.5 percent, this is not good news. The risk? Nothing less than disinflation at a time when the markets, at least since November, have been banking on reflation.


There's also news from the bond market. The 2-year Treasury yield has been rising while the 10-year has been falling, the result of Fed hikes combined with dimming expectations -- at least apparently in the bond market -- for future economic strength. But stocks have been sending very positive signals, rising this year to a series of records including the Nasdaq which got a big lift in the week from biotechnology, a sector however of its own and less tied to economic ups and downs.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 16-Jun-17 23-Jun-17 Change Change
DJIA 19,762.60 21,384.28 21,394.76 8.3% 0.0%
S&P 500 2,238.83 2,433.15 2,438.30 8.9% 0.2%
Nasdaq Composite 5,383.12 6,151.76 6,265.25 16.4% 1.8%
Crude Oil, WTI ($/barrel) $53.71 $44.69 $43.04 -19.9% -3.7%
Gold (COMEX) ($/ounce) $1,152.50 $1,256.10 $1,257.10 9.1% 0.1%
Fed Funds Target 0.50 to 0.75% 1.00 to 1.25% 1.00 to 1.25% 50 bp 0 bp
2-Year Treasury Yield 1.21% 1.32% 1.35% 14 bp 3 bp
10-Year Treasury Yield 2.45% 2.16% 2.14% –31 bp –2 bp
Dollar Index 102.26 97.11 97.26 -4.9% 0.2%


The bottom line

Gains in home sales and home prices point to badly needed strength for household wealth, perhaps in time to save second-quarter consumer spending. There are still plenty of questions over economic growth but high demand for labor and rising demand for housing are two central supports of the American consumer.


Week of June 26 to June 30

Three sets of data on the month of May will offer key updates on second-quarter GDP. The run opens on Monday with indications on business investment from the capital-goods components of the durable goods report. Advance trade follow on Wednesday with indications on both net exports and also business inventories followed on Friday with the week's most important report: personal income and outlays. This report will not only offer an input to second-quarter consumer spending but will also update PCE price indexes which are the most closely followed of any inflation readings. Strength in this report is not expected. Other data to watch are consumer confidence on Tuesday, a report that has been sky high, and pending home sales on Wednesday, a report where a rebound after two months of declines is the call.




Durable Goods Orders for May

Consensus Forecast, Month-to-Month Change: -0.4%

Consensus Range: -1.8% to 2.5%


Durable Goods Orders, Ex-Transportation

Consensus Forecast: 0.5%

Consensus Range: -0.5% to 1.0%


Durable Goods Orders, Core Capital Goods (Nondefense Ex-Aircraft)

Consensus Forecast: 0.5%

Consensus Range: 0.2% to 0.5%


Orders for core capital goods have managed only a 1 tenth monthly gain over the last 3 reports and that was way back in February. Shipments for this component have moved in line, falling 1 tenth to open the second quarter in April. Other readings in April were far worse with total orders falling 0.7 percent and ex-transportation orders (where monthly swings in aircraft are excluded) down 0.4 percent. Econoday's consensus for May durable goods orders is for another decline, at minus 0.4 percent and reflecting an expected downswing for aircraft. But ex-transportation orders are seen at plus 0.5 percent with core capital goods, in what would be a strong positive, also seen up 0.5 percent.


National Activity Index for May

Consensus Forecast: 0.32

Consensus Range: 0.10 to 0.54


The national activity index is expected to post a respectable 0.32 in May despite declines for manufacturing production, housing starts, and retail sales. But the unemployment rate declined and payroll growth was satisfactory. April's index was 0.49.


Dallas Fed General Activity Index for June

Consensus Forecast: 18.0

Consensus Range: 15.0 to 18.2 


Following nearly 2 years of fallout from the 2014 oil collapse, the Dallas Fed manufacturing report began to accelerate late last year and has extended the gains so far through this year. Forecasters see the general activity index for June holding steady at a very strong 18.0 vs May's 17.2.




Case-Shiller, 20-City Adjusted Index for April

Consensus Forecast, Month-to-Month Change: 0.6%

Consensus Range: 0.3% to 1.0%


Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Year-on-Year Change: 5.9%

Consensus Range: 5.8% to 6.1%


Prices have been perhaps the best news out a housing sector where sales and permits have been no better than mixed. Monthly gains for the Case-Shiller's 20-city index have been very strong this year including a 0.9 percent showing in the March report. Forecasters see the April index posting a 0.6 percent gain with the year-on-year rate unchanged at 5.9 percent.


Consumer Confidence Index for June

Consensus Forecast: 116.7

Consensus Range: 115.0 to 118.5


Unlike other readings on consumer spirits, the consumer confidence index has not been falling back from post-election highs. For the first-time since the dotcom bubble nearly 20 years ago, the index has posted 6 straight readings over 110 including May's 117.9. Econoday June's consensus is for a 7th plus 110 showing, at 116.7. A standout positive in the May report was a sharp move downward in those saying jobs-are-to-get, at only 18.2 percent and a new low for the ongoing expansion.


Richmond Fed Manufacturing Index for June

Consensus Forecast: 8

Consensus Range: 6 to 10


Richmond Fed's manufacturing index eased back to 1 in May signaling only marginal month-to-month growth in overall activity. Yet the slowdown followed the first back-to-back plus 20 showings since 1994 in March and April. For June, forecasters see the index bouncing higher to 8.




International Trade In Goods for May

Consensus Forecast, Month-to-Month Change: -$66.0 billion

Consensus Range: -$67.3 to -$65.0 billion


Opening second-quarter GDP on the defensive, the goods deficit deepened 3.5 percent in April to $68.4 billion. The Econoday consensus is calling for improvement in May to $66.0 billion. Advance data for wholesale and retail inventories in May, which both fell in April, will also be released with this report.


Pending Home Sales Index for May

Consensus Forecast, Month-to-Month Change: 0.5%

Consensus Range: 0.4% to 0.8%


The month-to-month path of existing home sales is not always accurately telegraphed by the pending home sales index which tracks initial contract signings. Final sales rose 1.1 percent in May despite 1.3 percent and 0.9 percent declines in pending sales in April and March. The consensus for May's pending sales index calls for a rebound to plus 0.5 percent in a result that would lift confidence in the housing sector.




Real GDP: 1st Quarter, 3rd Estimate, Annualized Rate

Consensus Forecast: 1.2%

Consensus Range: 0.9% to 1.5%


Real Consumer Spending, Annualized Rate

Consensus Forecast: 0.6%

Consensus Range: 0.5% to 0.9%


GDP Price Index

Consensus Forecast: 2.2%

Consensus Range: 2.2% to 2.2%


The third estimate for first-quarter GDP is expected to be remain unchanged at a 1.2 percent annualized rate of growth. Consumer spending was very weak in the quarter and is also seen unchanged at 0.6 percent growth. Forecasters see the GDP price index holding at 2.2 percent.


Initial Jobless Claims for June 24 week

Consensus Forecast: 241,000

Consensus Range: 236,000 to 244,000


Demand for labor is very strong reflected in jobless claims which are at historic lows. Forecasters sees initial claims coming in unchanged at 241,000 in the June 24 week.




Personal Income for May

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.4%


Consumer Spending

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.0% to 0.3%


PCE Price Index

Consensus Forecast, Month-to-Month Change: -0.1%

Consensus Range: -0.1% to 0.%


PCE Price Index

Consensus Forecast, Year-on-Year Change: 1.5%

Consensus Range: 1.4% to 1.6%


Core PCE Price Index

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.0% to 0.2%


Core PCE Price Index

Consensus Forecast, Year-on-Year Change: 1.5%

Consensus Range: 1.4% to 1.6%


Consumer spending is expected to slow in May, to a consensus gain of only 0.1 percent vs a moderate 0.4 percent rise in April. Personal income also came in at 0.4 percent in April and no better performance is expected with the May consensus at 0.3 percent. Price data are also not expected to improve with the PCE price index seen falling 0.1 percent in May vs April's 0.2 percent increase with the year-on-year rate at 1.5 percent vs 1.7 percent. Expectations for the core PCE (less food & energy) is a monthly 0.1 percent increase vs 0.2 percent in April with this year-on-year rate -- which is the most closely watched of any inflation indicator -- at a consensus 1.5 percent which would be unchanged from April.


Chicago PMI for June

Consensus Forecast: 58.2

Consensus Range: 57.5 to 60.0


The Chicago PMI has been steadily accelerating the last 4 months reaching a 2-1/2 year high in May at 59.4. Backlogs moved out of contraction during the month and employment improved sharply. One weakness in May, however, was new orders which slowed. Forecasters see June's index coming in at 58.2. This report tracks both the non-manufacturing and manufacturing sectors of the Chicago-area economy.


Consumer Sentiment Index, final June

Consensus Forecast: 94.5

Consensus Range: 94.3 to 97.5


The consumer sentiment index slipped back to the least optimistic reading since the November election, falling 2.6 points in preliminary June to 94.5 with both the current conditions and expectations components falling. The report said the move lower reflected easing confidence among both Republicans and Democrats. Econoday's consensus for final June to remain at 94.5.


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