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SIMPLY ECONOMICS

Housing improves, inflation doesn't
Simply Economics - July 21, 2017
By Mark Pender, Senior Editor

  

Introduction

Housing data are showing new life and the sector may be looking like a positive force once again for the 2017 economy. We'll also be looking at inflation, touching on the topics of lumber duties and what to expect, or not to expect, with cell phones. The latest on manufacturing and employment round out the week, one that precedes July's eventful last week.


 

The economy

Big gains for starts and permits were the week's biggest news and some of the best housing news in months. After 3 straight drops, starts rebounded sharply to a 1.215 million annualized rate in June for the best showing since February. Permits also jumped, to a 1.254 million rate for the best since March. But June couldn't bail out the quarter as both starts, averaging only 1.164 million, and permits, averaging 1.217 million, fell well short of the first quarter, by 6.0 percent and 3.4 percent respectively.


 

Less upbeat was news from the nation's home builders whose housing market index, which opened the year strongly, fell 3 points in July to 64 for the lowest result since November. Home builders are warning that high lumber prices, triggered in April by tarrifs on softwood imports from Canada, will be passed through to home buyers which can't be a positive for sales. And higher prices are not a positive for traffic which, after finally breaking the 50 line in May, fell back to 49 in June and 48 in July.


 

The week's inflation news comes from import and export prices which, like many other prices, are shifting lower. Year-on-year import prices in June fell for a 4th month in a row to a 1.5 percent rate that, at least, is still safely above the zero line. Export prices fell for a 3rd month in row and, at only 0.6 percent, are less safely above zero. One small boost on the import side, however, has been lumber prices which, beginning with the tariffs, spiked a monthly 8 percent in April with this annual rate over 20 percent.


 

Lumber is a special factor for builders and home buyers but it hasn't been getting the headlines that cell phone prices have. Janet Yellen has been attributing weakness in consumer prices to this year's big drop in wireless service prices. But is this really a special factor? Wireless services have, in fact, fallen each year in data going back to 2009. Can policy makers really count on wireless prices to stop falling? Price contraction for computers and communications, after all, is a centerpiece of our economy.


 

The CPI may or may not be getting help from a future recovery in wireless prices, but it will be getting a lift from the dollar. The dollar index fell 1.3 percent in the week for a very sizable year-to-date dip of 8.1 percent. A lower dollar will of course raise the cost of our favorite consumer imports. Yes, we'll be getting less for our money! But is this what we really want? It is if you're the Fed and are trying to pump up the nation's price action.


 

The drop in the housing market index may be mirrored in the slowing underway in private data out of the factory sector, which like those from home builders have fallen back to pre-election levels. New orders in the Philly Fed report are suddenly near zero, at only 2.1 to signal the lowest rate of monthly growth since September. An offset is new orders from Empire State which, after a weak spot in May, are now at very solid 13.3.


 

But the drop for Philly may be more telling than Empire's strength. Private factory data, where samples are small and responses voluntary, have been far stronger than actual factory data. ISM new orders are very closely tracked but a comparison with actual factory orders shows headfakes in April and May with ISM up and government data down. Durable goods orders will be one of the coming week's highlights, offering half of June's actual factory total.


 

The best news in the week once again comes from the economy's strongest suit: employment. Initial jobless claims fell a sharp 15,000 to 233,000 in the July 15 week, a week that was also the sample week for the July employment report. A comparison with the sample week of the June employment report shows a tangible 9,000 decline. The signal from the 4-week average, however, is one of steady strength, at 243,750 but still a 1,250 decline. Based on claims, labor demand remains strong.


 

Markets: Looking forward to a shutdown?

A coming cliff hanger appears to be the debt ceiling and whether the government may have to shutdown. We see this act every year and a happy sensible ending is usually the result, but not always. With the debt ceiling to be hit in early October, slow dread is the call for investors. Most of the action will be packed in late September when a stop-gap bill will have to be passed. Stocks haven't shown any effects yet but demand for the safety of gold and the 10-year Treasury is up.


 

Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 14-Jul-17 21-Jul-17 Change Change
DJIA 19,762.60 21,637.74 21,580.07 9.2% -0.3%
S&P 500 2,238.83 2,459.27 2,472.54 10.4% 0.5%
Nasdaq Composite 5,383.12 6,312.47 6,387.75 18.7% 1.2%
     
Crude Oil, WTI ($/barrel) $53.71 $46.59 $45.66 -15.0% -2.0%
Gold (COMEX) ($/ounce) $1,152.50 $1,227.90 $1,260.70 9.4% 2.7%
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% 1.35% 1.35% 14 bp 0 bp
10-Year Treasury Yield 2.45% 2.32% 2.24% –21 bp –8 bp
Dollar Index 102.26 95.13 93.93 -8.1% -1.3%

 

The bottom line

Higher lumber costs may be making 2017 less great than home builders had expected. These costs won't be stimulating building in a housing sector where new homes are lacking. But any price traction, even due to tariffs, is a plus right now for inflation which hopefully will be getting a boost from the drop underway in the dollar. The week ahead is enormously heavy and will include, not only an FOMC meeting where anything is always possible, but also the first estimate for second-quarter GDP.


 

Week of July 24 to July 28

Housing will be squeezed into the beginning of a very busy week. Existing home sales start the week off on Monday but are not expected to show continuing strength. Moderation is also the call for home prices with Tuesday's FHFA and Case-Shiller reports expected to slow. The difference may be Wednesday's report on new home sales which are expected to hold steady at a solid rate. The first main focus of the week is Wednesday's FOMC meeting where expectations are looking for no change in rates though language on inflation and balance-sheet unwinding will be watched. Durable goods orders are Thursday's highlight and, after back-to-back declines, are expected to rise sharply on aircraft orders with, however, only moderate strength expected for the balance of the report. The week's second main focus arrives on Friday with the first estimate for second-quarter GDP and a solid 2.6 percent rate, driven by the consumer, is Econoday's consensus.


 

Monday


 

PMI Composite for July, Flash

Consensus Forecast: 53.2

Consensus Range: 52.7 to 54.1


 

PMI Manufacturing for July, Flash

Consensus Forecast: 52.0

Consensus Range: 51.5 to 52.3


 

PMI Services for July, Flash

Consensus Forecast: 54.1

Consensus Range: 52.8 to 54.4


 

The PMI composite is expected to slow to what would be a still constructive 53.2 in the July flash from 53.9 in June. Slight slowing is expected for the manufacturing and services flashes, at a respective consensus calls of 52.0 and 54.1. Services have offered the best news with new orders and employment solid and optimism on the outlook positive.


 

Existing Home Sales for June

Consensus Forecast, Annualized Rate: 5.580 million

Consensus Range: 5.500 to 5.690 million


 

Existing home sales did rebound in May but pending sales, which track initial contract signings, fell 0.8 percent in the month. Forecasters see final sales in June slipping to a 5.580 million annualized rate vs May's 5.620 million in what would wind up a soft Spring selling season. Still, trends in this report continue to slope modestly higher, both for single-family and condos. Definite positives in the data are firming prices and rising supply.


 

Tuesday


 

FHFA House Price Index for May

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

Consensus Range: 0.4% to 0.7%


 

The FHFA house price index has been posting solid rates of growth though slight slowing to 0.6 percent is the consensus for May, down from a run of 0.7 percent and 0.8 percent gains. The year-on-year rate, at 6.8 percent in April, was the best showing in 3 years.


 

Case-Shiller, 20-City Adjusted Index for May

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

Consensus Range: 0.3% to 0.7%


 

Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Month-to-Month Change: 0.8%

Consensus Range: 0.6% to 1.0%


 

Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Year-on-Year Change: 5.8%

Consensus Range: 5.8% to 6.0%


 

Case-Shiller prices topped out early in the year and have been moderating since. The consensus for the 20-city adjusted index is only 0.3 percent in May, the same gain as April. May is a busy month for home sales and is reflected in the consensus for the unadjusted monthly index where the consensus is for a 0.9 percent gain. Year-on-year, the unadjusted index is expected to come in at 5.8 percent in what would be a 1 tenth gain.


 

Consumer Confidence Index for July

Consensus Forecast: 117.0

Consensus Range: 115.0 to 118.0


 

Unlike other readings on consumer spirits, the consumer confidence index has not been falling back from post-election highs. For the first-time in nearly 20 years ago, the index has posted 7 straight readings over 110 including June's 118.9. The Econoday consensus for July is very near that, at 117.0. In a positive indication for the labor market, the jobs-hard-to-get component has been in decline, falling to only 18.0 percent in June and a new low for the expansion.


 

Richmond Fed Manufacturing Index for July

Consensus Forecast: 8

Consensus Range: 7 to 9


 

Richmond Fed's manufacturing index bounced 6 points higher in June to 7 with forecasters calling for 8 in July. This report, like other regional factory samples, has posted some very strong readings this year including the first back-to-back plus 20 showings, in March and April, since 1994.


 

Wednesday


 

New Home Sales for June

Consensus Forecast, Annualized Rate: 612,000

Consensus Range:  590,000 to 630,000


 

New home sales entered the Spring on a down note before popping higher to a 610,000 annualized rate in a May report that also included a major upward revision for April. Forecasters see new home sales in June adding very slightly to May's strength with the consensus at 612,000.


 

Federal Funds Target for July 25 & 26 Meeting:

Consensus Forecast, Midpoint: 1.125%

Consensus Range: 1.00% to 1.25%


 

The Federal Open Market Committee is expected to hold their federal funds target at a 1.00 to 1.25 percent range with a 1.125 percent midpoint. Econoday's sample is unanimous with no expectations for a rate hike. Language on inflation, which the June statement conceded was slowing, will be closely watched as will any commentary on unwinding the Fed's balance sheet which some expect to begin as early as September.


 

Thursday


 

Durable Goods Orders for June

Consensus Forecast, Month-to-Month Change: 3.2%

Consensus Range: 1.5% to 5.5%


 

Durable Goods Orders, Ex-Transportation

Consensus Forecast: 0.4%

Consensus Range: 0.2% to 0.8%


 

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

Consensus Forecast: 0.3%

Consensus Range: 0.1% to 1.0%


 

Durable goods orders have been running soft with back-to-back declines in May and April. But June is expected to see a major bounce back with the consensus at 3.2 percent. The vast bulk of the gain, however, is expected to come from aircraft as the ex-transportation consensus is much more modest, at a moderate 0.4 percent gain. Orders for core capital goods (nondefense ex-aircraft) are also expected to show moderate strength with a 0.3 percent gain.


 

International Trade In Goods for June

Consensus Forecast, Month-to-Month Change: -$65.0 billion

Consensus Range: -$67.2 to -$63.2 billion


 

Exports of goods were up in May and imports of goods were down and further improvement, helped by low oil prices, is expected in June with the consensus at a $65.0 billion deficit vs May's $67.5 billion. June's total will be an input into second-quarter GDP and will be closely watched. Advance data for wholesale and retail inventories in June, which are also GDP inputs, will also be released with this report.


 

Initial Jobless Claims for July 22 week

Consensus Forecast: 240,000

Consensus Range: 235,000 to 243,000


 

Demand for labor is very strong reflected in jobless claims which are at historic lows. Forecasters sees initial claims coming in at 240,000 in the July 22 week vs an unusually low 233,000 in the prior week.


 

National Activity Index for June

Consensus Forecast: 0.10

Consensus Range: -0.50 to 0.13


 

June was a strong month for payroll growth but a mixed one for retail sales and manufacturing. The housing component of the national activity index is certain to get a lift from the month's strong permit and starts results. Forecasters are calling for a slightly positive index in June, at 0.10 vs May's minus 0.26.


 

Friday


 

Real GDP: 2nd Quarter, 1st Estimate, Annualized Rate

Consensus Forecast: 2.6%

Consensus Range: 2.2% to 2.9%


 

Real Consumer Spending, Annualized Rate

Consensus Forecast: 2.8%

Consensus Range: 2.2% to 2.9%


 

GDP Price Index

Consensus Forecast: 1.2%

Consensus Range: 1.0% to 1.8%


 

The first estimate for second-quarter GDP is expected to come in at a solid annualized rate of 2.6 percent, nearly doubling the first quarter's 1.4 percent showing. Retail sales have been flat yet consumer spending is expected to lead the quarter with a 2.8 percent gain, up from 1.1 percent. Inventories are expected to add to growth offsetting an expected fall in net exports. Nonresidential business investment is generally seen rising and residential investment falling. Inflation data have been very soft and only a 1.2 percent gain is expected for the GDP price index, down from an already soft 1.9 percent in the first quarter.


 

Employment Cost Index for 2nd Quarter

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

Consensus Range: 0.5% to 1.0%


 

Wage growth has been subdued this year but not employer costs which, in a gain last seen in 2007, jumped 0.8 percent in the first quarter. The Econoday consensus is calling for slowing to 0.6 percent in the second quarter.


 

Consumer Sentiment Index, final July

Consensus Forecast: 93.1

Consensus Range: 92.0 to 94.0


 

The consumer sentiment index has been falling back, down more than 5 points from its highs early in the year to 93.1 in the preliminary reading for July, a level that is expected to hold for the final report. The preliminary July report showed continued strength in current conditions but a noticeable slowing in expectations in a divergence that hints at future erosion for the headline index.


 

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