The Weekly Economic & Real Estate Forecast – 4/24/17 to 4/28/17

What I Saw Last Week

The NAHB Housing Market Index said its housing-market index fell by three points to 68 in April (I had forecast a more modest drop to 70).

HMI

Even with this contraction in this index, I am not concerned with the drop as there is clearly continued demand for new construction housing.  That said, builders are facing several challenges including hefty regulatory costs and ongoing increases in building material prices.

Irrespective of this modest drop, I believe that builder confidence is on very firm ground, and home builders are reporting strong interest from potential buyers.

U.S. Building Permits jumped 3.6% to a seasonally adjusted annual rate of 1.260M – I expected to see the figure rising to an annual rate of 1.240M units.

Permits

The growth was driven by a 13.8% surge in multifamily permits while single-family permits were flat to down in every region, except for the South (+1.3%). The Midwest saw the largest decline in single-family permits (-5.9%).

Though single-family permits fell 1.1% last month, they remain not too far from the more than nine-year high reached back in February. A tightening labor market, which is generating steady wage growth, is underpinning the housing market.

U.S. Housing Starts ran a bit loose in March with starts checking in at a seasonally adjusted annual rate of 1.215M units – I had expected to see a figure closer to 1.260M units – down 6.8% from the upwardly revised rate of 1.303M (from 1.288M) for February.

Starts

The downturn in starts was evenly balanced with single-family starts down 6.1% to 821,000 and multi-unit starts down 7.9% to 394,000. Single-family starts were flat or down in every region, except for the South (+3.2%). The Midwest saw the largest decline, with single-family starts down 35% from February.

Notwithstanding the weaker-than-expects starts data for March, this report held some positive connotations for first quarter GDP, as the number of units under construction at the end of the period was little changed at 1.085 million. That left the first quarter average of 1.081 million above the fourth quarter average of 1.054 million.

The key takeaway from the report is that single-family permits fell 1.1% to 823,000, which is a discouraging indicator for a housing market very much in need of new supply, specifically at lower price points.

U.S. Existing Home Sales in March rose 4.4% to a seasonally adjusted annual rate of 5.71 million units – I had forecast a smaller rise to an annual rate of 5.55M units.

Existing sales

March sales were 5.9% above the same period a year ago and marked the highest pace of sales since February 2007 when they stood at 5.79 million.

Total inventory increased 5.8% to 1.83 million existing homes for sale at the end of March, yet that is down 6.6% from a year ago. At the current sales pace, unsold inventory is at a 3.8-month supply versus the 4/6-months’ supply typically associated with a more balanced market.

The median existing home price for all housing types increased 6.8% year-over-year to $236,400, which is the 61st consecutive month of year-over-year gains. The median existing single-family home price jumped 6.6% year-over-year to $237,800.

The key takeaway from the report is that demand is strong, inventory is still low, and prices continue to rise, meaning it is important for mortgage rates to stay low to support affordability conditions since home prices are rising at a much faster pace than personal income.

What to Watch for This Week

The Case Shiller Index data for February is likely to show prices up 5.8% year-over-year (from 5.7% in January).  Demand remains robust in most the country.

U.S. New Home Sales rose at an annual rate of 592,000 units in February and I anticipate a slight contraction when the March data is released.  Look for a number of around 590,000.

Consumer Confidence jumped to 125.6 in March and I expect to see the April number pull back a little to 122.3.

The NAR Pending Home Sales Index rose 5.5% in February and the March figure should drop back slightly on inventory constraints.  Look for a rise of 4.8%.

The first take on US GDP in the first quarter of 2017 should show the economy having expanded by 1.1%.

The final Consumer Sentiment number for April should show no change from the preliminary figure of 98.0.

The Weekly Economic & Real Estate Forecast – 4/17/17 to 4/21/17

What I Saw Last Week

The Survey of Consumers conducted by the University of Michigan showed an uptick in the preliminary April reading for Consumer Sentiment which came in at 98.0 – I had anticipated a drop to 96.3.

Sentiment

The Current Economic Conditions Index rose from 113.2 to 115.2 – up from 106.7 in the same period a year ago – while the Index of Consumer Expectations rose from 86.5 to 86.9. (This index stood at 77.6 in the same period a year ago.)

The takeaway from the report is that consumers are feeling very good about current economic conditions, evidenced by the Current Economic Conditions Index rising to its highest level since 2000 and trending toward its all-time peak of 121.1 set in 1999.

The Retail Sales report for March was disappointing, not only because it was weaker than expected, but also because it featured downward revisions to the February number.

Total retail sales dropped by 0.2% (I had forecast a drop of 0.1%), and core sales remained unchanged.

Retail Sales

The downturn in March was driven by weakness in auto sales (-1.2%) and gasoline station sales (-1.0%), as expected. There was also some notable weakness, though, in building material and garden equipment and supplies dealer sales (-1.5%) and food services and drinking places sales (-0.6%).

Some offsetting strength was provided by electronics and appliance stores (+2.6%), miscellaneous store retailers (+1.8%), clothing and clothing accessories (+1.0%), non-store retailers (+0.6%), food and beverage stores (+0.5%), and general merchandise stores (+0.3%).

On a year-over-year basis, retail sales are up 5.2%. Excluding autos, retail sales are up 5.6%.

The takeaway from the report is that it underscores a clear divide between the strong consumer confidence readings, which are “soft” data, and the sluggish spending on goods by consumers, which is “hard” data.

Inflation, as measured by the Consumer Price Index, dropped by 0.3% in March (I had forecast no change) with core CPI dropping by 0.1%.

CPI

The March decline in CPI was the first monthly decline since February 2016 and the decrease in core CPI was the first since January 2010.

On a year-over-year basis, CPI is up 2.4%, versus 2.7% for the 12-months ending February. Core CPI is up 2.0% – the smallest 12-month increase since November 2015.

The takeaway from the report is that consumer inflation pressures eased in March, and it wasn’t just driven by a downturn in energy prices. That should take some of the edge off with respect to the idea that the Federal Reserve might have to be more aggressive than expected this year with its policy tightening efforts.

What to Watch for This Week

The NAHB Housing Market Index was measured at 71 in March and I expect to see a slight pullback in the April number. Look for it to come in down one point to 70.

U.S. Building Permits were running at an annual rate of 1.213M units in February. I expect to see improvement in the March report with the figure rising to an annual rate of 1.240M units.

U.S. Housing Starts are likely to drop back from the annual rate of 1.288M seen in February.  My expectation is for a figure closer to 1.260M units.

U.S. Existing Home Sales dropped in February to an annual rate of 5.48M units.  Look for a better number of sales in March and the annual rate rising to 5.55M units.

The Weekly Economic & Real Estate Forecast – 4/10/17 to 4/14/17

What I Saw Last Week

U. S. Construction Spending rose by 0.8% in February. While this was below the 1.0% increase that I had anticipated, the headline disappointment was offset by an upward revision to January (from -1.0% to -0.4%).

Con Spend

On the private side, residential construction spending increased 1.8%, which more than offset a 0.3% decline in non-residential spending that was paced by a downturn in communication (-8.1%), transportation (-4.2%), health care (-2.2%), and manufacturing (-1.7%) spending.

Total construction spending is up 3.0% year-over-year. Private construction spending is up 6.9% year-over-year while public construction spending is down 8.0% year-over-year.

The key takeaway from the report is that increases were seen in both private construction spending (+0.8%) and public construction spending (+0.6%).

March Non-Farm Payrolls increased by 98,000 (I was expecting a more robust 155,000). Over the past three months, job gains have averaged 178,000 per month. February non-farm payrolls were revised down to 219,000 from 235,000 and January payrolls were also lowered to 216,000 from 238,000.

Payrolls

March private sector payrolls rose by 89,000. February private sector payrolls were revised down to 221,000 from 227,000 and January private sector payrolls were also revised down to 204,000 from 221,000.

Hiring in March was expected to drop after the monthly gains of more than 200,000 in the two previous months, but this was the weakest showing for the economy in nearly a year. Although it represents just one month’s data, it will raise questions about whether improving business sentiment is actually translating into any meaningful action by employers.

The March Unemployment Rate was 4.5% versus 4.7% in February and the labor force participation rate was steady at 63.0%.

U RAte

Persons unemployed for 27 weeks or more accounted for 23.3% of the unemployed versus 23.8% in February.

The U-6 unemployment rate, which accounts for both unemployed and underemployed workers, decreased to 8.9% from 9.2% in February.

The takeaway here is that the unemployment rate is now at its lowest level since May of 2007.

Consumer Credit  increased by $15.2 billion in February after increasing an upwardly revised $10.9 billion (from $8.8 billion) in January.

Credit

The growth in February was driven mostly by an increase in non-revolving credit, which was up $12.3 billion from January to $2.79 trillion.  Revolving credit increased by $3.0 billion to $1.00 trillion.

Consumer credit increased at a seasonally adjusted annual rate of 4.75% in February, with revolving credit increasing at an annual rate of 3.50% and non-revolving credit increasing at an annual rate of 5.25%.

What to Watch for This Week

Consumer Sentiment was measured at 96.9 in March and the early April figure is likely to pull back slightly to around 96.3 as proposed changes to federal policy get ham-strung in Congress.

U.S. Retail Sales rose by 0.1% in February and the March figure should show an about-face with a small 0.1% contraction.

Inflation, as measured by the Consumer Price Index, rose by 0.1% in February and the March report is likely to show no change.

The Weekly Economic & Real Estate Forecast – 3/27/17 to 3/31/17

The FHFA Housing Price Index remained unchanged in January – I had forecast an increase of 0.5%.  Year-over-year, home prices are up by 5.7% (down from an annual growth rate of 6.2% in December).

FHFA

It was interesting to see home prices in the US come to a stop relative to monthly growth for only the second time since 2012.

I believe that rising interest rates are having an effect and that is clearly indicated by the halt in price growth.

For the nine census divisions, the price fluctuation in January ranged from a drop of 2% monthly in the East South Central division to an increase of 0.6% in the Pacific division. Annually, however, all changes were positive from an increase of 3.5% in the East South Central division to an increase of 8.3% in the Mountain division.

U.S. Existing Home Sales in February declined by 3.7% to a seasonally adjusted annual rate of 5.48M units – I had forecast a drop to 5.54M units.

Existing sales

The median existing home price for all housing types increased 7.7% year-over-year to $228,400, which marked the 60th consecutive month of year-over-year gains and the fastest increase since last January.

The median existing single-family home price rose 7.6% to $229,900. Single-family home sales fell 3.0% to a seasonally adjusted annual rate of 4.89 million.

Total housing inventory at the end of February increased 4.2% to 1.75 million existing homes for sale, yet that was 6.4% lower than the same period a year ago.

The key takeaway from the report is that limited supply and weakening affordability conditions are preventing more robust selling activity in the market for existing homes.

U.S. New Home Sales rose to an annual rate of 598,000 units in February – better than my forecast for a rise to 560,000 units and at a level last seen in July of 2016.

New sales

The strength in February was paced by a huge 30.9% increase in new home sales in the Midwest. While some might point to favorable weather as the driver there, bear in mind that the Existing Home Sales Report for February did not corroborate that view indisputably as existing home sales in the Midwest fell 7.0% in February.

The Northeast was a notable pocket of weakness. New home sales there declined 21.4% from January, with the February blizzard likely playing a part in the drop.

The median sales price declined 4.9% year-over-year to $296,200 while the average sales price increased 11.7% to $390,400.  Moreover, new homes priced at $299,999 or less accounted for 52% of new homes sold in February versus 46% in January.

What to Watch for This Week

Case Shiller Index data for January should show U.S. home prices up by 5.6% – matching the annual rise seen in December.

Consumer Confidence in March is likely to pull back to 113.3 from the February level of 114.8.

The NAR Pending Home Sales Index in February should show a turnaround from the 2.7% contraction seen in January.

The third and final take on U.S. GDP in the final quarter of last year will likely show a very modest increase to the previously reported number of 1.9%. I anticipate it to have risen to a growth rate of 2.0%.

U.S. Income & Spending data in February should show incomes up by 0.4% (matching the January growth rate) and spending up by 0.2% (again matching the prior month).

The final Consumer Sentiment number for March should remain at the preliminary reported figure of 97.6.

The Weekly Economic & Real Estate Forecast – 3/20/17 to 3/24/17

What I Saw Last Week

Inflation – as measured by the Consumer Price Index – matched my forecast for a 0.1% increase in February, with the core rate (which excludes food and energy) also exactly matching my forecast for a rise of 0.2%.

CPI

On a year-over-year basis, total CPI is up 2.7% before seasonal adjustment and core CPI is up 2.2%. February was the 15th straight month that the 12-month change for core CPI measured between 2.1% and 2.3%.

Core CPI was boosted by the gain in the recreation index, as well as increases in the index for medical care (+0.1%) and the indexes for rent and owner’s equivalent rent, both of which increased 0.3%.

The key takeaway from the report is that consumer inflation is certainly firming and offering a data-based rationale for the Feds move on rates.

U.S. Retail Sales met my forecast with a rise by 0.1% in February while core sales – which exclude auto sales – rising by 0.2% (marginally above my forecast for an increase of 0.1%).  I would add that February report also contained upward revisions for total January sales (from 0.4% to 0.6%) and core retail sales (from 0.8% to 1.2%).

Retail Sales

Monthly sales declines were registered across several discretionary categories, led by electronics and appliance stores (-2.8%), miscellaneous store retailers (-0.8%), clothing stores (-0.5%), sporting goods, hobby, book and music stores (-0.4%), general merchandise stores (-0.2%), and food services and drinking places (-0.1%).

The pockets of retail sales strength in February were building materials, garden equipment and supplies dealers (+1.8%), non-store retailers (+1.2%), furniture and home furnishing stores (+0.7%), and health and personal care stores (+0.7%).

The takeaway from the February report is that retail sales activity didn’t necessarily corroborate the high readings seen for consumer confidence, exposing some of the disconnect between “soft” survey data and the “hard” data.

As was fully anticipated by the market, the Federal Reserve raised rates from 0.625% to 0.825%.

While the Fed quickened the pace of easing with a quarter-point just three months after the last one, it left its median forecasts for a total of three rate rises in 2017 unchanged.

U.S. Housing Starts rose 3.0% in February to a seasonally adjusted annual rate of 1.288 million.  I had forecast a less robust increase of 1.1%.

Starts

The multi-unit segment, which is notoriously volatile, was the point of weakness in February with multifamily starts falling by 3.7% to an annual rate of 416,000.

There was a notable pickup in single-family starts in all regions except for the South (-2.6%).  The Northeast rose 16.7%, the Midwest was up 20%, and the West rose by16.8%.

As I had anticipated, U.S. Building Permits contracted, but the drop was more precipitous that I was expecting.  Total permits contracted by 6.2% to a seasonally adjusted annual rate of 1.213 million – I had forecast a smaller contraction of 2.6%.

Permits

Permits for single-family homes were on the mixed side. There were declines in the Northeast (-8.5%) and the South (-1.8%) that were offset by gains in the West (+14.7%) and the Midwest (+10.5%).

The number of units under construction at the end of the period was 1.091M units. The first quarter average of 1.084M is 2.9% above the fourth quarter average. That will compute as a positive input for first quarter GDP forecasts.

The key takeaway from the report is that there was strength in the single-family sector for both starts and permits. Single-family starts increased 6.5% to 872,000 while single-family permits increased 3.1% to 832,000.

Consumer Sentiment in early March came in at 97.6 – better than my call for an increase to 96.8.

Sentiment

The Current Economic Conditions Index jumped from 111.5 to 114.5, which is the highest reading since 2000, while the Index of Consumer Expectation rose from 86.5 to 86.7.

It was noted in the report that the Expectations Index among Democrats is at 55.3 while the Expectations Index among Republicans is at a whopping 122.4!  Independents pretty much split the middle at 88.3. Per the report, those disparate views suggest spending gains are likely to be uneven over time and across products.

The takeaway from the report is that consumers are feeling better about their current personal finances; however, there appears to be a sharp divide about the outlook that cuts sharply across political partisan lines.

What to Watch for This Week

The FHFA Housing Price Index rose by 0.4% in December and the January figure should show prices up by a further 0.5%.

U.S. Existing Home Sales were measured at an annual rate of 5.69M in January and the February figure should show a bit of a slowdown in substantial inventory constraints.  Look for a figure of around 5.54M units.

U.S. New Home Sales rose to an annual rate of 555,000 units in January and the February number should show sales rising further to an annual rate of 560,000 units.

The Weekly Economic & Real Estate Forecast – 3/13/17 to 3/17/17

What I Saw Last Week

Consumer Credit increased by $8.8B in January – well below my forecast for an increase of $17B – after increasing an upwardly revised $14.8B (from $14.2B) in December.

Credit

Credit2

January marked the slowest pace of consumer credit expansion since December 2015.

The growth in January was entirely due to the increase in non-revolving credit, which was up $12.6 billion from December to $2.78T trillion. Revolving credit decreased by $3.8 billion to $995 billion – the first month-over-month decline since February 2016.

Consumer credit increased at a seasonally adjusted annual rate of 2.75% in January, with revolving credit decreasing at an annual rate of 4.50% and non-revolving credit increasing at an annual rate of 5.50%.

The key takeaway from the report is that consumer credit decelerated in January, which is apt to contribute to subdued expectations for the pace of consumer spending and GDP growth in the first quarter.

February Non-Farm Payrolls took almost everyone by surprise with an additional 235,000 payroll jobs added to the economy.  I had forecast an additional 188,000 new jobs. January payrolls were revised up to 238,000 from 227,000 while the December numbers were revised down to 155,000 from 157,000.

Payrolls

Employment is generally regarded as a lagging indicator, yet the February report is the coincident indicator the stock market was seeking to corroborate its leading view that the Federal Reserve will be raising the fed funds rate soon for the right economic reasons.  Moreover, average hourly earnings rose 0.2%, leaving them up 2.8% year-over-year, further lending credence that the Fed will raise the target range for the fed funds rate at its March 14-15 FOMC meeting.

That is the key takeaway from this report, followed closely by the encouraging understanding that the labor market is strengthening, which is aiding the prospects for stronger economic growth.

Given the strength in employment growth, it was unsurprising to see the U.S. Unemployment Rate meet my forecast with a drop back down to 4.7% from the January figure of 4.8%.

U RAte

The fact that the unemployment rate dropped in February while the labor force participation rate rose supports the notion that the labor market is strengthening as the number of employed workers increased by 447,000 while the number of unemployed workers decreased by 107,000.

The employment-to-population ratio, in turn, increased from 59.9% to 60.0%, which is the highest it’s been since February of 2009.

 

What to Watch for This Week

Inflation – as measured by the Consumer Price Index – rose by 0.6% in January and I anticipate that we will see a further increase in February, but the increase will be much more modest.  I am looking for overall inflation to have risen by 0.1% and the core rate up by 0.2%.

U.S. Retail Sales rose by 0.4% in January and the February figure will show a slowdown with total and core sales up by 0.1%.

All eyes will be on the Federal Reserve meeting this week and I now fully anticipate the they will raise short-term rates from 0.625% to 0.825%.

U.S. Housing Starts were disappointing in January with a contraction of 2.6%; that said, single family starts rose by 1.9%.  I am looking for a a turnaround with total starts rising by 1.1%.

U.S. Building Permits rose 4.6% in January and the February figure is likely to show a sharp contraction of 2.6%.

Consumer Sentiment in early March should be modestly above the final February figure of 96.3. My call is for it to have risen to 96.8.

The Weekly Economic & Real Estate Forecast – 3/06/17 to 3/10/17

What I Saw Last Week

As I had anticipated, the NAR Pending Home Sales Index for January was a disappointment with a drop of 2.8% (I had forecast a contraction of 3%).

phs

I was not surprised to see the decline which was a function of very low inventory levels, deteriorating affordability and rising interest rates.

Regionally, pending home sales in the Northeast rose 2.3% month to month and were 3.6% above a year ago. In the Midwest sales fell 5.0% for the month and were 3.8% lower than January 2016. Pending home sales in the South gained only barely, up 0.4% for the month and up 2% for the year. The biggest drop was in the West where sales plunged 9.8% for the month and were 0.4% lower compared with a year ago.

The second estimate for GDP in the fourth quarter of 2016 stayed true to the advance estimate, which was otherwise lackluster, showing real GDP increased at an annual rate of 1.9% in the fourth quarter.  I was looking for growth of 2.1%.

gdp

With the second estimate, personal consumption expenditures were shown to have increased 3.0%, versus 2.5% with the advance estimate. That upward revision, however, was offset by reduced estimates for state and local government spending, and nonresidential fixed investment.

The key takeaway from the report is that soft business spending continues to act as a drag on GDP growth.

Low inventory levels cross the country led the Case Shiller Index to continue higher in December with the 20-city index up by 5.8% year-over-year.  I had forecast a 5.3% increase.

cs

Seattle, Portland and Denver once again topped the charts with the largest year-over-year gains. Seattle continued to lead the pack, rising at an annualized rate of 10.8%.

Of the nation’s 20 largest cities, seven reached their all-time highs in December: Seattle, Portland, Denver, Boston, Charlotte, North Carolina, San Francisco and Dallas.

Home prices continue to advance, with the national average rising faster than at any time in the last two-and-a-half years.

While rising home prices can trigger concerns about inflation, the speed at which they are growing is not alarming. Low inventory levels was the principal factor for the rise.

Consumer Confidence in February rose to 114.8 from 111.6 in January.  I had forecast a contraction to 111.5.

confidence

February marked the highest level for the index since July of 2001 when it hit 116.3.

The key takeaway from the report is that consumers are feeling better about current business and labor market conditions than they did in January; accordingly, they expect the economy to continue to expand in the months ahead.

Income & Spending data for January showed personal incomes up by 0.4% (matching my forecast) and spending up by 0.2% – modestly below my forecast for 0.3%.

income

The 0.4% increase in wages and salaries helped pace the pickup in income growth, along with a 0.8% increase in proprietors’ income and a 1.0% increase in rental income.

This report also exposes some of the disconnect between “soft” survey data, like the Consumer Confidence report, and the “hard” data. The former has been uplifting while the latter has suggested there is still plenty of heavy lifting left to do to reach the promised GDP growth land of 3-4%.

The sticking point with this report is twofold: (1) Real PCE declined 0.3%, led by a 0.3% decline in goods spending and a 0.2% decline in spending on services. That is going to be a negative input for Q1 GDP forecasts; and (2) The PCE Price Index was up 1.9% year-over-year, which leaves it tracking toward, and very close to, the Fed’s longer-run inflation target of 2.0%, which is to say it seems to satisfy the argument of any Fed official aiming to raise the policy rate at the March meeting (the core PCE Price Index was up 1.7% year-over-year, unchanged from December).

U.S. Construction Spending in January dropped by 1.0% – I had forecast an expansion of 0.6%.

con-spend

Total private construction spending increased 0.2% in January, paced by a 0.5% increase in residential spending. Nonresidential spending was flat, pressured by a 0.5% decline in both commercial and office spending.

Total public construction spending declined 5.0%, driven by a 4.7% decline in nonresidential spending. The latter was paced by a 3.3% decline in highway and street spending, as well as spending declines in most categories.  The only areas where spending was up being power (+3.9%) and amusement and recreation (+1.1%).

On a year-over-year basis, total construction spending is up 3.1%. That is owed entirely to private construction spending, which is up 7.3% year-over-year. Total public construction spending is down 9.0% year-over-year.

What to Watch for This Week

Consumer Credit increased by $14.2 billion in December and I am hoping to see a further expansion of $17B when the January figures are released on Tuesday.

Non-Farm Payrolls rose by 227,000 in January and the February number will be much softer.  Look for the country to have added 188,000 new jobs.

With the growth in payroll employment, the Unemployment Rate should drop back down to 4.7% from the January figure of 4.8%.

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