Improved Pending Home Sales Helped By Very Low Rates

Improved Pending Home Sales - Core Durable Goods Orders Weak, but Not Declining

Before getting into Improved Pending Home Sales, let's review Durable Goods. The economic surprise index has been cratering in America. But it’s barely negative in Europe. It’s at -68.1 in America and -0.3 in Europe.

In America it’s falling because of disappointing results like the May durable goods orders report. Good news is the weak headline reading seen in the chart below was mostly caused by weakness in aircraft orders.

Other than that, the results were ok. The report shows a continuation of the weak growth we’ve seen for a few months. It’s nothing to cause alarm about a recession. But also nothing to make you think the slowdown is over.  

Monthly new orders growth was -1.3% in May which missed estimates for a 0.1% decline.

This weakness lapped April’s decline of 2.8%, telling you how weak growth was.

Improved Pending Home Sales - Yearly headline new orders growth was -2.8% which is down from the 0.7% decline in April. Orders for transportation equipment fell 4.6% after declining 7.6% in April.

Motor vehicles and parts orders monthly growth was 0.6%. Orders for non-defense aircrafts fell 28.2%. That’s because of the decline in orders for Boeing’s 737 Max plane.

Growth ex-transportation wasn’t bad because it doesn’t include aircrafts. Ex-transportation growth was 0.3% monthly which beat estimates for 0.1% and April’s 0.1% decline.

Furthermore, core capital goods orders were up 0.4% monthly which beat estimates for 0.2% growth. That was on top of a 1% decline, so it’s not impressive.

As you can see from the chart below, yearly core orders growth improved slightly from 1.2% to 1.3%. Core shipments growth was a solid 4%.  

Unfilled orders fell 0.5%.

Improved Pending Home Sales - That’s likely because of aircrafts as unfilled orders for civilian aircrafts fell 0.9%. Orders for fabrications were up 0.5% monthly and machinery orders were up 0.3%.

However, orders for primary metals fell 1.1%. Inventories were up 0.5% which is line with shipments growth which is why the inventory to shipments ratio stayed at 1.67.

Because of this report, Bank of America lowered its estimate for Q2 GDP growth by 0.6% to 1.9% and Goldman Sachs raised its estimate from 1.4% to 1.5%.

It seems like Bank of America was too optimistic heading into the data releases on Wednesday and Goldman Sachs was too pessimistic. Growth will likely be between 1.6% and 2.1%. That’s my guess. Atlanta Fed’s Nowcast fell from 2% to 1.9%.

Nowcasts for the contributions of net exports and inventory investment changed from 0% and -1.04% to -0.38% and -0.8%.

Weak Weekly MBA Purchase Applications Growth, But Strong Yearly Growth

Improved Pending Home Sales - In the week of June 21st, the MBA composite index was up 1.3%. Refinance index was up 3% on top of a 4% decline. Purchase index was down 1% on top of a 4% weekly decline.

On the positive side, yearly purchase applications growth was a strong 9%. In the week of June 27th, the average 30 year fixed mortgage rate fell 11 basis points to a new 2019 low. It is at 3.73% which is the lowest reading since November 10th, 2016.

The all-time record low was 3.31% in November 2012. There isn’t much more rates can fall to help the housing market. They are near as low as they probably will ever get. I’m not expecting a new record low anytime soon.

Improved Pending Home Sales

In the midst of mostly disheartening economic data, the May pending home sales report beat estimates and had positive monthly growth. It certainly wasn’t hurt by the big decline in rates.

Specifically, the index was up 1.1% monthly which beat estimates for 0.6% growth and met the high end of the estimate range. The index was up from 104.3 to 105.4. Yearly growth was -0.7%, but this was the best reading since last July.

As you can see from the chart below, the Northeast was 2nd the weakest region. However, its reading actually had a big 3.5% monthly increase from 88.9 to 92.

Midwest had the strongest monthly growth as its was 3.6%, but its yearly growth was -1.2%. South had the best reading and it was the only index with positive yearly growth which was 0.7%. West had the worst reading and the worst declines as it had -1.8% monthly growth and -3.1% yearly growth.

Trade Deficit Grows In May

Improved Pending Home Sales - GDP growth rate in Q2 will be lower than Q1. But it could have better underlying numbers. It won’t be helped by trade and inventories as much as Q1.

That thesis was supported by the May International Trade in Goods report which showed the trade deficit increased from $70.9 billion in April to $74.6 billion in May. This deficit was greater than the consensus which was $71.5 billion.

Exports were up 3% after falling 3.2% and imports were up 3.7% after falling 2.5%. I’d rather see imports and exports rise. But in terms of GDP growth, if imports rise faster than exports, it’s a negative.   

Net exports are probably going to hurt Q2 GDP growth. Exports were $140.2 billion and imports were $214.7 billion. Exports of foods, feeds, and beverages were up 6.1% monthly to $11.9 billion.

Capital goods exports were up 3.5% to $46.3 billion. They had yearly declines of 9.1% and 3.8% respectively. Vehicle exports were up 4.7% to $13.8 billion. They were up 1.5% yearly.

Imports of foods fell 0.5% to $12.8 billion, but imports of vehicles were up 7.5% monthly to $33.2 billion. They were up 10.9% yearly. Consumer goods imports were up 2.7% monthly and down 2.4% yearly to $55.5 billion.

Improved Pending Home Sales - Conclusion

The data I discussed in this article wasn’t terribly disappointing for a change. We had ok core durable goods shipments growth. We also saw solid yearly growth in MBA purchase applications. And combined with Pending homes sales were all beating estimates with positive monthly growth.

There isn’t much data that tells us the economy is in a recession even though people are tempted to call for a recession every time there is a weak period. 

Spread the love

Comments are closed.