The Weekly Economic & Real Estate Forecast – 6/19/17 to 6/23/17

What I Saw Last Week

The Federal Reserve released its Q1-2017 Financial Accounts of the U.S. report and there were some really interesting data points that relate to housing.  The report showed the value of residential real estate in the country totaling $34.5 trillion in Q1 – up by almost 1.6 trillion from a year ago and 3.7% above its pre-recession peak.

Ddebt & Equity

Of equal, if not greater, interest to me is that homeowner equity in the quarter rose by $1.3 trillion to now stand at $13.7 trillion.

U.S. Retail Sales dropped 0.3% in May (I had forecast an increase of 0.1%) and retail sales, excluding autos, dropping by 0.3% (I had forecast an increase of 0.2%).

Retail Sales

Core retail sales – which exclude auto sales, gasoline station, building materials, and food services sales – were basically flat versus April.  A drop in electronics and appliance store (-2.8%), gasoline station (-2.4%), and motor vehicle (-0.2%) sales were key drags on overall sales, yet there wasn’t much strength seen in general.

Non-store retailers (+0.8%) were the notable exception in terms of sales strength. Clothing and clothing accessories stores sales rose by 0.3%.

The takeaway from this report is that consumers clearly remain guarded with their discretionary spending activity, which is likely the result of seeing little, if any, wage growth.

Inflation, as measured by the Consumer Price Index, declined 0.1% in May (I had forecast no change) while the core rate, which excludes food and energy, was up 0.1% (I had forecast a rise of 0.2%).

CPI

For the 12 months ending May, total CPI on an unadjusted basis was up 1.9%, versus 2.2% for the 12-months ending April, while core CPI was up 1.7% versus 1.9% for the 12-months ending April.

Total CPI was driven lower in May by a 2.7% decline in the energy index, which was led by a 6.4% decline in the gasoline index. The food index was up 0.2%. The increase in core CPI was paced by a 0.2% jump in the shelter index, but notably, declines were registered for many other indexes, including apparel (-0.8%) and medical care services (-0.1%).

The takeaway from this report is that it shows a softening trend in consumer inflation which should, presumably, be some cause for concern among Fed members.

As anticipated, the Federal Reserve raised its benchmark interest rate by 0.25% to a range of 1.0% – 1.25%. This was somewhat more interesting given the data shown above which shows inflation still running well below target.

The central bank now believes inflation will fall well short of its 2% target this year. The post-meeting statement said inflation “has declined recently” even as household spending has “picked up in recent months,” the latter an upgrade from the May statement that said spending had “rose only modestly.” The statement also noted that inflation in the next 12 months “is expected to remain somewhat below 2% in the near term” but to stabilize.  The likelihood of one more rate increase this year just dropped.

The NAHB Housing Market Index weakened slightly in June as it dropped two points to 67 from a downwardly revised May reading of 69.  I had expected to see it drop just one point.

HMI

All three HMI components posted losses in June but still remain at healthy levels. The components gauging current sales conditions fell two points to 73 while the index charting sales expectations in the next six months dropped two points to 76. Meanwhile, the component measuring buyer traffic also moved down two points to 49.

Builder confidence levels have remained consistently sound this year, reflecting the ongoing gradual recovery of the housing market. However, even as the housing market strengthens and more buyers enter the market, builders continue to express their frustration over an ongoing shortage of skilled labor and buildable lots that is impeding stronger growth in the single-family market.

U.S. Building Permits defied my expectations and dropped 4.9% to an annual rate of 1.168M units.  I had forecast an increase to 1.250M.

Permits

Permits for single-family units declined 1.9% as compared to April to an annual rate of 779,000 – the third straight month of declining permit activity suggesting single-family homebuilding may remain weak in the coming months.

The takeaway from the report relates to the continued decline in single-family permits, which means further supply shortages and affordability constraints are likely to persist in the new home market.

U.S. Housing Starts rose at an annualized rate of 1.092M in May – well below my forecast for an increase to 1.227M units. The number was down 5.5% from the revised April rate of 1.156M. On a year-over-year basis, housing starts were down 2.4%.

Starts

The overall decline in starts was paced by a 9.8% drop in multifamily units. Single-family starts declined 3.9% after ticking up 0.4% in April.  Single-family starts jumped 12.5% in the Northeast, rose 9.5% in the Midwest, declined 8.9% in the South, and fell 4.9% in the West.

The total number of units under construction at the end of the period declined 0.7% to 1.067M. I would note that 57% of homes under construction in May were multifamily (612,000) with the multifamily count almost 6% higher than a year ago (although in recent months this total has flattened). There were 455,000 single-family units under construction, a gain of 6% from this time in 2016 which is slightly lower than the April total (457,000) – a post-recession high.

The preliminary reading of the University of Michigan Consumer Sentiment Index for June declined to 94.5 from May’s final reading of 97.1 – I had forecast a drop to 97.0.

The Current Economic Conditions Index fell to 109.6 from 111.7 in May and the Index of Consumer Expectations slipped to 84.7 from 87.7 in May.

Sentiment

Interestingly, only a handful of respondents identified the James Comey congressional testimony as a factor in their outlook, meaning specific political concerns did not play a significant role in the modest dimming of the outlook. However, there is growing evidence that continued political bickering has taken a toll on sentiment across the political spectrum. Declines were observed across all political parties with self-identified independents reporting an 11.5-point decline in sentiment while Republicans (-9.2) and Democrats (-6.8) reported smaller declines.

What to Watch for This Week

U.S. Existing Home Sales in April were running at an annual rate of 5.57M units.  I think that we will see a small pullback when the May figures are released on Wednesday.  Look for a figure of around 5.52M units.

The FHFA Housing Price Index gauges the value of US housing and I am looking for a monthly increase of 0.4% after the 0.6% increase seen in March.

U.S. New Home Sales were running at an annual rate of 569,000 units in April and I am hopeful that the May figure will be an improvement.  Look for sales to be running at an annual rate of 599,000 units.

The Weekly Economic & Real Estate Forecast – 6/12/17 to 6/16/17

What I Saw Last Week

On Wednesday, the Federal Reserve released data regarding Consumer Credit in April and the number was a disappointment.  Total credit expanded by $8.1B – I had forecast a more robust increase of $15.0B.

Credit

The growth in April was driven predominately by non-revolving credit, which was up $6.6B from March to $2.81T.  Revolving credit increased by $1.5B to $1.011T.

Credit2

Consumer credit increased at a seasonally adjusted annual rate of 2.5% in April, with revolving credit increasing at an annual rate of 1.75% and non-revolving credit increasing at an annual rate of 3%.

This is the slowest growth in consumer credit since 2011, nearly 6 years ago. With 70% of US economic growth derived from consumer consumption, this declining trendline is worrisome for future growth.  Total household net debt reached a new record, surpassing 2008 which was driven by the exceptional growth in student debt and auto loans, the latter being key in consumer credit use.

What to Watch for This Week

U.S. Retail Sales rose by 0.4% in April and I expect to see the May number come in lower with total sales up by 0.1% and core sales up by 0.2%. 

Inflation, as measured by the Consumer Price Index, is likely to remain unchanged in May, but the core rate should have risen by 0.2%.

U.S. Building Permits should rise from the annual rate of 1.229M seen in April. My call is for an increase to an annual rate of 1.250M.

U.S. Housing Starts rose at an annualized rate of 1.172M in April and I expect the May figure to come in at 1.227M units. 

Consumer Sentiment in early June will likely drop just a little from the final May figure of 97.1. I am looking at 97.0.

The Weekly Economic & Real Estate Forecast – 6/05/17 to 6/09/17

What I Saw Last Week

The Case-Shiller Index data for March saw the 20-City index up by 5.9% year-over-year matching the annual gain seen in February and representing the fastest rate of growth since July of 2014.

CS

Among the 20 cities surveyed for this report, Seattle, Portland, and Dallas just reported their highest year-over-year gains while the smallest gain of 4.1% was seen in New York.

I continue to believe that households are staying in their homes longer rather than selling and trading up.  Additionally, I would contend that if mortgage rates start to rise further, this may lead households to further delay moving which will continue to put pressure on housing as inventories will remain at depleted levels and price growth will continue at above average levels.

While it is true that prices cannot rise indefinitely, there is really no way to tell when prices and mortgage rates will force a slowdown in housing.

Personal Income & Spending in April exactly matched my forecast for both to rise by 0.4%. The personal savings rate as a percentage of disposable income held steady at 5.3%.

Income

An increase in wages and private salaries (+0.7%) drove the uptick in personal income in April.

Real disposable personal income was up 0.2% for the month and up 1.9% year-over-year versus up 2.0% in March. Real PCE (Personal Consumption Expenditures), the core component of the GDP report, was up 0.2% in April. Spending on goods was up 0.7% while spending on services was flat on a chained basis.

The takeaway from the report is the year-over-year changes for the PCE Price Index (1.7% versus 1.9% in March) and the core-PCE Price Index (1.5% versus 1.6% in March) decelerated from the prior month. That is unlikely to alter the prevailing view that the Fed will raise the target range for the fed funds rate at its June meeting, although it will stir some belief that another rate hike this year may not happen.

Consumer Confidence in May slipped to 117.9 – I had forecast a smaller decline to 119.5 – from a downwardly revised 119.4 (from 120.3) in April.

The Expectations Index dropped from 105.4 in April to 102.6 in May while the Present Situation Index rose slightly from 140.3 in April to 140.7 in May.

Confidence

Despite the dip in May, the consumer confidence reading remains close to a 10-year high.

Of interest to me is the Conference Board report on the share of respondents planning to buy a home within six months. It indicated that 5.8% of respondents were planning to buy a home in May, compared with 6.4% in April. Despite monthly volatility, the trend in the share of respondents planning to buy a home within six months has been climbing signifying further trust in the housing market.

The takeaway from the report is that a downshift in consumers’ view of the short-term economic outlook triggered the lower overall reading for April.

The NAR Pending Home Sales Index decreased 1.3% in April for a second consecutive monthly decline and fell 3.3% below its level a year ago. The Pending Home Sales Index (PHSI), a forward-looking indicator based on signed contracts, decreased to 109.8 in April, down from a revised 111.3 in March.  I had forecast an increase of 0.8%.

Pending Index

The PHSI was lower in the Northeast, South, and Midwest by 1.7%, 2.7%, and 4.7% respectively, while jumping 5.8% in the West. Year-over-year, the PHSI fell in all regions, ranging from 0.6% in the Northeast to 6.1% in the Midwest.

Looking ahead, April existing home sales fell 2.3% and the drop in PHSI suggests that this index will contract further in May. The NAR cites, as dual headwinds, spring inventory levels that are down 9.0% from a year ago, and price increases that continue to exceed wage increases. However; I would note that builder sentiment continues on an upward trend, and new home sales have risen in 2017.

The takeaway here is that, as the economy continues to add jobs, rising demand among first-time buyers will support new and existing sales in 2017.

U.S. Construction Spending in April was very disappointing as total spending dropped by 1.4% (I had forecast an increase of 0.5%) month-over-month. The mitigating factor, however, came in the understanding that March construction spending was upwardly revised to show a 1.1% increase versus an originally reported decline of 0.2%.

Con Spend

Total private construction spending declined 0.7% in April, with private residential spending down 0.7% and private non-residential spending down 0.6%. A 1.9% decline in manufacturing spending and a 1.4% decline in power spending led the downturn in non-residential spending. Despite the April decline, private construction spending was up 10.4% year-over-year.

Residential spending in aggregate was down 0.9% in April while non-residential spending was down 1.7%. On a year-over-year basis, total construction spending was up 6.7%.

The Non-Farm Payroll report for May produced a headline disappointment with non-farm payrolls coming in lower than expected and far lower than the job gains reported in the ADP Employment Change Report last Thursday.

Payrolls

May non-farm payrolls rose by 138,000 (I had forecast a more robust 185,000). Over the past three months, job gains have averaged 121,000 per month – enough to cover population growth but not much more. April payrolls were revised lower to 174,000 from 211,000 and the March numbers were also revised down to 50,000 from 79,000.

The takeaway from the employment report is that wage inflation continues to be dormant despite increased hiring activity. That understanding will temper concerns about the Fed having to walk an aggressive rate-hike path.

The U.S. Unemployment Rate in May dropped from 4.4% to 4.3% – I had forecast no change.

U RAte

Persons unemployed for 27 weeks or more accounted for 24% of the unemployed versus 22.6% in April and the U-6 unemployment rate, which accounts for both unemployed and underemployed workers, decreased to 8.4% from 8.6% in April.

The drop in the unemployment rate can be attributed to a drop in the labor force participation rate which fell to 62.7% from 62.9%.

What to Watch for This Week

Very skinny week for data this week with just one notable announcement. On Wednesday, data regarding Consumer Credit in April is released and I anticipate that it will show an expansion of $15.0B.

The Weekly Economic & Real Estate Forecast – 5/29/17 to 6/02/17

What I Saw Last Week

U.S. New Home Sales in April were at a seasonally adjusted annual rate of 569,000 – down 11.4% from the upwardly revised March rate of 642,000 (from 621,000) – which was below my forecast for a drop to 575,000.

New sales

Taking into account the revisions for just the prior five months, there were 58,000 more new home sales between November and March than previously thought.

The downturn in new home sales in April was paced by the West region, which saw a 26.3% month-over-month drop in new home sales. Every region, though, saw a monthly decline: Northeast (-7.5%); Midwest (-13.1%); and South (-4.0%).

The median price of a new home declined 3.8% year-over-year to $309,200 while the average sales price dropped 3.1% to $368,300.

The takeaway from the report is that upward revisions to prior months more than made up for the shortfall in April relative to the consensus estimate, which is to say the April report is not as disappointing as it appears to be at first blush.

U.S. Existing Home Sales in April were at a seasonally adjusted annual rate of 5.57M, down 2.3% from a downwardly revised 5.7M (from 5.71M) in March and below my forecast for a drop to 5.65M.

Existing sales

Although it was good to see total housing inventory up 7.2% in April to 1.93M existing homes, we are still 9.0% below the same period a year ago, which marked the 23rd consecutive year-over-year decline.

The median existing-home price for all housing types increased 6.0% to $244,800, which was the 62nd straight month of year-over-year gains. The median price for existing single-family homes rose 6.1% to $246,100.

All-cash sales fell to 21% of transactions versus 23% in March and 24% a year ago, reflecting most likely the affordability constraint of high prices.

The median number of days a home was on the market fell to a new low of 29 days, down from 39 days a year ago.

The key takeaway from the report remains the same: existing home sales are being impeded by a lack of affordable supply, particularly in the lower- and mid-market price range.

The second estimate for US GDP revealed a seasonally adjusted annual growth rate of 1.2% which was better than my forecast for a more modest increase to 0.8% from the initial 0.7% first estimate.

Existing sales

The upward revision was attributed to increases in non-residential fixed investment and personal consumption expenditures which were larger than previously estimated and drops in state and local government spending being smaller than previously estimated.

The takeaway from the report is that the revision moved in the right direction, which will aid in tempering concerns about the slowdown when pitted against some otherwise rosy forecasts for the second quarter (Atlanta Fed GDPNow model at 4.1%) that should produce a more encouraging average for the first half of 2017.

The final Consumer Sentiment figure for May was revised slightly lower to 97.1 from the preliminary reading of 97.7. I had forecast a drop to 97.5.

Sentiment

The Current Economic Conditions Index was revised to 111.7 from the preliminary reading of 112.7. The final reading for April was 112.7.  The Index of Consumer Expectations was revised to 87.7 from the preliminary reading of 88.1. The final reading for April was 87.0.

The key takeaway from the report is that consumer sentiment levels continue to hover at post-election highs despite a politically partisan divide on the economic outlook.

What to Watch for This Week

Income & Spending data for April is likely to show both up by 0.4%.

Consumer Confidence in May should drop from 120.3 to 119.5. I am not worried as it is still at pre-recession levels.

The NAR Pending Home Sales Index for April should show a turnaround from the 0.8% contraction seen the prior month.  Look for an increase of 0.8%.

U.S. Construction Spending dropped by 0.2% in March and the April numbers should show an increase of 0.5% as residential construction picks up a little.

U.S. Non-Farm Payrolls rose by 211,000 jobs in April and the May figure should come in at a more modest 185,000.

The U.S. Unemployment Rate for May will remain at 4.4%.

The Weekly Economic & Real Estate Forecast – 5/22/17 to 5/26/17

What I Saw Last Week

U.S. Housing Starts dropped to a seasonally adjusted annual rate of 1.172 million in April – I had forecast a rise to 1.255M units. The April number was down 2.6% from a downwardly revised rate of 1.203M (from 1.215M) for March.

Starts

The downturn in starts was driven by a 9.2% decline in multifamily construction, yet single-family starts were up by a woeful 0.4%.

Single-family starts declined 29.2% in the Northeast, rose 19.4% in the Midwest, dropped 3.4% in the South, but rose 9.1% in the West

The number of units under construction at the end of the period held steady at a seasonally adjusted annual rate of 1.074 million, which was roughly in-line with the first quarter average, so there won’t be any strong growth takeaways there for second-quarter GDP estimates.

The takeaway from the report stems from the drop in single-family permits (see below), which suggests there will be continued supply shortages and affordability constraints in the new home market.

U.S. Building Permits declined 2.5% to a seasonally adjusted annual rate of 1.229M units.  I had forecast a rise to an annual rate of 1.270M units.

Permits

Most disappointed was a 4.5% drop in permits for single-family units.  Single-family building permits declined 1.9% in the Northeast, 3.1% in the Midwest, 7.9% in the South, but rose 2.1% in the West.

What to Watch for This Week

U.S. New Home Sales were running at an annual rate of 642,000 units in March and I anticipate a contraction when the April numbers are released on Tuesday.  My forecast is for the rate to drop to 575,000 as the number of starts remains well below average.

U.S. Existing Home Sales were running at an annual rate of 5.71 million units through March and the April figure is likely to show a modest drop to 5.65 million.  There are still not enough homes for sale.

The second estimate for US GDP is likely to show very slight improvement from the 0.7% rate first announced.  I think that it will rise to 0.8% – an improvement, but still disappointing.

The early May Consumer Sentiment figure was measured at 97.7 and I believe that the final number will show a very small drop to 97.5.

The Weekly Economic & Real Estate Forecast – 5/15/17 to 5/19/17

What I Saw Last Week

Inflation in April, as measured by the Consumer Price Index, was pretty much in line with expectations with the all-items index up by 0.2% (I had forecast 0.2%) and the core rate also matching my forecast with an increase of 0.1%.

CPI

On a year-over-year basis, the all items index was up 2.2%, versus 2.4% for the 12- months ending in March and the 1.7% average annual increase seen over the last 10-years.

The core index, which excludes food and energy, was up 1.9% year-over-year, versus 2.0% for the 12-months ended March and the average annual increase of 1.8% over the past decade.

The key takeaway from the CPI report is that consumer inflation pressures moderated a bit in April. That won’t change the thinking that the Fed will raise rates at its June meeting, yet it will temper concerns about the Fed possibly needing to be more aggressive with its rate hikes.

U.S. Retail Sales rose by 0.4% in April – I had called for a 0.6% increase – while core sales rose by 0.3% (below my forecast for an increase of 0.5%).

Retail Sales

The overall growth in retail sales was aided by a 0.7% increase in auto sales, as well as a nice jump in sales at electronics and appliance stores (+1.3%), building material and garden equipment and supplies dealers (+1.2%), and non-store retailers (+1.4%).

The takeaway from this report is that it puts consumer spending on a path toward being a much better contributor to second quarter real GDP growth than it was in the first quarter.

Consumer Sentiment in early May came in at 97.9 – this was well above my call for a pullback to 96.5.  The Current Economic Conditions Index was 112.7, unchanged from the final reading for April, while the Index of Consumer Expectations rose to 88.1 from 87.0

Sentiment

Interestingly, there hasn’t been a letup in consumer confidence since the election. The May number was nearly the same as the December to May average of 97.4.

The takeaway from this report is that consumers had some of the most favorable real income expectations in a dozen years, yet their buying plans were reportedly mixed. That disconnect seems to fit with the divide that has been seen between “soft” data, like this survey, and “hard” data like the personal spending report.

What to Watch for This Week

U.S. Housing Starts were running at an annual rate of 1.215M units in March and I anticipate that the April number will show an uptick.  My call is for annual starts to rise to 1.255M units.

U.S. Building Permits rose 3.6% to an annual rate of 1.260M units in March.  The April figure is likely to show further improvement with permits rising to an annual rate of 1.270M units.

 

The Weekly Economic & Real Estate Forecast – 5/08/17 to 5/12/17

What I Saw Last Week

The Income & Spending report for March showed incomes rising by 0.2% (after a downwardly revised 0.3% increase in February) and spending unchanged for the second month in a row. These figures exactly matched my forecast.

Income

The lackluster spending activity was already reflected in the advance estimate for Q1 GDP on Friday, so that isn’t a new headline shocker so to speak. Additionally, the personal income figures were also embedded in the GDP report and was not a surprise.

The key takeaway from the report is that it showed a deceleration in both the PCE (Personal Consumption Expenditures) Price Index and the core PCE Price Index year-over-year. That will temper concerns about the Fed being behind the curve in fighting inflation and it will quiet concerns about the Fed needing to be more aggressive in tightening monetary policy than is currently projected.

Total U.S. Construction Spending matched my forecast with a 0.2% decline in March.

Con Spend

Total private construction spending was unchanged in March as a 1.3% decline in non-residential spending offset a 1.2% increase in residential spending. The downturn in non-residential spending was led by educational (-7.8%), commercial (-3.2%), and office (-2.6%) spending.

On a year-over-year basis, total construction spending was up 3.6%, with total private construction spending up 7.0% and total public construction spending down 6.5%.

The key takeaway from the report is that the headline disappointment for March was more than offset by the upward revision to February, meaning the March miss wasn’t really a true miss!

The lead headlines from the April employment report were all encouraging. Payrolls increased more than expected, the unemployment rate dropped, average hourly earnings picked up and so did the average workweek.

April Non-Farm Payrolls rose by 211,000 (I had forecast an increase of 185,000 jobs).  March non-farm payrolls were revised down to 79,000 from 98,000 while February payrolls were revised up to 232,000 from 219,000.  I would add that, over the past three months, job gains have averaged 174,000 per month and are on track with my forecast for the country to add around 2 million jobs in 2017.

Payrolls

The key takeaway from the report for me is that there were some elements that left it a little out of sync with the view that the economy is poised to hit, and sustain, “escape velocity”.  The asynchrony I am referring to is the drop in the labor force participation rate and the deceleration in average hourly earnings growth on a year-over-year basis. The former dipped to 62.9% from 63.0% while the latter slipped to 2.5% from 2.6%.

Why there hasn’t been a meaningful acceleration in average hourly earnings growth with the unemployment rate at 4.4% is one of the more perplexing questions, yet I think it does provide the answer for why consumer spending has not lived up to the reportedly high levels of consumer confidence.

Perhaps that changes in the months ahead, yet it remains a stark reality today that will be buried beneath the press headlines addressing the job gains and the lowest unemployment rate since May of 2007.

Given the increase in employment, the U.S. Unemployment Rate dropped to 4.4% from 4.5% – I had forecast it to have notched up to 4.6%.

U RAte

The unemployment rate dropped even as the labor force participation rate edged lower to 62.9%. The employment-to-population ratio increased to 60.2%, its best showing of 2017 and the highest level since February 2009.

An alternative reading on the unemployment rate that includes those not actively looking for jobs as well as those working part-time for economic reasons dropped to 8.6% from 8.9% in March, the best reading since November 2007.

Consumer Credit rose by $16.4B in March – marginally above my forecast for an increase of $16B – after increasing a downwardly revised $13.8B (from $15.2B) in February.

Credit

The growth in March was driven mostly by an increase in non-revolving credit, which was up $14.5B to $2.805T.  Revolving credit increased by $1.9B to $999.8B.

Consumer credit increased at a seasonally adjusted annual rate of 4.25% during the first quarter (and 5.25% in March), with revolving credit little changed and non-revolving credit increasing at an annual rate of 5.75%.

 What to Watch for This Week

Inflation, as measured by the Consumer Price Index, dropped by 0.3% in March with the core rate 0.1% lower.  I am expecting to see total and core inflation up by 0.2%.

U.S. Retail Sales contracted by 0.3% in March and the April figure should be a lot better.  My call is for an increase of 0.6% and core sales up by 0.5%.

Consumer Sentiment in April was measured at 97.0 and the early May number should pull back a little to 96.5.

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