6/23/2015
By Jennifer Coombs

In the month of May, new orders for manufactured durable goods fell by $4.1 billion or 1.8% to $228.9 billion. However, when excluding transportation, new orders actually rose by 0.5%. Defense new orders played a large part in the rise, as when they are excluded, new orders actually fell 2.1%. The decline in shipments partially improved, falling 0.1% in May after falling 0.2% in April. A bit of good news may be that inventories of manufactured durable goods have fallen for the 23^rd consecutive month, this time by 0.2% to $400.6 billion. It’s only a matter of time before businesses will need to replenish their inventories, therefore increase their demand for labor.

Despite the broader market pullback, there was some very encouraging economic data released in the latter part of the morning session. Firstly, the Federal Housing Finance Agency (FHFA) home price index showed a 0.3% gain in April from a 0.3% gain in March, bringing the year-over-year rate to +5.3% in April. This is encouraging since prices have been flat so far this year. The readings on a regional basis are mixed, but suggested that the whole tide for housing is up. The year-on-year rates in this report roughly match those in Case-Shiller, but both of these reports lag substantially in time. However, the new home sales report (discussed later) shows that prices are expected to majorly improve into the summer months.

While we tend to prefer the data published by the Institute for Supply Management (ISM), Markit’s mid-month preliminary data usually provides a good taste on what the month was like. As expected the manufacturing sector continues to be weak, coming in at a June flash reading of 53.4, which was slightly lower than consensus at 54.0 and is the weakest reading since October 2013. However, the slowing isn’t centered on new orders (which actually increased for the month), but on production growth, which posted the weakest reading since January 2014. Business outlook is still cautious thanks to the impact of the strong dollar on exports, but employment data remains strong. Energy and equipment related materials are still experiencing weakness thanks to low oil prices. This report has normally been strong versus other manufacturing reports, so this pullback is very disappointing. However, the Richmond Fed’s Manufacturing report (also out this morning) showed a jump in production over the last month, which along with the Philly Fed report, shows that manufacturing is holding up quite well in some regions.

Lastly, and probably most importantly, the takeoff for the housing sector is now more evident than ever before. New home sales for the month of May increased by 2.2% over the prior month to a seasonally adjusted annual rate (SAAR) of 546,000 units, which is 6,000 more units than the high-end of the consensus forecast. Couple this with a 27,000 upward revision to the two prior months with April now standing at 534,000 and you get a whopping 8.1% gain over the prior month. This big surge in sales is making for an even stronger seller’s market with the supply-to-sales ratio down to a very thin 4.5 months from 4.6 months in April. The total number of new home sales on the market remained steady at 206,000 for the month. This big lack of supply should ultimately speed up construction activity to make up the difference, and this was evident in the number of new housing permits which have been climbing higher as well. The lack of supply is also a huge positive for sales prices, however the prices are currently down in the May report, lower by 2.9% to a median price of $282,800. On a year-over-year basis, the median home price is down by 1.0% versus a year-over-year sales gain of 19.5%. This discrepancy of sales to prices equals a big acceleration in pricing power for sellers in the coming months.

On a regional basis, sales grew a whopping 13.1% over last month in the Western region, which resulted in a 25.5% gain in sales year-over-year. The largest region, the South, had the strongest year-over-year gain at 33.3% despite sales dipping by -4.3% in May over the prior month. Sales in both the Northeast and the Midwest continue to be in the negative column, but both regions showed gains over the prior month. Both the new home sales and the existing home sales reports put housing as the top sector driving the US economy right now, and should offset negative data from manufacturing, at least in the near-term.

Jennifer Coombs
Wall Street Strategies

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