New Home Sales Remain Near Cycle High

Weak Kansas City Fed Manufacturing Report

Kansas City Fed manufacturing report was worse than the previous 3 regional Fed reports as the current and expectations indexes both fell. Unlike the prior 3 reports, this one has quotes which give us context on the numbers. As you can see from the chart below, the index fell from -2 to -3. The chart matches industrial production growth and durable goods orders. Manufacturing sector is in a modest recession. Numbers are negative, but better than 2015 and 2016. Production, volume of shipments, and volume of new orders indexes fell from 11, 9, and -3 to 8, 0, and -13.

Richmond Fed index showed a big burst in expectations, but the Kansas City expectations index fell from 5 to 2. Production and volume of shipments indexes both fell from 5 to 2. Volume of new orders index fell from 13 to 11. Expected capex index fell from 6 to 1. 

Good news is in the special question which asked firms about the primary driver of capital investment over the next year, less than 15% cited economic/political uncertainty. When asked about hiring workers, about 50% of firms said they have had difficulty hiring workers in the past 3 months because of a lack of qualified applicants.

In the selected comments section of this report, there were 3 quotes out of 11 which mentioned the trade war. One firm stated, “Trade war with China is really hurting our export business, and we’ve had to outsource outside the U.S. to retain only about half of our traditional customer demand in China. Besides the lost revenue, profit margins are half due to outsourcing the production.” I’m interested to see how firms react to the news about the latest trade negotiations. To be clear, weakness isn’t just because of the trade war. 

One firm stated, “Backlog dropping like a rock in past several months. Production teammates seeing their hours worked each week down by 30% to 40%. Tough market right now, competitors reducing prices way below what we are currently willing to go. Concentrating on cost reduction and taking care of what we have control over.”

Solid September New Home Sales

Unlike the recent housing reports which have been mostly modestly disappointing, the new home sales report was a modest beat. August report was lowered by 7,000 to 706,000; the September reading was 701,000 which beat estimates by 3,000. The June reading still is a cycle high which makes a recession less likely. That is, unless the weakness in the 2nd half of 2018 was the recession signal. 

Q3 certainly looks like a soft spot for the economy, but I don’t see a recession. 3 month average of new home sales in September was 691,000 which is the 2nd best reading of this cycle. Best was last month which was 700,000.

Unlike existing home prices, which rose, new home prices fell sharply. Monthly prices fell 7.9% to $299,400. Yearly price growth was -8.8%. This is even worse than the FHFA reading. It certainly closes the price gap between new and existing home prices. Average existing home price was $272,100. That’s a $27,300 difference. This decline in prices drove the 15.5% yearly growth in new home sales. Supply stayed at 5.5 months. Remember, supply was 4.1 months for existing homes. Both can increase slightly because of supply without it being problematic.

The chart below gives the long term context of the recent new home sales reports. Even though new home sales are at a cycle high, on a population adjusted basis, they have been below the long term range for this entire cycle. There is still room for more new homes to be built and the home ownership rate to increase. 

A big problem is affordability. Even with the full labor market generating positive real wage growth and interest rates being near their record low, many millennials are having a tough time affording housing. If the labor cycle ends soon, new home sales won’t get to the low end of the historical range for another few years. We might need to see home prices fall.

Leading Index Growth Rate Falls

Comps for the ECRI leading index will get much easier this fall. But that didn’t affect the October 18th reading as the yearly growth rate fell from 0.3% to -0.2%. Even though the index rose from 144.2 to 144.8. Comps will get easier in the next few weeks. 

As you can see from the chart below, the ECRI leading index has been range bound for the past year. It peaked in early 2018 along with the global equity market. The U.S. stock market has weak returns since the January 2018 peak. I don’t put much credence into the divergence shown in this chart as charts like this can be manipulated by the scales of their X axes.

Q3 GDP Nowcasts

Let’s look at the updates to the GDP Nowcasts as the advanced reading of the Q3 GDP report comes out this Wednesday. Median estimate is for just 1.5% growth. Anything above 2% would be a great reading. That shows how weak the data has been recently. Atlanta Fed report, which was updated on Thursday, showed no change in expectations as it still projects 1.8% growth. 

Existing home sales report caused the estimate for real gross private domestic investment growth to fall 0.3% to 0%. I doubt the new home sales report changed this estimate much because the August reading was revised lower and the September reading beat estimates slightly.

The 2nd to last Q3 NY Fed Nowcast was lowered by 3 basis points to 1.91%. It’s pretty rare for the NY Fed Nowcast to be above the consensus. If the NY Fed’s Nowcast is below the actual result like usual, there might actually be +2% growth. 

Q4 Nowcast is the NY Fed up to its usual ways as it only expects 0.92% growth. I think that’s too bearish, but we don’t know much about Q4 yet. Q1 GDP Nowcast was 88 basis points at one point; the advanced growth rate ended up being 3.13%. Q3 St. Louis Fed Nowcast is at 3.16% as it is usually optimistic.  

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