Housing Market Index Strong & Industrial Production Weak

Housing Market Index - MBA Mortgage Applications

Housing Market Index - In the week of May 10th, the MBA applications index fell 0.6% from last week after increasing 2.7%. The purchase applications index fell 1% after increasing 4%. Yearly growth was 7.7%. 

In April, purchase applications for newly built homes were up 15.6% annually. Recent decline in interest rates will provide further support for the housing market. Without this year to date decline, housing would be weak like last year. In the week of May 16th, the 30 year fixed mortgage rate fell 3 basis points to 4.07%. 

It is just 1 basis point above the 2019 low. I think June will see yearly demand growth acceleration once consumers see these even lower rates. The refinance index also fell 1% weekly after rising 1%.

Home Builder Sentiment

Housing Market Index - As you can see from the chart below, the Housing Market index increased from 63 to 66 in May which beat estimates for 64. This was a 7 month high. It has taken all year to regain the losses made late last year. The improvement in the April reading didn’t translate to all the other housing market readings, but it’s still good to see this index increase. Present sales and 6 month leading sales indexes had very strong readings of 72.

Anything above 50 is expansion. That means traffic still fell, but at a lesser rate as the index increased to 49. It seems like the housing market is improving, but entry level housing is still lagging as the traffic index showed a slight decline. 

Northeast region had a reading of 65 which was the highest once since May 2005. South, which is the biggest market, was at 67. West and the Midwest were at 74 and 56.

Weak Headline Industrial Production Growth

Housing Market Index - April industrial production report was weak. Monthly growth was -0.5% which missed estimates for 0% growth. March growth was revised up from -0.1% to 0.2%. Yearly growth was 0.9% which is the weakest reading since February 2017. In every recession since 1920, industrial production has fallen. 

There have been a few minor false recession calls by industrial production. The most notable non-recessionary decline in the past few decades was in 2015-2016 where growth troughed at -4.1%. Personally, I think if growth falls that low this year or next year, there will be a recession. The biggest reason the economy avoided a recession in 2016 was because service sector growth was steady. Service sector has grown as a percentage of the economy in the past few decades.

Monthly manufacturing growth was -0.5% which missed estimates for 0.1% and last month’s reading of 0%. It was even below the low end of the estimate range by 0.4%. Yearly growth was 0%. 

As you can see from the chart below, manufacturing has recently followed the weakness in the ISM manufacturing PMI. This correlation could actually be good news because the regional Fed manufacturing reports, which I haven’t reviewed yet, have been solid in May. 

ISM PMI is likely to improve next month. 

Housing Market Index - That doesn’t necessarily mean industrial production growth will do better, but it’s obviously possible.

Just as the retail sales report was negatively manipulated by the seasonal adjustment because of the timing of Easter, manufacturing also had a quirk in the data that make it look worse than it was. 

As you can see from the chart below, monthly manufacturing output growth minus the 6 month average has almost always been negative when the 15th is after the payroll survey and 22 working days. 

Since 2007, there was only one time monthly growth was above the 6 month average in this circumstance. We need to wait a month to see if the retail sales and industrial production reports were suppressed in April. It’s easy to see this industrial production report as weak because it goes along with the recent trend.

The capacity to utilization rate cratered because of this headline weakness as it fell from 78.5% to 77.9% which missed the consensus estimate for 78.7%. Motor vehicle and parts production fell 2.6% which was the 2nd monthly decline in a row. 

Yearly growth was -4.4%. This is consistent with the retail sales report and the increased 90+ day delinquency rate on auto loans. Business equipment investment fell 2.8% monthly and yearly growth was 0.1%. Consumer goods production fell 1.2%.

Construction supplies production growth was 0.1% which followed a sharp 1.7% decline. Hi-tech production was one of the good parts of this report as growth was 0.6% monthly and 3.2% annually. Another positive was mining volume growth which was 1.6% after 3 straight months of declines. Utilities output fell 3.5% monthly and 4.7% yearly.

Empire Fed

Housing Market Index - So far, the Empire Fed and Philly Fed indexes have been strong. Empire Fed’s general business conditions index increased from 10.1 to 17.8 as you can see from the chart below. 

That beat estimates for 9 and was above the high end of the estimate range of 11. The new orders index was up 2.2 points to 9.7 and the shipments index was up 7.7 points to 16.3. 

Both the prices paid and the prices received indexes fell slightly. The 6 month expectations sub-indexes were mostly very positive. General conditions were up 18.2 to 30.6. New orders were up 12.9 to 33.4. Capex and technology spending were up 1 and 2.5 points to 26.2 and 22.8.

Housing Market Index - Conclusion

The MBA applications data has shown some weakness, but the reports from April were strong. May Home Price index showed further improvement. Industrial production report was weak like the retail sales report. 

However, both were affected by weird issues. Retail sales were hurt by a seasonal adjustment caused by the Easter holiday shift and industrial production growth was low because of the timing of the survey. Even though manufacturing generally looks terrible, there are green shoots. Empire Fed index snapped back in May. 

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