New Home Sales

Sales of new homes slowed but not all the data in January’s new home sales report are negative. New home sales came in at a much lower than expected 593,000 annualized rate in January though, in offsets, the two prior months are revised a net 25,000 higher. Supply saw a much needed lift as more new homes moved into the market, up a monthly 2.4 percent to 301,000 units for sale. On a sales basis, supply jumped above 6 months to 6.1 vs. 5.5 and 4.9 months in the two prior months. Sales in January were soft and overall new home sales were down a yearly 1.0 percent. Prices are another negative in the report, down 4.1 percent for the median to 323,000 though the yearly rate is still positive at 2.5 percent. The new home market surged into the endo of last year but has slowed in January. Lack of supply continues to be a major issue for the market.

Durable Goods Orders

The major indications on the factory sector are mixed for January with more signs of moderation than acceleration. Total orders declined a sharp 3.7 percent reflecting an unexpected dip of 0.3 percent in ex-transportation. Capital goods are also a part of the weakness reflected in the sharp decline in orders; core orders were down 0.2 percent in January following a 0.6 percent decline in December. Total shipments are another point of weakness up only 0.2 percent for a slow start to begin the 2018 first quarter. Shipments of core capital goods, which are inputs into GDP business investment, began the quarter with only a 0.1 percent gain. Total unfilled orders are yet another negative, down 0.3 percent and aside from a 0.6 percent gain in December are extending a surprisingly flat trend. One positive in this report is inventory growth, up 0.3 percent and together gains for both whole sale and retail inventories are pointing to a quick start for first quarter inventories. This quick start, however, isn’t what the factory sector is showing. Year on year growth rates in today’s report underscore the slowing, moving down from the low double digits/ high single digits level to only around the 6 percent range. Like housing, the factory sector too appears to be slowing from last year’s rush at the in the fourth quarter.

International Trade in Goods

Exports came back sharply in January feeding an oversized $74.4 billion goods deficit in January, in what starts off another quarter of trouble for net exports and GDP. Exports fell 2.2 percent in the month with capital goods and industrial supplies both posting sharp declines and easily offset the sizable gain seen in the smaller category of consumer goods. Imports also fell but on a less dramatic scale, down 0.5 percent with imports of consumer goods, the larger category down 2.2 percent. Imports of capital goods were also down. This report again, like the durable goods report, points to a beginning of the year slowing for cross-border trade and a slowing lopsided against exports.

Fed Chair Speech: Jerome Powell

In his prepared statement, Jerome Powell, Federal Reserve chair, repeated the message of the January FOMC statement: inflation will likely move higher this year and hold near the Fed’s 2 percent target. Powell underscored that a series of gradual rate increases is in store for the future. He also stated that policy makers need  to lift inflation but at the same time avoid overheating of the economy. He noted that wages should begin to increase at a faster pace and cited what he sees as a strong outlook for the economy including foreign demand for US exports which he describers as firming. Powell said that more a simulative fiscal policy will be good for growth. He downplayed the ongoing volatility of the stock market and said financial conditions remains supportive of the economy and are not weighing too heavily on the future outlook.

In Jerome Powell’s testimony before the House of Representatives Committee, he sighted seeing no significant risk of recession. He echoed his prepared statement and underscored the strengthening outlook for the economy. However, he did avoid questions from House members regarding whether this strength will mean a fourth rate hike this year vs. the three that are already expected.  He welcomed tax cuts and the prospect of rising fiscal stimulus, saying they may lead to higher corporate investment and in turn an improvement in productivity. He also repeated the importance of the 2 percent inflation goal, stating that it gives the Fed more leeway and “ammunition” to manage interest rates and calling it the “golden” standard among global central banks. Powell also voiced support for the effectiveness of quantitative easing, which the Fed is currently working on unwinding. Lastly, he urged that the membership of the Fed’s current 7-member board, four members short at the moment, be filled promptly.

S&P Corelogic Case-Shiller HPI

Case-Shiller 20 city adjusted home prices rose a strong and as expected 0.6 percent in December. Overall year on year prices are up 6.3 percent and despite a 1 downtick from November, are still trending higher. Given the climbing housing prices, a little moderation is probably a good thing and will help lower the risk of overheating.

FHFA House Price Index

The FHFA house price index did came in at a lower than expected 0.3 percent gain in December, readings are still pointing to strength, however. The year on year gain is at 6.5 percent with November’s rate was revised 2 tenths higher to 6.7 percent. In contrast to the overall regional data the breakdown in the Case-Shiller report showed the West with less than exceptional data. The Mountain and Pacific regions lead the way at a respectable 9.0 and 8.6 percent gains; the South Atlantic is solid at 6.7 percent followed by the West South Central at 6.6 percent. Lastly the West North Central was at a solid gain of 4.6 percent. Home price proved to be one of the major features of the economy in 2017 and the outlook for 2018, appears to be slightly different.

Consumer Confidence

New long-term highs are the continuing story of the consumer confidence index which jumped to 130.8 in February easily beating economists’ high end of predictions. Only 14.7 percent of the sample say jobs are currently hard to get which is down noticeably from 16.3 percent in January and points to acceleration in employment for the month of February. The sample’s outlook for the labor market also continues to rise with 21.6 percent, nearly 3 percentage points higher than in January, seeing more jobs opening up six months form no. However, only 41.3 percent are now seeing stock moving higher over the next six months for a nearly 10 point monthly decline. Inflation expectations are up 1 tenth to 4.7 percent which is very subdued for this particular reading. A look at component readings show similar strength between the present assessment and future outlook, at 162.4 for a 7.7 point gain and 109.7 for as 5.7 point gain, respectively. Enormous strength in consumer confidence has been a standout feature of the economic data, in some contrast however with consumer spending where strength has been tangible but more limited. If the stock market begins to calm down, this may cause this report to accelerate further.

Mortgage Applications

With a pause in the continued rise in mortgage rates seen in the past few weeks, purchase applications for home mortgages rose a seasonally adjusted 6.0 percent in the week of February 23rd. But the unadjusted, purchase applications were down 1.0 percent from the prior week, putting the year on year gain in the Purchase Index at a slim 3.0 percent while applications for refinancing, which are usually more sensitive to interest rate changes, fell 1.0 percent, taking the refinance share of mortgage activity down 2.6  percentage points to 41.8 percent.

GDP

There is little change between the second and first estimates for fourth quarter GDP, revised 1 tenth lower ta an expected annualized rate of 2.5 percent. Consumer spending is unchanged at a very strong 3.8 percent as downward revisions were made to spending on durables, down 4 tenths to 13.8 percent, and nondurables, down 9 tenths to 4.3 percent are offset by an upward revision to the largest category off service spending, up 3 tenths at 2.1 percent. Residential investment got a noticeable upgrade to a 13.1 percent rate from 11.6 percent in the first estimate while nonresidential investment was lowered by 2 tenths to 6.6 percent. These are both very solid levels and like consumer spending, point to fundamental economic demand. Net exports virtually unchanged in today’s revisions, remain at a very sizable $625.2 billion and pulling down the quarter’s headline GDP rate by 1.1 percentage points. Inventories are also a negative factor, slowing in the quarter to an $8.0 billion build from 38.5 billion in the third quarter pulling down the headline by 0.7 points. On the positive side is government purchases in the quarter which are revised marginally lower to 2.9 percent. This rate may become a positive wildcard in future quarters given the outlook for increased deficit spending. Another possible positive is inventory growth which is off to a fast start so far this quarter as businesses scramble to restock shelves with the current strong demand we’ve been seeing. Strength is the message of this GDP report, masked by the nation’s trade imbalance and the quarter’s inventory change excluding GDP rose 4.3 percent a reading unchanged from the first estimate. On the inflation from, the GDP price index rose 2 tenths in the quarter to a 2.3 percent rate which is down 1 tenth from the first estimate though the core, however, is revised 1 tenth higher to 2.2 percent, which hints at building pressures, marks 6 tenths acceleration from the third quarter.

Pending Home Sales

Existing home sales appear to be slowing in the latest evidence from the pending home sales index which fell an unexpected 4.7 percent in January to a 104.6 level that is the lowest in nearly 3.5 years. Today’s result points to a third straight decline for final sales of existing homes which fell very sharply in both the months of January and December. Lack of supply is a key factor holding down sales along with rising mortgage rates. The housing sector accelerated at the end of last year, but despites the strong leadership of the new ho0me market, it appears to have slowed this year so far.

Jobless Claims

Initial jobless claims were down 10,00 in the week of February 24th to a lower than expected 210,000 for the best reading in 49 years. The four week average is at 220,500 and is trending at a pace roughly 15,000 lower than a month ago comparison which points at increasing strength for the February employment report. Continuing claims, however, did rise up 57,000 in the lagging data for the week of February 17th though the four week average is down slightly at a 1.920 million level which is slightly lower than the month ago comparison. The unemployment rate for insured workers is at a very low 1.4 percent. Claims are low meaning layoffs are minimal and demand for labor strong, further confirmation that the economy is at or very near full employment.

Personal Income and Outlays

Core inflation did noticeably rise but not more than what was estimated, at a 0.3 percent increase in January; however, it was not enough to lift the year on year rate which holds at an as expected level of 1.5 percent. Total prices, reflecting a rise in gas, rose 0.4 percent with this year on year rate also unchanged at 1.7 percent. These results fit in with the Federal Reserve’s expectations for a gradual trend upward for prices but they don’t accelerate the outlook. The income side of this report does show the effect of tax changes, as personal taxes fell 3.3 percent in the month to help underpin total income which rose a solid 0.4 percent for a second straight month. The wages and salaries component of income rose 0.5 percent for a second time in three months. Disposable personal income, after holding at 0.3 and 0.4 percent gains in prior months, rose 0.9 percent in January for the largest gain in a year. Spending data are soft, up only 0.2 percent overall and marking a weak

Construction Spending

Nonresidential spending for January were weak holding total spending unchanged in the month for this construction spending report. Private nonresidential fell 1.5 percent pulled down by power, commercial, and office components; year on year it is down 1.1 percent. Housing, on the other hand, continue to grow; residential spending was up 0.3 percent in the month hand up 4.2 percent on a yearly basis. Single-family homes are holding up this component up 0.3 percent in the month and 4.2 percent on a yearly basis. This increase offsets the multi-family component down 1.3 percent in the month and down 2.4 percent on a yearly basis. Housing is a larger component than nonresidential spending reflected in the total year-on-year rate which is at plus 3.2 percent.

Consumer Sentiment

Consumer sentiment, at 99.7, ended February roughly at the mid-month reading and well above January’s 95.7. The two components in today’s report show similar gains: current conditions up 4.4 points to 114.9 which hints at improvement for February consumer spending; and expectations up 3.7 points to 90.0 to underscore the consumer’s confidence in the outlooks for jobs and income. Readings on inflation expectations are unchanged for a third straight month at 2.7 percent for the 1-year outlook and unchanged for a second straight month at 2.5 percent for the 5-year outlook. Consumer confidence remains a standout feature of the economic data, in contrast to actual consumer spending which has been more moderate than robust.