Inventories and Prices Impair Home Sales: August 21 – 25

Tight inventories were hampering home sales in July. Here are the five things we learned from U.S. economic data released during the week ending August 25.

#1Existing home sales slipped in July as inventories remained tight. The National Association of Realtors tells us that existing home sales slowed 1.3 percent during the month to a seasonally adjusted annualized rate (SAAR) of 5.44 million units. This was 2.1 percent above the annualized sales rate of a year earlier. Sales grew during July in two Census regions—West (+5.0 percent) and South (+2.2 percent)—but fell in both the Northeast (-14.5 percent) and Midwest (-5.3 percent). Two regions also have positive 12-month sales comparables: West (+5.0 percent) and South (+3.6 percent). Inventories of unsold homes remained very tight, with only 1.92 million homes available for sale at the end of July. This was down 1.0 percent from June, 9.0 percent from a year earlier, and the equivalent to a mere 4.2 month supply. NAR’s press release notes that “the negative effect of not enough inventory to choose from and its pressure on overall affordability [have] put the brakes on what should’ve been a higher sales pace.”Existing and New Home Sales July17-082517.png

#2New home sales also dropped during July. Per the Census Bureau, sales of new single-family homes were at a seasonally adjusted annualized rate (SAAR) of 571,000 units. This was down 9.4 percent from June and off 8.9 percent from the same month a year earlier. Sales fell in three in four Census regions: Northeast (-23.8 percent), West (-21.3 percent), and South (-4.1 percent). New home sales increased 6.2 percent in the Midwest. Similarly, three of four Census regions have experienced year-to-year sales declines, including the Northeast (-13.5 percent), Midwest (-12.7 percent), and South (-11.7 percent). New home sales were 1.7 percent above their July 2016 rate. Inventories of new homes grew 1.5 percent to a seasonally adjusted 276,000 units. This translated into a 5.8 month supply of new homes on the market. As a result, the median sales price of new homes sold during the month—$313,700—was 6.3 percent above that of a year earlier.

#3The pace of economic expansion slowed during July. The Chicago Fed National Activity Index (CFNAI) shed 17-basis points during the month to slip to a negative -0.01 reading. This was the third time over the past five months in which the CFNAI was negative, indicative of the U.S. economy growing slower than its historical average. The CFNAI is a weighted average of 85 economic measures. During July, 42 of the measures made a positive contribution to the CFNAI during July. Among the four broad categories of economic measures, only those related to employment made a positive contribution (adding nine basis points to the index). Weighing on the index were components associated with consumption/housing (costing six basis points), production (costing two basis points), and sales/orders/inventories (costing a basis point). The CFNAI’s three-month moving average, with smooths some of the month-to-month volatility in the index, lost 14-basis points during the month to -0.05. This was the moving average’s lowest reading since March.

#4A sharp decline in airplane orders weighed heavily on durable goods orders in July. New orders for manufactured durable goods slumped 6.8 percent to a seasonally adjusted $229.2 billion, according to the Census Bureau. This was the largest decline in durable goods orders in almost three years. The drop was partially the product of new orders for civilian aircraft tumbling 70.7 percent (note that aircraft order data tend to be very volatile month-to-month), contributing to 19.0 percent decrease in transportation goods orders (also not helping was a 1.2 percent fall in new orders for motor vehicles). Net of transportation goods, new durable goods orders gained 0.5 percent to $154.8 billion. Rising during the month were orders for electrical equipment/appliances (+2.6 percent), computers/electronics (+1.6 percent), and fabricated metal products (+1.0 percent). New orders fell, however, for machinery (-1.4 percent). A proxy for core business investment—civilian non-aircraft capital goods orders—gained 0.4 percent. Shipments grew for a third straight month (+0.4 percent), unfilled order lost ground for the third time in four months (-0.3 percent), and inventories expanded for the 12th time in 13 months (+0.3 percent).

#5Home prices continue to rise far more quickly than the general rate of inflation. The Federal Housing Finance Agency’s purchase-only Home Price Index edged up 0.1 percent during June and has risen by 6.5 percent over the past year. The measure of prices of homes that have been purchased at least twice (hence a repeat purchase index) gained in five of nine Census regions during the month, led by the East South Central (+1.3 percent) and Pacific (+0.7 percent) regions. Prices held firm in the Middle Atlantic but fell in three regions: West South Central (-0.5 percent), South Atlantic (-0.2 percent), and East North Central (-0.1 percent). All nine Census regions have positive 12-month comparables, with prices growing by the largest percentage over the past year in the Pacific (+9.8 percent), Mountain (+7.9 percent), East South Central (+7.1 percent) regions.

Other U.S. economic data released over the past week:
Jobless Claims (week ending August 19, 2017, First-Time Claims, seasonally adjusted): 234,000 (+2,000 vs. previous week; -26,000 vs. the same week a year earlier). 4-week moving average: 237,750 (-9.4% vs. the same week a year earlier).
Mortgage Delinquencies (2017 Q2, Delinquency Rate of Outstanding Mortgages, seasonally adjusted): 4.24% (vs. 2017Q1: 4.71%, vs. 2016Q2: 4.66%).
Temporary and Contract Workers (2017Q2, Average Number of Temporary and Contract Workers per week): 3.13 million workers (+1.9% vs. 2017Q1, -1.4% vs. 2016Q2).

The opinions expressed here are not necessarily those of Kevin’s current and previous employers. No endorsements are implied.

Consumer Spending Pauses, Expectations Ease: June 26 – 30.

Growth in consumer spending moderated during May as had consumer sentiment in June. Here are the 5 things we learned from U.S. economic data released during the week ending June 30.

#1Personal spending grew at a sluggish pace during May. The Bureau of Economic Analysis estimates real consumer personal expenditures (PCE) grew 0.1 percent during the month following two back-to-back months of 0.4 percent gains. Real spending swelled for both nondurable goods (+0.2 percent) and services (+0.1 percent) but slipped for durable goods (-0.1 percent). Real PCE has increased 2.7 percent over the past year, including a strong +7.0 percent year-to-year gain in durable goods spending. Removing the adjustments for price variability, nominal consumer spending also increased 0.1 percent during the month to $13.214 trillion on a seasonally adjusted annualized basis. Growing at a faster rate were personal income (+0.4 percent), nominal disposable income (+0.5 percent), and real disposable income (+0.6 percent). The latter was the largest single-month gain in real disposable income since April 2015. As a result, the savings rate rose to its highest mark since last September with a 4/10ths of a percentage point increase to +5.5 percent. Finally, the PCE deflator, a closely watched measure of inflation, has grown +1.4 percent over the past year, as did the core PCE deflator (which removes both energy and food from the analysis). Both remained below the Federal Reserve’s 2.0 percent inflation target.Real Disposable Income and PCE-063017

#2One possible reason: Consumers appear a bit less confident about the future. The Conference Board’s Consumer Confidence Index added 1.3 points during June to a seasonally adjusted 118.9 (1985=100), marked by Americans feeling better about current business conditions but less so about conditions in the coming months. The present conditions index surged 5.7 points to 146.3 (approaching the measure’s best reading since 2001) while the expectations index shed 1.7 points to 100.6. 30.8 percent of surveyed consumers felt current business conditions were “good,” compared to 12.7 percent who saw them as being “poor.” Survey respondents also were more positive about labor market conditions as 32.8 percent of consumers said jobs were “plentiful” while only 18.0 percent felt that they were “hard to get.” The press release noted that “[c]onsumers anticipate the economy will continue expanding in the months ahead, but they do not foresee the pace of growth accelerating.”

On the other hand, the University of Michigan’s Index of Consumer Sentiment lost two full points during June to drop to a seasonally adjusted 95.1 (1966Q1=100). This was the measure’s lowest reading since last fall’s election and was the resulting a deteriorating outlook for the future. The expectations index fell by 3.8 points to 83.9 while the current conditions index edged up by 8/10ths of a point to 112.5. As has been the trend with this survey since last November, Republicans were far more positive about current and future business conditions than were Democrats. The press release indicates that the index readings suggest personal spending will grow by 2.3 percent during 2017.

#3Even with another upward revision, Q1 GDP growth was soft. The Bureau of Economic Analysis now estimates Gross Domestic Product grew at a seasonally adjusted annualized rate (SAAR) of +1.4 percent, an improvement from the 1.2 percent gain reported a month earlier and the initial estimate of a 0.7 percent advance. Q1 economic growth was slower than the 2.1 percent and 3.5 percent during the two previous quarters. The most recent upward revision was the product of higher than previously believed levels of personal consumption expenditures (PCE) and exports. The biggest contributors to Q1 GDP growth were nonresidential fixed investment (+123 basis point contribution to GDP growth), exports (+82-basis points), personal consumption expenditures (+75-basis points), and residential fixed investment (+48-basis points). Notable is that the contribution from consumption was down sharply from the previous quarter when PCE added 240-basis points of GDP growth. Also holding back Q1 GDP growth were the negative contributions from private inventory accumulation (-111-basis points), imports (-59-basis points), and government expenditures (-16-basis points). Corporate profits from current production slumped 2.3 percent during Q1 to $2.102 trillion (SAAR). Even with the decline, corporate profits were up 3.3 percent from a year earlier.

#4Economic growth has appeared to have downshifted during May. The Chicago Fed National Activity Index (CFNAI), a weighted average of 85 economic indicators, plummeted by 83-basis points during the month to a seasonally adjusted -0.26. Only 32 of the 85 economic indicators made a positive contribution to the CFNAI. Among the four major categories of indicators, production-related indicators deteriorated by far the most, with its contribution to the headline index falling from +0.53 to -0.16. Also softening from their April contributions were indicators related to employment (down 14-basis points to -0.02) and consumption/housing (off two-basis points to -0.09). The contribution from sales/orders/inventories indicators improved by 3-basis points to +0.02. The three-month moving average for the CFNAI, which smooths some of the month-to-month variability and therefore may be a better indicator of business trends, fell by 17-basis points to +0.04. Nevertheless, the reading above 0.00 suggests that slightly above average economic growth over the past three months (even if the pace of expansion slowed sharply during May).

#5Durable goods orders fell for second consecutive month in May. Per the Census Bureau, new orders for durable goods dropped 1.1 percent to a seasonally adjusted $228.2 billion. This followed a 0.9 percent decline in April. Pulling down the headline measure were large declines in orders for civilian and defense aircraft (-11.7 percent and -30.8 percent, respectively). This resulted in a 3.4 percent decrease in overall transportation goods, even as new orders for vehicles gained 1.2 percent during May. Net of transportation goods, durable goods orders edged up 0.1 percent, its third increase in four months. Orders increased for electrical equipment/appliances (+1.0 percent), machinery (+0.6 percent), and primary metals (+0.3 percent), but fell for computers (-3.2 percent), communications equipment (-3.1 percent), and fabricated metal products (-0.2 percent). A proxy for business investment—civilian capital goods orders net of aircraft—cooled 0.2 percent during May. Durable goods shipments improved for the first time in three months (+0.8 percent). Unfilled orders shrank 0.2 percent while inventories expanded 0.2 percent.

Other U.S. economic data released over the past week:
Jobless Claims (week ending June 24, 2017, First-Time Claims, seasonally adjusted): 244,000 +2,000 vs. previous week; -23,000 vs. the same week a year earlier). 4-week moving average: 242,250 (-9.2% vs. the same week a year earlier).
Pending Home Sales (May 2017, Index (2001=100), seasonally adjusted):  108.5 (vs. April 2017: 109.4, vs. May 2017: 110.4)
Case-Shiller Home Price Index (April 2017, 20-City Home Price Index, seasonally adjusted): +0.3% vs. March 2017, +5.7% vs. April 2016).
Agricultural Prices (May 2017, Prices Received by Farmers, seasonally adjusted): +2.1% vs. April 2017, +4.8% vs. May 2016).

The opinions expressed here are not necessarily those of Kevin’s current and previous employers. No endorsements are implied.

Q1 GDP Growth Revised From Weak to Tepid: May 22 – 26

The U.S. economy expanded at a tepid pace in early 2017 while the housing market paused in April. Here are the 5 things we learned from U.S. economic data released during the week ending May 26.

#1Even with an upward revision, the U.S. economy expanded at a slow pace during the opening months of 2017. The Bureau of Economic Analysis revised its estimate of first-quarter growth in the Gross Domestic Product (GDP) from a seasonally adjusted annualized growth rate of 0.7 percent to a gain of 1.2 percent. The weak Q1 GDP gain followed a 2.1 percent annualized increase in economic activity during the final three months of 2016. The Q1 GDP revision was the result of higher than previously believed levels of nonresidential fixed investment, personal spending, and state & local government spending (although pulling down the estimate was a lowered estimate of private inventory accumulation during the quarter). Nevertheless, the updated GDP estimate still presents a similar story of what had been reported a month ago: a sharp slowdown in the growth of personal consumption expenditure resulted in the smallest growth in economic activity in a year. Consumption added 44-basis points to GDP growth during Q1 after having contributed 240-basis points to Q4 2016 growth. Most of Q1’s economic growth instead came from fixed investment, with residential and nonresidential fixed economic responsible for 50-basis points and 134-basis points of economic growth during the quarter, respectively. This report also presented the first glimpse of corporate profits, which were at a seasonally adjusted annualized rate of $2.110 trillion. This was off 1.9 percent from the final three months 2016 but up 3.7 percent from Q1 2016. The BEA will revise its GDP estimate once again on June 29.Q1 GDP Contributors 052817

#2On the bright side, economic activity appears to have sped up during April. The Chicago Fed National Activity Index, a weighted average of 85 economic measures, jumped by 42-basis points during the month to a reading of +0.49. This was the measure’s highest point since November 2014. The surge was largely the result of a 45-basis point improvement in the index components tied to production (to a +0.46 contribution to the CFNAI). Also improving during April were CFNAI components linked to employment, with a five-basis point increase to +0.10. Slipping from their March performance were index components tied to sales/orders/inventories (down seven basis points to a neutral contribution of 0.00) and the personal consumption/housing categories of index components (shedding two basis points to -0.06). In all, 46 of the CFNAI’s 85 components made positive contributions to the index. The CFNAI’s three-month moving average grew by 23-basis points to a reading of +0.23. A reading above 0.00 for the moving average is consistent with an economy that is expanding faster than its historical average.

#3Sales of previously owned homes took a breather during April. Per the National Association of Realtors, existing home sales declined 2.3 percent during the month to a seasonally adjusted annualized rate (SAAR) of 5.57 million units. Sales decreased during April in the South (-5.0 percent), West (-3.3 percent), and Northeast (-2.7 percent), but improved in Midwest (+3.8 percent). Existing home sales were 1.6 percent above their April 2016 pace. There was a 4.2 month supply of homes on the market at the end of April, its highest point since last October. However, the 1.93 million homes available for sale at the end of April was 9.0 percent below that of a year earlier. As a result, the median sales price of $244,800 was 6.0 percent above that of a year earlier. NAR’s press release linked the slowdown in home sales to “new and existing inventory…not keeping up with the fast pace homes are coming off the market.”

#4Sales of new homes sagged during April. The Census Bureau reports that new home sales fell 11.4 percent during the month to a seasonally adjusted annualized rate (SAAR) of 569,000 units. This was still 0.5 percent above the year-ago sales rate of new homes. Sales dropped in all four Census regions during the month, led by sharp declines in both the West (-26.3 percent) and Midwest (-13.1 percent). On a year-to-year basis, new home sales had grown in the Midwest (+19.7 percent) and South (+4.1 percent) but had slowed in both the West (-13.7 percent) and Northeast (-5.1 percent). Inventories of unsold new homes expanded 1.5 percent to 268,000 units. This was the equivalent to a 5.7 month supply.

#5Consumer confidence remained strong during May, although one’s political views greatly influenced their outlook. The Index of Consumer Sentiment from the University of Michigan inched up 1/10th of a point during the month to a seasonally adjusted reading of 97.1. The same measure was at 94.7 one year ago and was in line with its six-month average of 97.3. The current conditions index dropped by a full point to 111.7 (May 2016: 109.9) while the expectations index added 7/10ths of a point to 87.7 (May 2016: 84.9). The press release noted that the recent pattern of a sharp partisan divide remained, with survey participants that identify themselves as Republicans indicating great optimism and those that are Democrats being particularly pessimistic. 84 percent of Republicans reported “favorable” news about recent economic developments, compared to a mere 37 percent of Democrats. Conversely, 73 percent of Democrats described “unfavorable” economic news versus only 19 percent of Republicans. The press release also stated that the survey results suggested real personal spending would grow 2.3 percent during 2017.

Other U.S. economic data released over the past week:
Jobless Claims (week ending May 20, 2017, First-Time Claims, seasonally adjusted): 234,000 +1,000 vs. previous week; -34,000 vs. the same week a year earlier). 4-week moving average: 235.250 (-14.7% vs. the same week a year earlier).
Durable Goods (April 2017, New Orders, seasonally adjusted):  $231.2 billion (-0.7% vs. March 2017). New orders net of transportation goods: $152.7 billion (-0.4% vs. March 2017).
FOMC minutes
FHFA House Price Index (March 2017, Purchase-Only Index, seasonally adjusted):  +0.6% vs. February 2017, +6.2% vs. March 2016.
Wholesale Inventories (March 2017, Inventories of Merchant Wholesalers, seasonally adjusted): $594.6 billion (+0.2% vs. February 2017, +3.0% vs. March 2016).

The opinions expressed here are not necessarily those of Kevin’s current and previous employers. No endorsements are implied.