After Dragging GDP Growth For Six Quarters, Perhaps Housing Will Help Boost the Economy

By | September 23, 2019

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

Coffee and Economic Review

World shares rose on Friday as stimulus measures by major central banks eased worries about growth. Meantime, oil headed for its best week since January 2016. Renewed tensions in the Middle East, after an air attack knocked out production at a major oil supply hub, unnerved investors early in the week. Oil was up 7.6% for the week, the biggest gain since the first week of 2019.The MSCI’s world equity index gained 0.1% on Friday but was still heading for a weekly loss. The Federal Reserve and the European Central Bank cut interest rats during the last full week and China lowered a key lending rate, an effort to shore up growth. Economic data from the U.S. on housing starts and industrial production came in stronger than expected, easing worries about the globe’s largest economy.

U.S. stocks started the Friday trading day higher after reports that President Trump was exempting hundreds of Chinese products from tariffs. Two negotiating sessions in two days between the U.S. and Chinese delegations covered agricultural issues and the strengthening of China’s intellectual protections and forced transfer of U.S. technology firms. Some of the Chinese delegation were to visit U.S. farming regions over the weekend but the trips were cancelled. The Dow Jones Industrial Average sank 160.60 points on Friday to 26,934.19, while the S&P declined 14.89 points to 2,991.90. Other factors in trade included “quadruple witching”, while the S&P will rebalance on Monday. Volatility will remain high in coming weeks as trade talks will continue with speculation ranging on the outcome of the talks. Some analysts project a complete deal, or at least a truce. Other warn that the difference between the parties are so great, a compete deal may be years away. The potential effect on the market and the economy ranges from an upside impact with a complete deal to a downhill slide towards recession in the case of renewed tariffs and a greater trade war.

Divided they cut. The FMOC cut its key lending rate by 25 basis points from 2.0% to 1.75%. The rationale was the same as in July. There were three dissents for the first time since 2016 as St. Louis Fed President James Bullard wanted a 50-basis point cut and two regional presidents didn’t see the need for any cuts. The dot-plots from all 17 policymakers showed even broader disagreements, with seven showing another rate cut this year, five seeing the current rate cut as the last for 2019 and five who wanted no more rate cuts. Expectations for the economy was nudged higher to 2.2% from 2.1% in June. The GDP forecast for 2020 and 2021 remained at 1.9%. The plots pointed to a slightly less dovish attitude than expected. We still expect a cut in the fourth quarter, but that is not set in stone.

With the Fed continuing to emphasize data dependence, the housing market, the most interest rate sector of the economy, takes on a greater role as an indicator of the efficacy of monetary policy in shielding the economy from the global slowdown and weakness in manufacturing. Total housing starts surprised on the upside, jumping 12.3% to 1.36 million annual pace. Existing home sales also rose in August. The roughly 130 bps reduction in mortgage rates are helping the housing industry. After dragging GDP growth for six quarters, perhaps housing will help boost the economy in coming months. Industrial production rebounded 0.6% in August, with a strong 0.5% jump in manufacturing output. Manufacturing remains weak on trend, but the August report suggests that perhaps, it won’t get any worse.

Next week, we get a look at the Chicago Fed National Activity Index, new home sales, international trade in goods, wholesale inventories, durable goods orders and personal income and outlays.

Latest Data

The U.S. Economy:

Industrial production rose 0.6% in August, the third increase in four months. The decrease for July was revised upward. Mining led the top-line index, rising 1.4%. Manufacturing rose 0.5% in July, following a 0.4% decline in July. Manufacturing production remained down 0.4% from a year earlier. Motor vehicle and parts output fell 1% in August, its first loss in four moths Non-auto production increased 0.6%. Non-auto production remains down 0.5% from a year earlier. Utility output climbed 0.6% in August. The August gain in industrial production was the biggest gain in a year. Mining led the increase after Hurricane Barry drove down production in July. Warmer temperatures helped utility output. We expect volatility in the industrial sector for the remainder of the year. The auto and housing markets are flat. Global growth is weak and trade uncertainties are causing businesses to become conservative in investment decisions. There are both up-side and downside ramifications on the outcome of the October trade talks with China. Some form of a positive deal may help boost manufacturing. On the other hand, renewed tariffs could help sink investment and confidence. Our projections are that there could be an interim deal, but a complete deal is unlikely until after the election.

Housing starts increased 12.3% in August to an annual pace of 1.364 million units. Starts remained 6.6% above year earlier levels. Single-family starts rose 4.4% to 919,000, while the multi-family sector saw a 32.8% increase to 445,000. Total permits rose 7.7% to 1.419 million units. The increase in permits suggest a slightly better pace of activity than we’ve seen in recent months. The sharp decline in mortgage rates since last year, combined with slower house growth price growth is keeping affordability from getting worse. Housing starts have now rebounded at a decent rate for August, but the overall trend does remain weak. The question is now, where does the market go, upwards like August, or back on the very slow path so far this year? We project a slow upward trend at best, but not the start of a market decline.

Existing home sales increased modestly in August. Sales increased in three out of four census regions. Existing home sale in the West are lagging because of tight markets and reduced affordability problems.  Single-family sales totaled 4.9 million in August, up 1.2% from July and 2.9% y/y. Condo/co-op sales totaled 590,000, up 1.7% from July and equal to August 2018. The market tightened for both single-family and condo/co-op homes. Listings for single-family homes totaled 1.64 million in August, down 1.8% from July and by 3% y/y. Listings of condo/co-op homes totaled 218,000 in August, down 3.5% m/m and 0.5% y/y. The inventory-to-sales ratio for single-family homes was 4 months for single-family homes, down 0.1 month for July and 0.3 from August 2018. Thanks for mortgage rates falling more than 120 basis pints from November on a 30-year loan, existing home sales have recovered. The market remains tight and that may be a help for new home sales.

The outlook for the U.S. economy remains steady. The Conference Board’s index of leading economic indicators was unchanged in August, following a 0.4% rise in July. The coincident index rose 0.3% in August, after no change in July. For the leading indicators, building permits and the leading credit index made the largest positive contribution to the August headline indicator. The labor market made no contribution. On net, financial markets were negative for the index. The ISM New Orders index was also negative for the month. We expect a bumpy road for manufacturing for the remainder of the year.

Important Data Releases This Week

The August Chicago Fed National Activity Index will be released on Monday, September 23 at 8:30 AM EDT. The index is expected to improve in August, rising from -0.36 to 0.06.

August new home sales will be released on Wednesday, September 25 at 10:00 AM EDT. New home sales are uneven month-to-month, but like existing home sales, which have been trending higher this year, we expect a jump from 635,000 to 665,000.

August international trade in goods will be released on Thursday, September 26 at 8:30 AM ET. We see a deepening of the trade gap in goods, rising from $72.3 billion to $73.4 billion. Exports rose sharply in July, while imports fell.

August wholesale inventories will be released on Thursday, September 26 at 8:30 AM EDT. Wholesale inventories are expected to increase 0.3% in August, following the 0.2% increase in July.

August durable goods orders will be released on Friday, September 27 at 8:30 AM EDT. Durable goods orders in August are expected to decrease 1.2% following two months of strong civilian aircraft orders. Ex-transportation orders are expected to rise a modest 0.2%.

August personal income and outlays will be released on Friday, September 27 at 8:30 AM EDT. We project personal income to increase 0.4% in August, following the weak 0.1% advance in July. Spending is set to rise 0.3% for the moth. The PCE deflator and core is projected to rise 0.2%. This will bring the headline price index up 1.5% y/y and the core up 1.8%.


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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.

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