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Econ Wrap-Up: Durable Goods Orders, New Home Sales, Consumer Confidence and More

5/26/2015
By Jennifer Coombs

There are some signs of life in the capital goods sector, which is helping to limit the aircraft-related decline in April’s durable goods orders to around -0.5%, which was roughly in-line with consensus. Excluding major transportation orders, the core reading is up an encouraging 0.5% after a 0.6% gain in March. In particular, strength was concentrated in the nondefense capital goods excluding aircraft, and reflects strength in business investments which until today’s report had been considered soft so far this year. New orders increased by 1.0% after an even stronger reading of 1.5% in the prior month. Shipments were also lifted by 0.8% in April after a strong reading of +1.0% in March, which should give a boost to gross domestic product (GDP) estimates for the second quarter of 2015. There are plenty of soft spots in the report, but the underlying theme of improvement in durable goods is one of the best pieces of news for the industrial sector so far this year.

 

 

There were three major housing readings released during Tuesday's (5/26) session. Firstly, home prices are rising solidly into the spring selling season, although there have been signs of stalling. The S&P Case-Shiller adjusted 20-city house price index increased by a very solid and slightly higher-than-expected 1.0% for the month of March. There were notable gains across all cities and regions; however this data was not confirmed by the Federal Housing Finance Agency (FHFA) House Price Index which rose by a lower-than-expected 0.3% in March. However, year-over-year, both readings showed an improving trend with Case-Shiller noting a 5.0% increase and the FHFA index rising 5.2%. Below is a chart of the month-over-month percentage change in the FHFA index.

 

 

Turning back to the Case-Shiller reading, the strongest gain in March ironically came from Detroit, where prices increased by 2.6% after gains of 1.2% and 1.0% in the prior two months. Since strength in housing prices came out of one of America’s most hard hit recession cities, this speaks very well for the overall strength in housing prices. Also strong were price increases of 1.8%, following a gain of 1.7% in February. West Coast cities and Florida, as usual, were at the top of the price list. The unadjusted Case-Shiller data tells roughly the same story, but both data sets show +5.0% year-over-year housing rates which is rising trend since the start of the year.

 

 

The other major reading on the housing sector confirmed what earlier housing reported noted the week of May 18th. In April, new home sales made a solid comeback, up 6.8% to a seasonally adjusted annual rate (SAAR) of 517,000 homes. This was on the high-end of consensus expectations, and far above the adjusted March reading of 484,000 homes. The strength in this report is primarily concentrated in the Southern region, which is the largest and most important housing region. Sales rose 5.8% in April, but the revision from the prior month failed to reverse the 11.8% drop in sales back in March. The chart below shows the month changes in new home sales across all four major housing regions. The total supply of new homes on the market rose to 205,000, but the ratio of supply relative to sales fell to 4.8 month from 5.1 months in the prior period. The low supply in new homes should encourage a pickup in building activity, but at the same time, the lower supply is harmful to current sales. Price readings are still relatively favorable with a 4.1% rise in the median price of a new home to $297,300 for a year-over-year gain of 8.3%. Ultimately, the month-to-month readings are always volatile, but these gains in April substantially underscore the surge in housing starts and permits, which is more than enough to offset the weaker-than-expected existing home sales for the month. Overall, this is just one more sign that the housing sector is improving from the recession lows.

 

 

Next, consumer confidence is beginning to stabilize, yet the long-term expectations remain rocky. After having greatly spiked at the start of 2015, the Conference Board’s reading on consumer confidence is stabilizing at a solid level of 95.4 in May, which is just slightly above the consensus estimate of 95.1. Income expectations are slightly higher, as are the buying plans for autos, homes, and appliances. Employment-readings are mixed with 27.3% of those surveyed (versus 25.9% in April) saying that jobs are currently hard to get. This reading will be closely monitored as it is indicative of a major red checkmark for the May employment report. This report remains consistent with the Federal Reserve’s description of consumer confidence in their minutes from back in April, which notes that the index is at a historically high level. However, this strength in the consumer’s attitude has yet to translate into meaningful retail spending.

 

 

Lastly, and certainly not least, was even more evidence that contraction in the energy sector continues to weigh down the Dallas Fed Manufacturing Survey. For the month of May, the reading fell even deeper into negative territory, with a headline reading of -20.8 versus the -16.0 and -17.4 readings in the last two months. Production levels have taken a turn for the worse, coming in at -13.5 (versus the -4.7 reading in April) as did employment at -8.2 (versus +1.8 in April). New orders continue to be deep in the red at -14.1 versus -14.0 in April and although prices paid are still in the red, the decline is beginning to ease up. All in all, the region Fed reports point to another slow month in US manufacturing, which is struggling from a weakness in exports and, as this report confirms, from a substantial contraction in the energy sector.

 

Jennifer Coombs
Wall Street Strategies

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