Housing Demand Seemed to Peaked

By | August 23, 2021

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

Stocks recovered ground on Friday, despite concerns about economic growth, amid growing COVID cases, which continued to take a toll on oil prices. The Dow Jones Industrial Average ended up 0.67% on Friday, while the S&P gained 0.81% and the Nasdaq Composite added 1.9%. All three indexes ended up with weekly losses, following a sell-off mid-week after Federal Reserve minutes were released suggesting that the central bank will pare back stimulus by year’s end.  The MSCI world equity index, which tracks shares in 45 countries, rose 0.43%. The Fed is likely to dominate economic conversation this week as well with the meeting of central bankers at Jackson Hole, Wyoming. Investors will be watching for clearer signs of the Fed’s plans on tapering. There were also concerns that rising COVID cases globally could affect economic growth. Oil prices fell for a seventh straight session. Brent crude ended the week, down 2.17% at $65.01, while U.S. crude fell 2.26% at $65.25.

The Delta variant has cast a cloud on the economic outlook. New daily cases continue to trend higher and are at the highest level since February. Hospitalizations are also increasing, and some states are reaching full capacity for intensive care. High frequency data on restaurant seating and TSA checkpoints revealed that activity has plateaued but is not decreasing substantially. The sideways move in conjunction of the weaker than expected retail sales report could result in weaker consumer spending.

Retail sales fell 1.1% in July, to a level 17% higher than a year earlier, but down 2% from where it was three months ago. Sales were mixed but is clear there is some payback from the consumer tase for goods over the past months. Sporting goods and building material store shave seen sales decline for a fourth consecutive month. Auto sales are weak because of limited supply caused by the shortage of semiconductors.  Furniture, grocery and clothing store sales all declined. The data presents a potential problem for consumption going forward.

Data last week did show a continued improvement for industrial output. Industrial production rose 0.9% in July. Manufacturing grew 1.4%, driven by a 11.2% increase in output from the auto sector. There were seasonal distortions in that number, as a number of auto plants worked in July. Auto plants are seeing weeks of being closed and then reopen depending on supplies of semiconductor chips. Manufacturing for the nonauto sector continues to e strong. The index for manufacturing for July was 0.8% above its pre-pandemic level. Production of durable goods rose 2.4% in July. Gains in output were strong across the board suggesting that capital investment is continuing to be upbeat. There were suggestions that the problems in supply chains and employment were eased slightly in July. That is good news but the rise in COVID infections is a risk.

U.S. housing starts fell more than expected in July, dropping 7% to an annual pace of 1.534 million annualized units. Housing demand seemed to have peaked as high prices and lack of inventory are dampening demand. While builders grapple with limited availability of land, labor and materials, the report does suggest some progress. The number of homes started but not completed increased to 689,000, the most since 2007.Housing may have peaked for a few months, but demand is still expected to remain at high levels, as more inventory surfaces and wages rise, suggesting a solid foundation.

This week will provide insight on existing and new home sales, advance durable goods, personal income and outlays and the PCE deflator. A lot of eyes will be on Jackson Hole and conversations concerning tapering and the increase in COVID infections.

Latest Data

The U.S. Economy:

Retail sales dropped sharply in July, falling 1.1%Auto were a significant drag, falling 3.9% in July, the third consecutive monthly decline. Excluding autos, retail sales were down 0.4%, after rising 1.6% in June. Nonauto retail sales have dropped in three out of the last four months. Non-store retail sales dropped 3.1% in July, but part of this can be attributed to the shift in Amazons Prime Day, which normally occurs in July, but happened in June this year. Sales were up 15.8% above July 2020 levels. Retail trade was down 1.5% from June but was up 13.3% from a year earlier. The auto sector’s sales were still up `9.3% from a year earlier. Sales fell 1.2% from June and food and beverage sales were down 0.7%. There was a price-driven increase in gasoline sales of 2.1%. Food and drinking places saw a 1.7% monthly increase. Sales were powered this year by the massive stimulus programs by the federal government. That additional boost to spending is fading and spending is starting to shift from goods to services, which are starting to be reflected by weaker retail sales. Overall, consumer spending should be positive, as job growth remains decent and wages are rising.

Industrial production increased more than expected in July, due to a jump in production of autos and parts. Industrial production increased 0.9% in July after a 0.2% increase in June. Manufacturing output grew 1.4% in July. About half of the gain in factory output came from a 11.2% jump in auto output, as a number of auto makers trimmed or canceled their usual July shutdowns. Despite the July increase, production of autos and parts were about 3-and-a-half percent below recent peak in January 2021. Utility output fell 2.1% in July and mining increased 1.2%. The index for manufacturing for July was 0.8% above its pre-pandemic level. Production of durable goods rose 2.4% in July. In addition to motor vehicles, gains of 1.5% or more were recorded by machinery, electrical equipment, appliances and components, aerospace and miscellaneous transportation equipment. The production of nondurable goods increased 0.3%, with the largest increases recorded by textile and plastic products.

The outlook for the industrial sector remains decent, but shortages of semiconductors and other supply chain issues have been problematic for manufacturers. Total IP in July was 6.6% above its year earlier level but 0.2% below its pre-pandemic (February 2020) level. It is widely assumed that production of semiconductors would improve over the course of this year on a global level. It appears this shortage may persist through the end of the year and perhaps, into 2022. Other manufacturers have seen some progress in the supply chain issues, although it is too early to see an end to supply chain issues. The price of some commodities has flattened recently, a part because of lower demand in China.

Business inventories increased strongly in June, although shortages of raw materials continue to frustrate efforts by motor vehicle retailers to restock. Total inventories increased 0.8% in June and were up 6.6% from June 2020. Retail inventories rose 0.3%, manufacturers saw a 1.0% increase and wholesalers saw a 1.1% increase. Sales increased 1.4% in June, up 19.9% from a year earlier. The June inventory-to-sales ratio was 1.25, down significantly from the 1.41 reading a year earlier. The outlook for inventory accumulation is good, but supply chain shortages are constraining production The supply chain problem is expected to ease, although in the case of semiconductors, it may take several quarters before the problem is resolved.

U.S. housing starts fell more than expected in July, dropping 7% to an annual pace of 1.534 million annualized units. Starts in June were revised up to 1.65 million annualized units. The bulk of the weakness was in the multi-family sector, where starts fell 13.1%, the third decline in the past four months. Single-family starts decreased 4.5% to an annual pace of 1.111 million. Housing permits rose 2.6% to 1.542 million. Single-family permits fell 1.7% to 1.048 million annualized units. High building material costs are hurting housing and sapping builder confidence. The National Association of Homebuilder’s confidence index fell 5 points in August to 75, the lowest reading since July 2020. Total completions rose 5.6% to a 1.391 annualized rate. Housing demand seemed to have peaked as high prices and lack of inventory are dampening demand. While builders grapple with limited availability of land, labor and materials, the report does suggest some progress. The number of homes started but not completed increased to 689,000, the most since 2007. Demand will still be decent, but housing activity is likely to flatten, until more inventory can be found.

Important Data Releases This Week

The July existing homes sales report will be released on Monday, August 23 at 10:00 AM. More inventories have helped dales pick up from their April lows. Demand is cooling from its fever pitch and some sellers are lowering prices. Better inventories should help the sales slide. Sales came in at an annual pace of 5.86 million in June and should equal 5.85 million in July.

The July new homes sales report will be released on Tuesday, August 24 at 10:00 AM. New home sales growth over the past few months had helped inventory build and have cooled price growth. More home sales at better price should help home sales from weakening further. Sales came in at 676K in June and should equal 710K in July.

The July durable goods report will be released on Wednesday, August 24 at 8:30 AM. Durable goods likely pulled back in July due to a falloff in transport orders. We project durable goods orders to fall 1.2% in July but to have increased 0.5% excluding transportation. Aircraft orders are coming back but Boeing had a weak July, following a strong June. Businesses are investing solidly in capital goods and this trend should continue. While overall durable goods orders are expected to cool from the consumer side, businesses will continue to invest, making a solid floor.

The July personal income and outlays report will be released on Friday, August 27 at 8:30 AM. The recent weak retail sales report and drop in sentiment in the University of Michigan’s consumer confidence have raised clouds concerning consumer spending. Dales are quite elevated from their pandemic-peak and despite some uncertainties, we think spending will continue at an elevated level. Personal spending should increase 0.4% in July and incomes will also rise 0.4%. Price power is still rising but some cooling is expected following a drop in airfares and auto prices. After the 1.0% rise in June, the PCE deflator is expected to rise 0.4%.

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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.