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%.

The Weekly Economic & Real Estate Forecast – 2/27/17 to 3/3/17

What I Saw Last Week

U.S. Existing Home Sales rose 3.3% in January to an annual rate of 5.69M units.  (I was expecting a less robust increase of 1.8% to an annual rate of 5.57M units.)  Single-family home sales jumped 2.6% to a seasonally adjusted annual rate of 5.04M units.

existing-sales

The median existing-home price for all housing types increased 7.1% to $228,900, marking the 59th consecutive month of year-over-year gains. The median existing single-family home price increased 7.3% year-over-year to $230,400.

Total housing inventory of 1.69 million existing homes available for sale was 7.1% lower than a year ago, marking the 20th straight month of a year-over-year decline. There is a 3.6-month supply of unsold inventory at the current sales pace, which is unchanged from December and the lowest level since January 2005.

The key takeaway from the report is that high prices and limited inventory continue to compress the affordability factor for prospective buyers, and have prevented existing home sales from being even stronger.

The final Consumer Sentiment number for February was revised up to 96.3 from 95.7.  I had expected a more modest increase to 95.8.

sentiment

The Current Economic Conditions Index was revised up to 111.5 (from 111.2) versus the final reading of 111.3 for January.  The Index of Consumer Expectations was revised up to 86.5 (from 85.7) versus the final reading of 90.3 for January.

The key takeaway from the report is that overall consumer confidence is high, yet there are clear splits along party lines with respect to the economic outlook. That understanding, it was noted, creates an expectation that there will be greater volatility and discretionary spending differences across subgroups.

Following a disappointing December, U.S. New Home Sales rebounded in January to a seasonally adjusted annual rate of 555,000 units. I had forecast an increase to 565,000.  That was a bit disappointing relative to my estimate, yet it was 3.7% above the December sales rate and 5.5% higher than seen a year ago.

new-sales

The median sales price increased 7.5% year-over-year to $312,900, while the average sales price slipped 1.3% to $360,900.

New home sales were up in all regions month-over-month, with the exception of the West (-4.4%), which might have been impacted by the inclement weather in California.

At the current sales pace, there was a 5.7-months’ supply of new homes for sale at the end of January, which is unchanged from December.

The takeaway from the report is that high prices continue to impede stronger sales activity at the lower end of the new home market. That point is borne out in the fact that homes priced $299,999 or less accounted for 44% of new homes sold in January 2017 versus 53% in January 2016.

 

What to Watch for This Week

The NAR Pending Home Sales Index for January will likely show a drop of 3% on the back of very low inventory levels.

The second estimate for GDP in the final quarter of 2016 should be revised up from the initial estimate of 1.9%. I am looking for growth of 2.1%.

Consumer Confidence in February is likely to pull back just a little. Expect to see it drop from 111.8 to 111.5.

Income & Spending in January will be mixed with incomes up by 0.4% and spending up by 0.3%.

U.S. Construction Spending in January should turnaround after having contracted by 0.2% in December.  Look for an expansion of 0.6%.

The Weekly Economic & Real Estate Forecast – 2/20/17 to 2/24/17

What I Saw Last Week

Inflation – as measured by the Consumer Price Index – for January rose by 0.6%, marking the largest increase since February 2013.  I had forecast a rise of 0.3%.  Core CPI, which excludes food & energy, rose by 0.3% – slightly above my forecast for a rise of 0.2%.

cpi

Total CPI is up 2.5% year-over-year, the largest 12-month increase since March 2012, while core CPI is up 2.3% versus 2.2% for the 12-month period ending in December.

A 7.8% increase in the gasoline index accounted for nearly half the increase in the all items index in January, but the indexes for shelter (+0.2%), apparel (+1.4%), and new vehicles (+0.9%) were also major contributors.

While the Fed’s preferred inflation gauge is the PCE Price Index, the key takeaway from the report is that consumer inflation pressures are rising, which in turn should increase the potential for a rate hike at the March meeting.

U.S. Retail Sales in January rose by 0.4% – I had expected an increase of 0.1% and core sales (ex-auto) also outperformed with an increase of 0.8% (I had forecast +0.4%).

retail-sales

Motor vehicle sales were down 1.4%, but otherwise, there were no glaring points of weakness in January retail sales, which got a nice boost from a 2.3% increase in gasoline station sales and a 1.4% increase in food services and drinking place sales.

The key takeaway from the report is that discretionary spending on goods picked up in January, which will compute into a positive input for first quarter GDP forecasts.

The NAHB Housing Market Index fell 2 points to 65 in February suggesting that builders in the newly built single family home market remain optimistic but the index is giving back part of its post-election surge.  I had forecast an increase to 68.

hmi

All three HMI components fell in February. The component gauging current sales conditions dipped one point to 71, and the index charting sales expectations in the next six months registered a three-point decline to 73. The component measuring buyer traffic dropped five points to 46.

While builders remain optimistic, I am seeing the numbers settling back into a normal range.

Declines were broad based across the index’s components. Prospective buyers’ traffic accounted for the bulk of the headline’s drop, as the measure fell 5 points on the month. Home builders continue to report difficulty reducing costs as supply side restrains, including labor shortages, are continuing to fuel price gains.

With much of the decline this month resulting from a decrease in buyer traffic, builders continue to struggle to minimize costs while dealing with supply side challenges such as a lack of developed lots.

U.S. Building Permits jumped 4.6% to a seasonally adjusted annual rate of 1.285 million – well above my forecast for growth of 1.7%.

permits

Total growth was driven by the multifamily sector which rose by 20%.  Single family permits dropped by 2.7% to 808,000. That said, permits for single-family homes were actually up in all regions, with the exception of the West, which saw a large 17.2% decline.

I am not overly worried about the slowdown in permit activity as the three-month rolling average for single family permits is now at a new post-recession high.

U.S. Housing Starts declined 2.6% in January to a seasonally adjusted annual rate of 1.246 million – I was expecting a more modest contraction of 0.5%.

starts

That decline, however, followed a sizable upward revision for December (from 1.226M to 1.279M) and it was offset somewhat by a 1.9% increase in single-family starts.

The number of units under construction at the end of the period was 1.069 million, which was 1.5% higher than the fourth quarter average. That will compute to a positive input for Q1 GDP forecasts.

Single-family starts were up in all regions, with the exception of the West, which saw a surprisingly large 18.6% drop in single-family starts.

The key takeaway is that, absent the December revision, starts would have increased month-over-month, which is to say the headline decline isn’t as disappointing as it might sound at first blush.

 

What to Watch for This Week

U.S. Existing Home Sales dropped by 2.8% in December to an annual rate of 5.49M.  I am hopeful that the January number will be better and that the report will show sales up by 1.8% to an annual rate of 5.570M units.

The final Consumer Sentiment number for February will show little change from the initial figure of 95.7.  My call is for 95.8.

U.S. New Home Sales dropped by 10.4% in December and I am looking for a turnaround in the January number.  My forecast is for a 5.6% increase to an annual rate of 565,000 units.

The Weekly Economic & Real Estate Forecast – 2/13/17 to 2/17/17

What I Saw Last Week

Total outstanding Consumer Credit rose by $14.2B in December – below my call for an increase of $19.4B – after increasing by an upwardly revised $25.2B (from $24.5B) in November.

credit

December marked the slowest pace of consumer credit expansion since February 2016.

The growth in December was paced by an $11.8B increase in non-revolving credit, which rose to $2.77T.  Revolving credit increased by $2.4B to $996B, which tied October 2016 as the smallest month-to-month increase since February 2016.

The key takeaway from the report is that consumer credit – both revolving and non-revolving – continued to expand, albeit at a slower pace, yet providing fuel for a potential increase in economic activity.

The preliminary reading for the February University of Michigan Consumer Sentiment Index checked in at 95.7 – below my expectation for a less severe drop to 97.9 (from 98.5).

sentiment

The pullback in February was related almost entirely to the Expectations Index, which slipped from 90.3 to 85.7 – the Current Economic Conditions Index slipped from 111.3 to 111.2.

The release pointed out that there is a sharp partisan divide when it comes to expectations. Specifically, Democrats’ Expectations Index is close to an historic low while Republicans’ Expectations Index is near an historic high.

I believe that the partisan divide could be a precursor of a more moderate pace of economic growth, yet much depends on actual spending activity. To that end, the report notes that negative expectations have more influence determining spending than positive expectations do, so the reminder was offered that forecasts for spending should take into account a higher likelihood of asymmetric downside risks.

However, while consumer sentiment faded, the key takeaway is that it is still high, as there have only been five higher readings in the past decade.

What to Watch for This Week

Inflation – as measured by the Consumer Price Index – has been rising steadily and this will continue.  Look for the overall rate of inflation to have risen by 0.3% in January with the core rate up by 0.2%.

U.S. Retail Sales disappointed in December with a rise of just 0.6%.  Unfortunately, I do not see a turnaround when the January data is released on Wednesday.  My forecast is for total sales to be up by just 0.1% with core sales (ex-auto) up by 0.4%.

The NAHB Housing Market Index dropped from 69 in December to 67 in January and my forecast is for it to rise by one point to 68.

U.S. Building Permits dropped by 0.2% in December and I am looking for a turnaround with permit issuance up by 1.7% to an annual rate of 1.23M units.

U.S. Housing Starts rose by 11.3% in December but this rate cannot continue.  Expect a modest contraction of 0.5% to an annual rate of 1.22M units, but we should see an increase of 2.5% for single family starts.

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