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Economy Will Stall Without Higher Household Incomes

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Tuesday, 05 March 2019 01:24 PM Current | Bio | Archive

INDICATOR: February NonManufacturing Activity and December New Home Sales

KEY DATA: ISM (NonMan.): +3 points; Orders: +7.5 points/ New Home Sales: +3.7%; 2018: +1.5%; Prices: -7.2%

IN A NUTSHELL: “The rebound in nonmanufacturing activity is encouraging, but given the government shutdown, it is best to wait and see if the move upward was real or Memorex.”

WHAT IT MEANS: We’d been getting some very disappointing economic data recently, so it was nice that the Institute for Supply Management’s index of nonmanufacturing activity popped up in February. The measure, which had declined the previous two months, now stands at a level above the average for the previous twelve months. The business activity measure surged with only one industry, retail, reporting a decline. Indeed, this was a really solid report as orders soared and backlogs built. That holds out hope for even better activity in the months to come. Despite the greater demand, hiring continues to slowly fade. That is a warning sign that was supported by a flat February reading on small business payrolls by the Paychex/IHS Markit Small Business index.

New home sales rose solidly in December and the level was above expectations. This report was delayed by the partial government shutdown. That said, December demand was down from the December 2017 pace and for the year, sales rose modestly. Also, there were sharp downward revisions to the previous three months numbers, so we need to be a little cautious in coming to any conclusions about how the market ended last year. The details of the report also call for reading conditions carefully. There was a huge increase in sales in the Northeast but a sharp drop in the Midwest. Sales increased solidly in the South but were up minimally in the West. As for prices, they were down sharply, which isn’t a sign of strong demand. Supporting the view that the housing market is not suddenly rebounding was the minimal rise in CoreLogic’s Home Price Index in January. The HPI increase over the year continues to decelerate with Las Vegas being the only ten top metro area to post a gain of 5% or more.

MARKETS AND FED POLICY IMPLICATIONS: With the winter weather affecting consumers and businesses and the partial government shutdown messing up the data, it is hard to know with any confidence the current condition of the economy. That is why the members who have been speaking out, including Chair Powell, keep saying that the Fed needs to be cautious in deciding what to do next. Even if we get a trade agreement of any kind, it is not likely to cause growth to rise sharply anytime soon. That is not how trade works, especially given the slowdowns in so many economies around the world. Right now, it looks like second half growth will be back at trend, or 2.25% growth, as the tax cut high will be gone by then and trade would only add a little, at best. Unless household incomes increase a lot faster, there is little reason to think the expansion can accelerate. Ending the trade uncertainty could hype the equity markets for a while, but that boost might wind up being short-lived if the economy fades as currently projected.

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

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JoelNaroff
Unless household incomes increase a lot faster, there is little reason to think the expansion can accelerate.
economic, household, income, higher
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2019-24-05
Tuesday, 05 March 2019 01:24 PM
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