Tags: Economic | Recovery | Investors | Fed | Home | Sales

Modest Economic Recovery Yet to Disappoint Investors

Image: Modest Economic Recovery Yet to Disappoint Investors
(Dollar Photo Club)

Tuesday, 23 May 2017 12:28 PM Current | Bio | Archive

  • INDICATOR: April New Home Sales, May Philadelphia and Richmond Fed Surveys
  • KEY DATA: Sales: -11.4%; Prices: -3.8%/ Phila. Fed (Nonman.): -4.5 points; Orders: -18.5 points/ Richmond Fed (Man.): -19 points; Orders: -26 points
  • IN A NUTSHELL: “Don’t read too much into the drop in new home sales as demand had been rising strongly this year.”

WHAT IT MEANS: Few economic indicators move in a consistent pattern so it was not surprising that after surging this year, new home sales cooled in April. But the sharp decline needs to be put into perspective. The March pace (642,000 units annualized) was the highest since October 2007 and the number of times since then it has been above 600,000 can be counted on one hand. In other words, this segment of the economy was starting to shift into high gear and one month easing doesn’t tell me that conditions have fallen apart. The drop is sales, though, was across the nation with all four regions posted a decline. But the 26.3% fall off in the West does point to something strange in the data, so let’s see what May brings before we get carried away in assuming there is a major slowdown in the housing market.

While I am not worried about housing, there are some warning signs in the recent surveys of business activity that came out of the Philadelphia and Richmond Federal Reserve Banks. The Philadelphia Fed’s Nonmanufacturing index dropped moderately in May, but it was the orders index that was eye opening. It fell sharply and the percentage of respondents reporting that orders declined doubled. Let’s be clear, orders are still increasing, but moderately not robustly, and that may be leading to the slowdown in hiring. In addition, expectations continue to slide, though they are at a reasonable level.

The Richmond Fed’s survey of manufacturers also indicated that the bloom is off the rose when it comes to the economy. The recent improvement in activity disappeared as new orders stopped growing. With order books thinning, it doesn’t appear that a pick up in manufacturing in the Richmond Fed’s district will occur soon.

MARKETS AND FED POLICY IMPLICATIONS: The economic data that have come in recently point to a more modest second quarter rebound than initially projected. They don’t point to a problem with the economy, just more indications that this year’s growth rate will not likely be significantly different from what we have seen over the past five years. Nevertheless, that hasn’t seemed to trouble investors. Hope springs eternal that there will be massive tax cuts for business and huge increases in infrastructure spending and that may happen. But the impacts will not be felt until next year. As for the Fed, there is a difference between good growth and good enough growth. Another year of 2% or so growth may not be considered good by most standards, but it is good enough to cause the unemployment rate to fall, the labor market to tighten and inflation to continue to trend upward. With the Fed’s dual mandate largely met, there really isn’t any reason not to continue raising rates slowly. Actually, a 2% growth rate is desirable given the current state of the economy. It doesn’t create rapid change in markets, thereby limiting bubbles and problems. If we could actually get 3% or more growth for any extended period, we would be looking at extreme labor shortages in many parts of the nation and the likelihood of significant increases in wages and prices. That could force the Fed to raise rates faster than anyone expects. So the warning, when it comes to growth, is watch what you wish for, you just may get it.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

© 2017 Newsmax Finance. All rights reserved.

1Like our page
Don’t read too much into the drop in new home sales as demand had been rising strongly this year.
Economic, Recovery, Investors, Fed, Home, Sales
Tuesday, 23 May 2017 12:28 PM
Newsmax Inc.

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

© Newsmax Media, Inc.
All Rights Reserved