Housing Starts Slipping Slightly in June

By | July 22, 2019

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.


Coffee and Economic Review

Global stocks rose on Friday as investors firmed up bets on a U.S. interest rate cut at the end of July. The actions followed a speech by a top Federal Reserve official that helped cement expectations a rate cut was forthcoming. MSCI’s All-Country World Index, which tracks shares in 47 countries, was having its best day in two weeks, up nearly half a percent for the day and on track for a six-week streak of weekly gains. Comments by New York Fed President John Williams on Thursday made it virtually certain, in the marketplace’s view, that the Fed would cut rates by at least 25 basis points at the Fed meeting at the end of July. In oil market, crude surged after the United States said its navy had destroyed an Iranian drone in the Straight of Hormuz, a major chokepoint for global crude oil flows.

Wall Street’s main indexes fell on Friday following a report that the Federal Reserve was going to cut interest rates by only a quarter-percentage point at the end of July. A report by the Wall Street Journal said that the central bank was prepared to do a quarter point cut in July and more later given may do more later giving concerns about a decline in global economic growth and uncertainty about trade. Futures market odds of a 50- basis point cut in July soared to 71% on Thursday and then fell to 22.5% on Friday. The Dow Jones Industrial Average fell 0.25% to 27,154.2 on Friday, while the S&P lost 0.62% to 2,976.61.

Economic data was generally stronger than expected last week. The latest data shows a resilient domestic economy and seems to argue that there is little need for a rate cut. Retail sales surged 0.4% in June, for a third consecutive month. Spending growth seems solid, compared to the volatility seen at the end of 2018. Industrial production was flat in June, but manufacturing grew a solid 0.4%. Despite the two-month positive reading for manufacturing, both total IP and manufacturing were negative in the second quarter. The trade truce may be providing some reprieve but the ongoing uncertainty and a recognition that any agreement between the U.S. and China won’t happen quickly, amid the growing evidence of a slowing global economy, is keeping the manufacturing sector in the slow lane. Residential construction may have bottomed but any recovery has been disappointing. Housing starts fell 0.9% in June on weakness in the multi-family sector. Despite single-family starts rising in there out of the last four months, total starts year-to-date are running almost 4% below last year’s pace. Permits fell 6.1% in June, suggesting little upward momentum in the near-term.

Next week, the economic calendar will be a little lighter with key data on housing, durable goods orders and GDP. The economy will likely grow under 2% in the second quarter but averaged with the first quarter, is still growing on trend at a decent rate. Still, housing and manufacturing are weak, and trade is casting a big shadow. On the other hand, the consumer remains solid. Economic growth is expected to be modest but positive for the remainder of the year.+++++++++++++++

Latest Data

The U.S. Economy:

Retail sales increased 0.4% in June, the third consecutive increase at that magnitude. Excluding autos, sales advanced 0.4% and excluding autos and gasoline, sales grew 0.7%. Non-store retailers, restaurants and vehicle dealers led the monthly increase. Declines were few, led by gasoline stations, department stores and appliance stores. Sales were 3.4% above year earlier levels. Spending is becoming consistent after a volatile start to the year. The government shutdown, weather and volatility in gas prices likely had a hand in the first quarter volatility. Retail sales growth should be healthy going forward. Job creation and income growth remain strong. Trade is creating uncertainty but is not affecting the consumer side, as it is casting a shadow on the business side. If trade talks fail, the next wave of tariffs will impact the consumer. We are hoping that progress will continue.

The U.S. is not importing a lot of inflation. Import prices fell 0.9% in June, after remaining unchanged in May. Excluding petroleum, import prices declined 0.4% in June. Petroleum prices fell 6.5% in June. Export prices were also weak, falling 0.7% in June. Inflation is basically tame, giving the Federal Reserve the leeway, it needs to cut rates. Import prices exclude duties, so the impact of tariffs are not caught in this measurement. Tariffs are inflationary but with global growth slowing, manufacturers have less price pressure.

Business inventories increased 0.3% in May, following April’s 0.5% surge. Merchant wholesalers and retailers led monthly gains, rising 0.4% each. Manufacturers added 0.2% to stocks. Business sales bounced back with a 0.2% rise, offsetting the 0.2% decline in April. This kept the inventory-to-sales ratio at 1.39 months. Bloated stocks remain an issue, although the inventory build moderated in May. Sales have been weak and are not keeping up with inventory build. While it is encouraging to see the I/S ratio come down from its peak in February, it remains high for this part of the business cycle. The trade war is causing part of this build up. Businesses have been stockpiling ahead of tariff deadlines. Also, auto inventories are up as that sector has passed its peak both here and abroad. The shift to e-commerce has resulted in higher inventories to assure quick deliveries. The I/S ratio should come down in coming quarters, but trade is a major uncertainty.

Industrial production was unchanged in June, following a 0.4% increase in May. The index was held back by a 3.5% decline in utility output. Manufacturing advanced 0.4% in June, following a 0.2% increase in May. Motor vehicle and parts output rose 2.9%, following a 2.3% rise in May. Excluding the auto sector, manufacturing output rose 0.2% in June, after remaining unchanged in May. For the second quarter, total industrial production declined at an annual rate of 1.2%. Manufacturing declined 2.2% in the second quarter, about the same pace as in the first quarter. We expect a bumpy rise for the industrial sector, as the global economy is slowing and escalating trade tensions and tariffs present significant headwinds. The successful completion of a trade deal would be a plus for industrial activity, but renewed tariffs would keep the industrial side weak for a prolonged period. Most likely, there will be some form of a deal but that may take months to complete.

Housing starts slipped slightly in June thanks to a fall in the multi-family sector. Total starts fell 0.9% m/m to an annual pace in June of 1.253 million units. The single-family component rose 3.5% to 847,000 in June, while the multi-family sector fell 9.2% to 408,000. Future housing activity doesn’t look much brighter, as permits fell 6.1% to 1.220 milion units. Single-family permits advanced 0.4% and the multi-family component fell 16.8%. Single-family starts are down 0.8% y/y, while the multi-family sector is up 13.3% y/y. Despite low mortgage rates, housing activity has been flat. The job market for construction is tight and there still is insufficient supply of new homes, especially at the lower end of the cost spectrum. Affordability is a big issue for the first-home buyer’s market. With these structural headwinds, we expect only minor progress in the housing market.


China’s economic growth slowed to a 6.2% growth I the second quarter from a year earlier. It was the slowest pace in 27 years. The data marked a slowdown from the first quarter’s 6.4% increase. Beijing has leaned on fiscal stimulus to underpin growth this year, announcing tax cuts worth nearly two trillion yuan (291 billion) and a quota of 2.15 trillion for special bond issuance by local governments aimed at boosting infrastructure spending. China has also cut the reserve requirement ratio (RRR) six times in early 2018 to free up more funds for lending and more cuts are expected. Exports fell 1.3% in June from a year earlier, after a 1.1% increase in May. Imports fell 7.3% after a 8.5% drop in May. An official survey showed factories were shedding jobs at the fastest rate since the global crisis a decade ago. Some Chinese economic news was not bad. Retail sales jumped 9.8%, the fastest pace since March 2018. Gains were led by a 17.2% surge in car sales. Car dealers are offering big discounts to lure customers. Motor vehicle production fell 15.2% n June, the 11th monthly decline in a row. Industrial production climbed 6.3% y/y, picking up from May’s 17-year low. Fixed-asset investment for the first half of the year rose 5.8% from a year earlier, up from May’s 5.6% advance. Monthly data in June was better than expected, but with the weakness continuing in the factory sector, many analysts doubt it is the start of a turnaround.

Important Data Releases This Week

June Chicago Fed National Index will be released on Monday, July 22 at 8:30 AM EDT. The index is expected to show little improvement in June at 0.00 versus the -0.05 reading in May. The index has been signaling subpar growth all year.

June existing home sales will be released on Tuesday, July 23 at 10:00 AM EDT. We project that sales will remain unchanged at 5.340 million in June. Existing home data has been uneven but moving upwards, with price data climbing and more supply coming into the market.

June new home sales will be released on Wednesday, July 24 at 10:00 AM EDT. At 626,000, new home sale in May were unexpectedly weak in a report that showed a sharp decline in prices. Yet, year-to-date sales are up substantially and a move higher to 655,000 is expected for June.

June durable goods will be released on Thursday, July 25 at 8:30 AM EDT. We project durable goods orders to rise 0.7% in June, following a 1.3% decline in May. Core capital goods orders were better than the headline number in May, rising 0.4%. We project that sector will see a 0.2% rise for June.

June international trade in goods will be released on Thursday, July 25 at 8:30 AM EDT. We project the trade deficit will narrow from May’s $74.6 billion to $72.5 billion. Exports rose strongly in May but imports rose more strongly.

First estimate of second quarter DP will be released on Friday, July 26 at 8:30 AM EDT. Real GDP is projected to have increased 1.9% in the second quarter, following a 3.1% increase in the first quarter. Spending will be firm, rising 3.9%, up significantly from the 0.9% advance in the first quarter.

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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.