INDICATOR: April Existing Home Sales and May Philadelphia Fed NonManufacturing Activity

KEY DATA: Sales: -0.4%; Median Prices (Over-Year): +3.6%/ Phil. Fed: -3.7 points; Orders: -14.8 points

IN A NUTSHELL: “Despite months of declining mortgage rates, the housing market is just not coming around.”

WHAT IT MEANS: It just doesn’t seem to be happening in the housing market. Mortgage rates, which hit their highest rate in nearly eight years in November, have declined steadily since then. Yet there are no signs that buyers have reacted significantly to the drop. The National Association of Realtors reported that sales of existing homes eased in April. That makes two months in a row now that demand was off. Two months doesn’t make a pattern, but when you look at sales over the year, it was off by 4.4%, which is not good news. Indeed, so far this year, the sales pace is running about 2.5% the rate posted in 2018. That is really discouraging since mortgage rates have been below last year’s average. In April, moderate weakness in the Northeast and a modest decline in the Midwest were largely offset by a relatively mild increase in the West. In other words, there were no regions that showed either large increases or decreases, indicating that sales were not greatly impacted by the dreaded “weather issue”. As for prices, they continue to rise, but the gains are moderate. There was one good piece of data in the report: Inventories are rising. Since so much has been made of the last of supply holding down sales, maybe with more homes on the markets, buyers will be able to find the home of their dreams - or at least one they can live with or in.

With manufacturing output faltering, it is imperative that the service side of the economy holds up if growth is to remain solid. Well, it is not clear how much that is happening. The Philadelphia Fed’s nonmanufacturing index was down during May, led by somewhat slower growth in new orders. But this report was not all negative. Employment and investment remained strong and optimism increased sharply. Indeed, about 65% of the respondents expect their own business activity to grow over the six months while only 8% expect it to decline.

MARKETS AND FED POLICY IMPLICATIONS: Eventually, the economic data will actually matter again, but I suspect for a while only the really major and wildly unexpected reports will make a sound in the market forest. The puppet master has control and investors have tunnel vision. That is fine as long as the economy continues to grow decently. And there is every reason to think that will be the case for quite a while. Job gains are strong, incomes are rising and inflation is not destroying spending power completely. Meanwhile, dividends are hitting record highs and coupled with the massive buybacks, the crutches supporting the markets continue to keep things from falling apart. But the buybacks are waning and the ability to maintain the dividends will depend upon earnings and that means the economy could come back into play, maybe sooner than many believe. That should give investors pause. Strong growth is needed and that means wage gains will be key. There is little reason to think that with companies already having committed so much of their tax cuts to buybacks and dividends, capital spending will surge. In addition, fiscal policy is largely off the table, especially given the war between the president and the Democrats. But if wage gains don’t accelerate, and they have been decelerating lately, consumer demand will not surge. That means earnings could falter. And if they do rise faster, margins could narrow. In other words, there are real risks to market values and I haven’t even mentioned the Long March on trade the Chinese say they have started. The Chinese have long memories and even if an agreement is reached, be it more puff than pastry or not, they will not allow themselves to be put in a position of weakness again. Over the next few years, they are likely to de-link themselves s from key relationships and that cannot be good for some U.S. companies or sectors.

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