Housing is a Powerful Driver For the Rest of the Economy

By | September 28, 2020

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

The markets were on a see-saw on Friday as stocks in large parts of the world headed for their worst weeks since the peak coronavirus panic. Asia managed to end its worst week since the March global meltdown with a modest gain. Europe’s main bourses started steady, but with Britain and France now notching up almost record numbers of new virus cases, the mood was jittery. London’s FTSE clawed up 0.2% but Frankfurt’s Dax and CAC40 in Paris were down 0.2% and 0.4%, leaving the pan European STOXX 600 down more than 3%. There was a flicker of hope overnight after squabbling U.S. political parties rekindled talk of another super-sized stimulus package. Most analysts say that is unlikely until after the election.

Technology stocks rode to the rescue on Friday on Wall Street, lifting the main indexes more than 1%. However, the Dow and the S&P still posted their longest weekly losing streaks in a year as fears of a slowing economy sparked an almost month-long rout. The Dow Jones Industrial Average rose 358.52 points, or 1.34% to 27,173.96. The S&P gained 51.87 points, or 1.60% to 3,298 and the Nasdaq added 241.30 points, or 2.26% to 10,913.56. Both the Dow and the S&P posted their fourth consecutive weekly declines, the longest losing streak since August 2019. The Nasdaq closed higher for the week after falling the previous three and is now up 22% for the year. The S&P is up a bit more than 2% for the year.

Initial claims for unemployment insurance disappointed. Seasonally adjusted new filings rose from 866,000 to 870,000 in the week ending September 19. Continuing claims were down round 70,000 in the week ending September 12. Pandemic unemployment claims dropped 45,074 to 630,000. The data has been volatile and difficult to separate signal from noise. The total number of people claiming unemployment insurance benefits was 26.04 million in the week ending September 5, down from 29.77 million. The data suggest the labor market is still reeling from the COVID-19 crisis. New filings remain elevated. High frequency data suggests the labor market is moving sideways. Downside risks are high because of the persistent spread of the virus. Job growth is slowing and could stall out in the fourth quarter.

Economic data was on the light side last week, but housing data continues to show strength. Sales of both new and existing homes both topped expectations in August and mortgage applications bounced back from their Labor Day weekly decline. Existing home sales rose 2.4% to a 6.0 million units pace in August, which cut inventories 0,7% to 1.49 million units at the end of the month. The number of new homes for sale is a whopping 18.6% below its year-ago level, while sales are up 10.5%. With inventory low and demand high, prices are soaring. The median price of an existing home is up 11.4% in the last year and all four regions have seen double-digit price gains. New home sales increased 4.8% to a 1,011,000 annualized pace in August. Housing is a powerful driver for the rest of the economy. We have already seen clear evidence in this at home improvement stores, furniture retailers and manufacturers of building materials, furniture and appliances. Many home-owners are scrambling to add living space because of children moving back home and people working at home. Durable goods orders rose 0.4%, a disappointing rate, but the fourth consecutive monthly rise. Transportation slowed August orders, as orders for motor vehicles and parts fell 4%. Core capital goods orders rose 1.5%, also its fourth monthly rise. Business investment is rebounding, a good sign considering that some industries like airlines are still depressed and auto sales slowed down.

Next week, we get a look at advance trade in goods, personal income and outlays, the ISM manufacturing index, construction spending, motor vehicle sales, factory orders and the payroll report.

Latest Data

The U.S. Economy:

The August reading of the Chicago Fed’s National Activity Index showed continued moderation after unprecedented swings earlier in the year. The index fell to 0.79 after a July reading of 2.54. Two of the broad categories made positive contributions to the index, but all four sectors decreased from July. The three-month moving average came in at 3.05, down from 4.23 in July. Negative readings indicate a slowing rate of activity and readings below -0.7 have been historically associated with a recession. Production-related indicators contributed 0.23 to the index in August, down from July’s 1.26 reading. The sales, inventories and orders category contributed -0.04 to the index, compared to July’s 0.53 reading. Employment-related indicators contributed 0.63, a hair below July’s 0.65 reading. The personal consumption and housing category contributed -0.04, down from 0.09 in July. The outlook for the index remains certain, but the large gains seen in May and June are gone. Although manufacturing is improving, output remains around 7% below its pre-COVID-19 level. It may take years to reach pre-crisis levels for employment. 

Existing home sales advanced 2.4% in August to a 6.0 million annualized units. Sales were up 10.5% from a year earlier. All four regions reported increases in August The Northeast had the biggest gain. Sales of existing single-family homes came in at 5.37 million annualized units, up from 5.28 million in July and 4.84 million a year earlier. Existing condo/co-op sales came I at 630,000 units I n August, up from 580,000 in July and 590,000 a year earlier. Low mortgage rates are fueling housing activity. Inventory has dropped to an all-time low of 1.4 million, less than half the amount seen at the start of 2011. Existing home sales should remain upbeat for the remainder of 2020.

New home sales came in above expectations. In August 1,011,000 annualized units were sold, a 4.8% increase from July. The August gain followed a 14.7% jump in July and a 20.5% increase in June. Compared with last August, the median sales price was down 4.3% and the number of new homes for sale was down 13.2%. Low interest rates are spurring demand. The 30-year fixed mortgage rate remains firmly below 3%. The housing market is on fire, but several factors will likely slow the pace. The record low inventory means higher prices. The labor market is slowing and the impact of the large umber of unemployed will start to affect spending, unless there is more stimulus. 

U.S. durable goods orders disappointed in August, rising only 0.4%. Transportation was mostly to blame, particularly autos. Orders for motor vehicles and parts declined 4%. Defense aircraft orders fell 6.4%. Excluding transportation, orders increased 0.4%. The key nondefense capital goods orders excluding aircraft rose 1.8%, the fourth consecutive monthly increase. Business investment has reversed some of the losses in March and April, when nonessential businesses were shut down. Core capital goods orders remain well below their February levels. Some parts of business investment are recovering more quickly than others. Durable goods orders have risen over the last few months. Fundamentals are favorable for some industries and not for others. Air travel is down and so are orders for nondefense aircraft. Low oil prices continue to weigh on mining. Auto sales were increasing but took a step back in August. Business equipment orders are strong and housing activity is robust. This suggest a positive industrial sector but at a modest pace.

Important Data Releases This Week

The advance trade in goods will be released on Tuesday, September 29 at 8:30 AM. Trade volumes are recovering slowly as the global economy is only slowly recovering. Exports and imports remain well below pre-COVID-19 levels. Exports are gaining ground slowly, but imports have surged recently leading to a big spike in the goods deficit. We expect the trade deficit in goods to fall from the $79.3 billion level in July to $73 billion.

The July personal income and outlays report will be released on Thursday, October 1 at 8:30 AM. Incomes have seen some big swings lately and August will be no different. Incomes were volatile in early months due to the fiscal rescue programs, but they did settle down in July to a 0.4% advance. Spending has also seen some big month-to-month changes. We expect incomes to rise 0.3% for August and spending to advance 1.0%.

The September ISM manufacturing index report will be released on Thursday, October 1 at 10:00 AM. Manufacturing has been recovering but the pace has slowed recently. We project the ISM manufacturing index will fall to 55 from the August reading of 56.

The August construction spending report will be released on Thursday, October 1 at 10:00 AM. Construction spending advanced 0.1% July as weakness in nonresidential and the public sector is largely offsetting the strong single-family sector. We project that pattern to continue, with total construction spending advancing 0.2% for August.

The September U.S. vehicle sales report will be released on Thursday, October 1 at a varying time in the afternoon. Auto sales slowed to slightly below 15 million in August. We think sales will hit 15.2 million for September.

August factory orders will be released on Friday, October 2 at 10:00 AM. Already released durable goods orders showed a 0.4% advance, largely driven by weakness in the transportation sector. A slower pace of recovery is expected for the factory sector, with factory orders rising 0.4%.

The September payroll report will be released on Friday, October 2 at 8:30 AM. Most indicators suggest employment continued to improve in September but at a slower pace. Census hiring will be a drag in September after adding 240,000 jobs in August. The number of weekly initial unemployment claims has stopped falling. We look for payrolls to rise by 900,000 for September.

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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.