Tags: economy | strong | growth | weakness

Strong Growth Is Creating Weak Spots in Economy

Strong Growth Is Creating Weak Spots in Economy
(Dollar Photo Club)

Monday, 23 July 2018 12:29 PM Current | Bio | Archive

INDICATOR: June Existing Home Sales

KEY DATA: Home Sales: -0.6%; Over-Year: -2.2%; Median Prices (Over-Year): +5.2%

IN A NUTSHELL: “With supply limited and prices and mortgage rates rising, it is not surprising that housing sales are softening.”

WHAT IT MEANS: The key housing market is suffering from a major case of agita. Existing home demand, which makes up nearly ninety percent of all home purchases, declined again in June. That was the third consecutive monthly drop. Over the year, sales were off for the fifth month in the last six. In other words, demand has largely flatlined. In June, the decline was limited by a sharp rise in the Northeast that nearly offset drops in the South and West. Demand rose modestly in Midwest. Worse, there are some warning signs that indicate the market is not balanced and could be facing problems going forward. Sales of the units costing $250,000 or less are down quite sharply over the year, those in the middle, between $250,000 and $750,000 are up modestly while the highest priced homes are selling strongly. Entry-level buyers are having issues finding and affording homes, especially since prices continue to rise sharply – they hit an all-time high in June. About the only good news in the report was the continued increase in homes on the market. They have risen for the last six months. That said, the inventory level is still way too low.

In a separate report, the Chicago Federal Reserve’s National Activity Index rebounded in June and is now showing that that strong growth should continue. Not surprisingly, it was led by a jump in the production components of the index. Manufacturing is doing well and should support the economy for months to come.

MARKETS AND FED POLICY IMPLICATIONS: The overall economy is in great shape, but there are a few cracks in the armor. Those “weaknesses”, though, are being created, in part, by the strong growth. Rising interest rates and the surging cost of construction that are the direct result of the solid economy, are forcing up home prices and reducing affordability for the key entry level home buyers. The percent of all homes sold to first-time buyers is down from June 2017 and that segment makes up nearly a third of all sales. As I always say, no good economy goes unpunished and right now, it is the housing market that is suffering. As for investors, it is all about growth and earnings, which so far are generally really good. It would take an awfully bad situation for a company’s after-tax earnings to falter given the huge tax cuts. And the strong demand should be creating some decent top-line numbers. As for the president’s tweets and their impacts on the markets, they wilder they get, the less investors seem to take them seriously. Another favorite saying of mine is that the markets may be efficient but that doesn’t mean they are rational. When it comes to the tweets, they may just be doing the right thing – at least for now.

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

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The overall economy is in great shape, but there are a few cracks in the armor. Those “weaknesses”, though, are being created, in part, by the strong growth.
economy, strong, growth, weakness
Monday, 23 July 2018 12:29 PM
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