I’m seeing that the US economic outlook is still running bullish, but big ticket items like housing are slowing down. House is 1/10 of the US economy. The housing skilled labors are in high supply, but General Motors (GM) is going to layoff over 14,000 employees in the coming years. This is the outlook, both good and bad.
• Economic View
• Housing View
On Wednesday morning, before the opening bell, the Bureau of Economic Analysis reported, in its “second” reading (based on a more complete set of data than the preliminary reading released last month on Oct. 26), that real Gross Domestic Product — GDP adjusted for inflation, our best gauge for economic growth — increased at a seasonally adjusted annual rate of 3.5% in the third quarter of 2018, matching expectations and unchanged from the advance reading. This follows an unrevised 4.2% annual rate in the second quarter of the year.
However, while the headline number was unchanged, there were fluctuations in the underlying metrics as “upward revisions to nonresidential fixed investment and private inventory investment were offset by downward revisions to personal consumption expenditures (PCE) and state and local government spending.”
Regarding PCE, a crucial metric given the importance of consumption to U.S. economic growth, I note that on a seasonally adjusted annual basis, the PCE index came in at +3.6 from the preceding period, below the +3.9% increase expected by analysts and down from +4.0% previously reported.
On Wednesday, shortly after the opening bell, the U.S. Census Bureau reported that new home sales in October dropped 8.9% to a seasonally adjusted annual rate of 544,000. Making up the headline reading were sales of 22,000 homes in the Northeast, 60,000 in the Midwest, 313,000 in the South and 149,000 in the West.
The reading greatly missed expectations of 575,000, however, serving to partially offset the miss, September’s reading was revised up to a rate of 597,000 (from 553,000, previously reported). With the monthly decrease, on a year-over-year basis, sales are down 12.0% from October 2017’s estimated rate of 618,000.
It is also worth noting that of the 544,000 new homes sold during the period, 177,000 have yet to begin construction, while 196,000 remain under construction. Recall, looking at the stage of construction can be helpful for two reasons. First, it can indicate additional work to come for labor forces tied to the home building market, a factor that could mean more wage inflation on the horizon as skilled laborers are already in short supply, and second, it can point to the potential for additional sales to come for those companies that supply building materials for new homes.
Digging deeper, month over month, sales declined across all major regions, falling 3.2% in the West (-1.3% YoY), 7.7% in the South (-11.6% YoY), 18.5% in the Northeast (-46.3% YoY) and 22.1% in the Midwest (-16.7 YoY). As for costs, the average selling price in October rebounded to $395,000 (from $794,000 in September). The median sales price, however, ticked down to $309,700 (from $321,300 in September).
Given the current supply of new homes for sale, which at the recent pace of sales sits at 7.4 months, I would not be surprised to see average prices hover at current levels, or pullback as supplies have now been at or above the six-month level many consider to be balanced between supply and demand for five consecutive months and will likely also seeing pressure from the recent rise in mortgage rates, should the Fed maintain its hawkish stance.
I continue to believe the housing market, which I reiterate tends to punch above its weight due to its influence on various other sectors of the economy such as construction, associated services subscription and expenditures (think internet, utilities, etc.) is showing cracks in the U.S. economy. And while the U.S. economy continues to expand, I maintain the view that the Fed must walk back its hawkish commentary if it doesn’t want to derail the expansion I are still seeing.
Further backing this view, I remind you that in past months the narrative was that a lack of supply was causing pressure on sales, well, we’ve clearly got the supply now as indicated by inventory sustaining above the 6-month level, however, the housing markets continues to struggle. I believe this leaves one factor left to blame: prices. However, I do not believe the list prices to be the issue, rather, I believe higher rates, and more importantly the Fed’s guidance for additional hikes to come, are making it so that once potential buyers start to calculate monthly mortgage, the prospects of buying homes become dim.
Bottom line, the housing market is telling us that as strong as the consumer may be based on smaller purchases, like those made on Black Friday and Cyber Monday, they are not strong enough (or optimistic enough about their economic outlook) to take on a ~5% mortgage! I look forward to hearing from Fed chair Powell later today and reiterate that in order for the market to take the next meaningful leg higher, he must walk back his hawkish commentary and revert back to a data-driven path. Right now the data is telling us that three hikes in 2019 (after an expected hike in December) is simply too aggressive at the moment, especially should I see no resolution on the China trade front.