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Look behind at February 17, 2020 week: Housing continued strong through January, manufacturing in February suggest sectoral downturn is done

A look behind at the February 17 week shows that the US economy appears to be in what Chair Jerome Powell call a “good place”. It was a relatively light data calendar in a four-day workweek. The two main messages from the data reports were:

  • Housing is responding positively to low mortgage rates, employment security, and rising wages. Housing activity typically slows in the winter months, but mild weather and high confidence are keeping homebuyers in the market. This may be borrowing some activity from the spring months, but if the fundamentals remain solid, it could be less than it might.
  • Evidence is mounting that the factory sector is emerging from the mild contractionary period that began in August 2019. District bank surveys of manufacturing for February are pointing to another month of expansion at the national level. If so, the sectoral recession likely wound up in December. Activity picked up after the signing of the first phase of the trade agreement with China in December, and global economic conditions have improved. There are still the risks associated with the outbreak of COVID-19 to worry about, but so far the US economy has felt only spotty negatives. That could change for supply chains the longer the quarantines in China last.

The NAHB/Wells Fargo Housing Market Index was down a scant 1 point to 74 in February and remains not far below series highs for the report. Sales of single-family units remained nearly as strong as in the prior month, as did expected sales and buyer traffic.

Starts of new homes were at post-recession highs with only a slight dip to 1.567 million units (SAAR) in January after 1.626 million in December. Permits-issued were at a post-recession high of 1.551 million units in January. The demand for new homes is strong and builders are moving to capture it.

Sales of existing homes dipped to 5.46 million units (SAAR) in January, but the decline was from a near-term peak of 5.53 million in December and was in part driven by meager supplies of homes to purchase. Sales are reviving and moving consistently back toward levels seen early in 2017 and 2018. Potential homebuyers are both less worried about risks to the economy that might make buying a home unwise, and more tempted by a favorable mix of low mortgage rates and rising incomes.

Two weeks of upticks in the 30-year fixed mortgage rate as reported by Freddie Mac still leaves the month-to-date average at 3.47%, its lowest since 3.47% in October 2017. The rate is one that helped power the firming of the housing market in 2017.

The general business conditions indexes in both the New York and Philadelphia Fed surveys of manufacturing in February added to the evidence that the shallow recession in the factory sector that began in August 2019 bottomed out in December. The New York index had a solid 8.1 point rise to 12.9 in February, up for a second month in a row and the highest since 14.4 in May 2019. The Philadelphia measure gained 19.7 points to 36.7, jumping upward for a second month in a row and the highest since 39.7 in February 2017. While the recent increases in Philadelphia should be read with some caution,  combined with the New York reading, it does suggest that activity is rebounding with solid new orders, possibly related to the signing of trade deals and diminished uncertainties.

With only one regional survey available for the service sector in February, it is harder to get a sense of activity there. However, the New York Fed’s Business Leaders Survey had a 6.1 point rise in its business activity index to 9.8, its highest since 20.6 in May 2019. It would appear that the it is not only the factory sector that is benefiting from trade agreements.

The Conference Board’s Leading Economic Index for January bounced back and rose 0.8% in January after down 0.3% in December. The rise is probably overstated due to unusual and outsized increases for building permits and unusually low levels of jobless claims. Nonetheless, it does signal renewed upward momentum at the start of the year.

The Final Demand PPI rose 0.5% month-over-month in January which was a good bit more than expected. Year-over-year the PPI was up 2.1%. However, the BLS said 90% of the rise was due to the 1.2% increase in trade services. This is likely to be a one-off and price gains for producers should steady in the coming month outside the softness in energy prices.

The three District Bank Nowcasts for GDP were more consistent across forecasts when the week’s data was included. The Nowcasts aren’t the best predictor of the actual number. However, when taken together, it looks like things are shaping up for another quarter of around 2% growth. The advance estimate of fourth quarter GDP will be released at 8:30 ET on Thursday, February 27 at 8:30 ET.

The release of the minutes of the January 28-29 FOMC meeting was by-and-large not very interesting in regard to the outlook for monetary policy. There was nothing that would contradict public comment by policymakers in the three weeks since the end of the meeting. Even with a nod to the risks presented by the COVID-19 outbreak and other geopolitical considerations, the FOMC looks set to keep rates on hold for some time to come. Discussion of the monetary policy framework review suggests that the FOMC is leaning toward using a range centered at 2% to convey it symmetric inflation objective, or might even just stick with the current formulation as less open to misinterpretation on the part of the public. There was also extensive discussion of monetary policy as an instrument to aid in financial market stability. The upshot was that this needs more research to better understand the relationship.


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