30 Aug 2017

Economic Insights - August 21 - 25, 2017

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The next Economic Insights will be distributed the week of September 11 and will report on economic events for the month of August, and the week of September 4.

Topic Summaries:

  • Extra, Extra: read about the synchronized upturn: The upturn must be consensus because it hit the front page of the Wall Street Journal. Now that it’s official, the economic momentum of the upturn has likely crested, and we’d agree.
  • Are U.S. home buyers turning cautious? Yes, likely so with inventories lean and prices surging. Housing is fine right now, but activity could fall off quickly if mortgage rates rise.
  • No fireworks at Jackson Hole: Analysts expecting hints of future policy at Jackson Hole were sorely disappointed. That’s likely because officials were satisfied with current market expectations.

Extra, Extra: read all about the synchronized upturn

That’s how the newspaper hawkers of yesteryear would have yelled it. Yes, the synchronized world economic upturn we’ve been touting for months finally made the papers, and the front page of the Wall Street Journal no less on Thursday, September 24. Now it’s official: the OECD (Organization for Economic Co-operation and Development) noted that all forty-five countries it tracks will grow in 2017. The last time this happened was in 2007. Further, an astounding thirty-three of those are accelerating.

Now that it’s news, the synchronized upturn is surely consensus. But since it turned consensus it’s likely peaking. We’d agree, the acceleration phase is over or is already behind us. The super-fast 4% second-quarter growth pace in Japan was doubtless the crest. Sentiment there is still picking up, and wage gains will advance, but potential growth is likely only 1% or so given the declining population, so deceleration is probable.

Economic momentum has topped in China too, as July production and consumption data, as well as export and import growth, weakened from the second quarter. The latest data from the Eurozone shows no slippage or acceleration, just solid, healthy, robust numbers. Business surveys of euro area purchasing managers were very strong in August, and consumer and business confidence remained near all-time highs.

U.S. growth stays vigorous and could hit 3% in the third quarter. Although the tragedy in Texas from Hurricane Harvey will dampen what otherwise would have been a standout economic quarter. Still, this will likely be the peak in growth momentum, though it is unlikely to fall off much until late-2018. House price gains are slowing, and new and existing home sales have plateaued (next section). The best news is there are very strong levels of consumer confidence, solid business surveys, and a surge in orders and shipments of capital goods. Strong investment is the key for a sustained expansion, and seems to be falling into place.

Are U.S. home buyers turning cautions?

Likely so, with inventories lean and prices surging. Sales of existing homes fell in July to an eleven-month low of 5.44 million annual rate (ar), new home sales were the weakest this year at 571,000 ar. Neither new nor existing homes are on the market very long, and prices are still rising, indicating resilient demand but also limited inventory.

Too few homes for sale has been a nagging theme for some time. Inventories of saleable existing homes in July were 1.92 million, down 9% from the prior year, and have fallen for twenty-six months straight. That’s only a 4.2 month’s supply, well below the 6 months the National Association of Realtors (NAR) considers necessary for a balanced market. New home inventories are starting to rise and hit a 5.8 month’s supply, the highest since September 2015. Borrowing costs are low, so more people still judge the buying environment as ‘good” rather than “bad.” However, that majority dropped to a six-year low of 63% in July. Why the fall? Most likely because the median existing house price hit an eleven-year high of $260,600, and the median price of new homes is up 46% from the recession trough at $313,700.

Rapidly rising prices may be eroding demand. The index of mortgage applications for home purchases is sagging, and after topping the end of the first quarter, suggests that housing demand is peaking. That index was down 4.0% in the four weeks leading up to August 8, off 8.0% from the June peak, and is now at a six-month low.

Prices up, affordability down:

The NAR issued a Housing Affordability Index that was 151 on June 2017, far above the 2006 low near 100, and above the 1990s when the index ranged 115 to 140. However, with current low mortgage rates, the index is still well below the 2010 to 2014 peak. The affordability of new homes varies widely by area. In the Los Angeles metropolitan area, a new home absorbs 50% of the median income, whereas in Oklahoma City, the most affordable metro area, a new house takes only 18.2% of median income. The national average is about 25% to 27%.

Buyers push back:

Since the financial crisis, buyers have had limited numbers of homes from which to choose from. But, because of the growing economy, better incomes, robust job gains, and rising household formation, a growing pool of home buyers and housing activity flourished. Now, that process may have peaked. The share of survey responses saying home-buying conditions are bad because of rising prices hit an eleven-year high in August. Yes, that was a very small minority, only 23%, but that’s up from under 5% in 2012, and not far from the record 27% in 2006. Higher prices are being offset by very low mortgage rates, but signs of resistance are mounting. Housing is fine right now, but activity could drop quickly if mortgage rates rise much.  

No fireworks at Jackson Hole

Analysts looking forward to pyrotechnics, policy hints or hyperbole at Jackson Hole were out of luck. The conference was a focus because attendees had used it in the past to describe potential changes in monetary policy, or push investors toward a desired reaction. In 2013, then Federal Reserve (Fed) Chair Ben Bernanke, teed-up a third round of quantitative easing. European Central Bank (ECB) President Mario Draghi laid out a framework in 2014 for dealing with low growth and lack of inflation in the Eurozone. Expanded quantitative easing was announced by the ECB the following January. With policy changes likely in both the United States and Eurozone, investors wanted new insights.

Neither current Fed Chair Yellen nor Draghi talked about current conditions or monetary policy. Yellen discussed post financial crisis banking regulations and noted only modest reductions were needed. Draghi addressed low productivity growth in the developed world and thought a more open global economy would help. The lack of policy comment implies current market expectations are acceptable.

Markets presume the Fed will announce a start date for bond portfolio reduction in September with implementation in October. Markets also assume the ECB will reduce their monthly bond buys in early 2018. Purchases will continue, but at a slower pace. Japan’s growth is robust, but low inflation will keep the central bank there from turning less accommodative until sometime next year.

The extraordinary monetary policy that began after the financial crisis will be around for quite a while. Once started, quantitative easing or bond purchases will be part of the central banker tool box forever. Reducing accommodation at the margin should be well managed by an improving global economy.

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