2018 in Review: A Stronger Economy vs. a Slowing Housing Market

About this same time a year ago, I wrote about an economy which was gradually building enough strength to spark inflation, thus impacting costs for suitable land, labor and materials.  Following that, the tax cuts enacted at the beginning of 2018 have certainly turbo-charged an already improving economy, resulting in robust consumer confidence, more job openings than candidates to fill them, and the lowest unemployment rate in nearly 50 years.

For the housing market, however, rising interest rates, lack of inventory and high prices have definitely conspired to slow sales for both new and existing homes.

U.S. GDP growth, which averaged 2.3 percent in 2017, surged to 4.2 percent by the second quarter of 2018, slipping to a still-strong advance estimate of 3.5 percent during the third quarter.  Notably, it was increasing consumer spending during the third quarter which made up for a slowdown in business investment. Still, current forecasts are suggesting this rate of growth to fall below 3.0 percent during the final quarter of the year.

Job growth, which rose by 250,000 in October, averaged 212,500 per month through the first ten months of 2017 (up 18.3 percent from the same period of 2017), with much of that growth noted in the fields of construction, manufacturing, health care and professional services.  In addition, October’s official unemployment rate of 3.7 percent is the lowest reported since mid-1969.

Not surprisingly, as of the end of September, the number of unfilled jobs was nearly 18 percent higher than the number of officially unemployed persons, which is the primary reason we’re starting to see more wage inflation of close to 3.0 percent per year.

Speaking of inflation, the Federal Reserve has been keeping it mostly in check so far in 2018 with three rate hikes, and a fourth planned for December.  However, given that the Producer Price Index – which tracks wholesale input prices – jumped by 0.6 percent in October (or three times what was forecast), the odds for that fourth rate hike have certainly increased.

Still, the Consumer Price Index remains fairly tame, rising by 2.3 percent year-on-year through September versus 2.1 percent in 2017.  Moreover, the annual increase in the Fed-preferred PCE Price Index has been trending lower since the summer months, falling to 2.0 percent by September.

Consumer confidence has also helped prop up the economy in 2018, with the University of Michigan’s widely watched sentiment index remaining at its highest year-to-date level since 2000.  Even stock market volatility, inflation and polarized politics have done little to dent consumer confidence, with consumers feeling flush enough to tap their savings or borrow money to fund their purchases.

Nonetheless, a booming economy with rising inflation and home prices often takes an eventual toll on the housing market.  Although builder confidence remained strong at 68 in October, building permits took a breather in September, slipping slightly from both the previous month and the same month of 2017.  September housing starts also dipped moderately from August, but were up 3.7 percent year-on-year.

Yet it was September’s preliminary new home sales which dropped the most, falling 13.2 percent year-on-year to the lowest level in nearly two years as the months of supply jumped to 7.1 months, the highest since March of 2011.  However, since this data is regularly revised, it’s possible that new home sales have merely flattened out in line with building permits.

In its own survey, the Mortgage Bankers Association showed September new home mortgage applications up 8.2 percent year-over-year, and year-to-date sales for 2018 were still up 3.1 percent versus 2017.

For existing homes, a combination of low inventory for starter homes and higher interest rates helped drive down September sales down 4.1 percent year-on-year, for the lowest annual sales rate since November 2015.

Unsold inventory rose slightly to a 4.4-month supply, up from 4.2 months a year ago, while the median sales price rose 4.2 percent, for the 79^th straight month of year-on-year gains. Although September pending home sales did rise slightly from August, they were still down 1.0 percent year-on-year, and have fallen on an annual basis for nine consecutive months.

Another indicator of affordability, the NAHB/Wells Fargo Housing Opportunity Index, fell to 56.4 percent in the third quarter of 2018, for the lowest rate since the same quarter of 2008, and down sharply from the last peak of 77.5 in 1Q 2012.  Consequently, in the months ahead, look for more affordable supply and rising wages to counteract higher interest rates in order to keep the housing market humming.

October job growth rose to 250,000, unemployment rate unchanged at 3.7 percent

October nonfarm payroll employment rose by 250,000 -- far higher than estimates -- and the unemployment rate was unchanged at 3.7 percent. Wage gains also grew at their highest level since 2009, up 3.1 percent year-on-year.

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Second Quarter 2018 Economic Update: The Strongest Growth since 2014, But Will it Last?

It was certainly good news to hear that the initial estimate for GDP growth of 4.1 percent in the second quarter of 2018 was the fastest since the third quarter of 2014. This recent rate of growth compares to 2.2 percent in the first quarter of 2018, 2.3 percent in 2017 and 1.5 percent in 2016. As of early August, GDPNow was also forecasting third quarter growth of 4.3 percent, although both these GDP estimates and forecasts are likely to change as more information comes in.

Most of the surge noted during the second quarter was due to a boost in consumer spending (along with the highest levels of consumer confidence in years), exports, nonresidential fixed investment (including commercial real estate, factories and machinery) and government spending. It would have been even higher were it not for declines in private inventory investment by businesses and residential fixed investment (including home building and remodeling).

One political factor weighing heavily on the boost in growth was the export of goods, with its rise quadrupling from the first quarter to 13.3 percent, as numerous countries stocked up in advance in order to avoid real and potential retaliatory tariffs.   This export surge itself was responsible for about one full point of the 4.1-percent GDP increase. At the same time, the rate of import growth fell sharply to just 0.5 percent, indicating that domestic suppliers either had adequate inventories or capacity to meet demand.

Another political factor was the tax cuts enacted at the beginning of 2018, which boosted consumer spending after a lag in the first quarter, and led to large corporations buying hundreds of billions of their own shares, thus helping to support the stock market. A healthy stock market, in turn, improves both 401k balances as well as consumer confidence.

What we don’t know yet is if the export surge or the boost in consumer spending is sustainable, but we’ll find that out through the rest of the year.

For now, the job market remains tight, with July unemployment dipping back to 3.9 percent along with 157,000 new positions. Looking at just the second quarter of 2018 alone, job growth rose by over 21 percent versus the same quarter of 2017. Moreover, for the first seven months of 2018, job growth increased by over 16 percent versus 2017.

Wages, which had remained stubbornly flat throughout much of the economic recovery, surged during the second quarter of 2018 by 2.8 percent over the previous year, for the sharpest increase since the third quarter of 2008.

Still, with inflation slowly on the rise, most of these wage gains are being eaten up by higher costs for energy, transportation and shelter. Annual core inflation readings from the CPI, PPI and PCE Price Index have recently ranged from 1.9 to 2.8 percent versus the Fed’s preferred increase of 2.0 percent. It’s for that reason that we’re likely to see a total of four interest rate increases by the Fed this year, and up to three more in 2019.

For the housing market, although home builders continue to push forward on meeting demand, they’re up against several headwinds including higher mortgage rates (up 18 percent annually through the first week of August), higher building costs (especially tariffs on Canadian timber) and ongoing difficulties locating suitable land and labor.

Although average monthly housing starts and building permits did fall by a small amount between the first and second quarters of 2018, they were still up moderately for the first half of the year versus 2017. New single-family home sales, which averaged an annual rate of 646,000 in the second quarter of 2018, were also up 6.4 percent for the first half of the 2018 versus 2017.

The pricing premium for new versus existing homes, which approached 40 percent as recently as the end of 2017, steadily fell to just nine percent by June of 2018, thus making a new home much more competitive. In fact, forecasters are pointing to the new home market to drive the housing market in the near term, as the existing home market remains penned in by low inventory, increasing affordability issues and higher interest rates.

Still, with the backlog of unsold new single-family homes rising to 5.7 months in June, some builders are also facing similar affordability challenges with their buyers. In the long run, however, given the huge pent-up demand for housing in the U.S., only the most serious shocks to the economy are likely to derail the long and slow recovery.

Jobs rose by 157,000 in July, unemployment rate edged down to 3.9 percent

Total nonfarm payroll employment rose by 157,000 in July, and the unemployment rate edged down  to 3.9 percent. This growth rate compares with 248,000 in June and 190,000 in July of 2017. Employment increased in professional and business services, in manufacturing, and in health care and social assistance.

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ADP: Private Sector Employment Increased by 219,000 Jobs in July

Private-sector employment increased by 219,000 from June to July, on a seasonally adjusted basis. 
This compares to 181,000 in June and 203,000 in July of 2017.

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JOLTS: Job openings dipped 3.0 percent in May as hiring picked up

The number of job openings edged down 3.0 percent to 6.6 million on the last business day of May. Over the month, hires rose 3.1 percent to 5.8 million, while separations rose 0.8 percent to 5.5 million.

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As expected, after decreasing in May, the Employment Trends Index continued its solid path upwards in June, with positive contributions from all of its components and rising by 5.2 percent year-over-year to 108.94. The labor market will continue to tighten in the coming months, with strong employment growth outpacing the number of people entering the labor force.

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Total nonfarm payroll employment increased by 213,000 in June, and the unemployment rate rose to 4.0 percent as more job seekers came off of the sidelines. Job growth occurred in professional and business services, manufacturing, and health care, while retail trade lost jobs.

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ADP: Private Sector Employment Increased by 177,000 Jobs in June

Private-sector employment increased by 177,000 from May to June, on a seasonally adjusted basis.  This compares with growth of 189,000 in May and 154,000 last June.

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May job growth rebounded sharply to 223,000, unemployment rate edged down to 3.8 percent

Total nonfarm payroll employment increased by 223,000 in May, and the unemployment rate edged down to 3.8 percent. Employment continued to trend up in several industries, including retail trade, health care, and construction.

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ADP: May private job growth rose 9.4 percent from April to 178,000

Private-sector employment increased by 178,000 jobs in May, on a seasonally adjusted basis.  This compares to 163,000 jobs last month and 202,000 jobs the same month of 2017.

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Total nonfarm payroll employment increased by 164,000 in April, and the unemployment rate edged down to 3.9 percent, due mostly to the labor force shrinking by 236,000 as Baby Boomers step up retirement. Job gains occurred in professional and business services, manufacturing, health care, and mining.

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First Quarter Economic Update: Green Shoots Everywhere, but Tariff Impacts Unknown

By almost all measures, the U.S. economy continues to strengthen, for the 3rd-longest recovery of 33 different business cycles since 1854.

As of mid-April, GDP growth is estimated to have risen by 2.0 percent during the first quarter of 2018, but was recently downgraded with concerns about potential trade wars.  This growth rate compares to 2.3 percent in 2017 and 1.5 percent in 2016.

So far this year, inflation is being tamed by regular, planned rate hikes by the Federal Reserve, although the March Producer Price Index showed an annual growth rate of 3.0 percent, which suggests that businesses are facing higher costs before passing them into consumers.

While job growth did dip to 103,000 positions in March, the first quarter’s average of 202,000 is still up by nearly 14 percent from the same period of 2017.

The tax cut taking effect as of January 1^st, besides giving an extra boost to corporate spending, has also led to an increase in the personal savings rate of consumers, rising one full percentage point directly before and after the law took effect. 

Not surprisingly, this extra kick in paychecks has sent  consumer sentiment soaring to highs not seen since just after the turn of the 21^st century.

This has been, in essence, a Goldilocks economy: Running just hot enough to warrant gradual interest rate hikes to keep it from overheating while still providing consumers both the spending power and the confidence for optional purchases including homes, autos, travel and entertainment.

If there is a concern on the immediate horizon for the building industry, it’s the impact of tariffs on the economy in general, and homebuilding in particular.  Prior to the tariffs of three to 24 percent assessed on Canadian software lumber, new home prices were based more on factors such as location, quality and competition than construction costs alone.

Since then, however, prices have risen sharply, with the pricing premium for new versus existing homes rising to 35 percent, when 10 to 20 percent has been closer to the historical norm.

The cost increase has also had an impact on home prices, as more existing homeowners looking to upgrade stay put until more new home options become available.  More recently, ‘panic buying’ of foreign steel and aluminum to beat additional tariffs was mentioned by an Institute of Supply Management Report, driving up short-term prices and causing inventory shortages for spot buyers.

For their part, home builders are doing everything they can to ramp up production, with March building permits and housing starts up 7.5 and 10.9 percent, respectively, compared to a year ago.

Yet most of these gains were for multi-family homes, pointing to continuing challenges including not just the Canadian tariffs, but also finding suitable land and construction labor. 

In addition, with a recent report noting that average pay in construction is now nearly ten percent higher than for all private employees, these extra costs must either be absorbed by the builder or passed along in the form of higher prices.

Even with higher prices, however, one area in which builders have the upper hand over most existing homes is with green building.  

According to a study by the global consultancy Booz Allen Hamilton, green building was projected to grow at over 15 percent year-over-year from 2015 through 2018, not only outpacing overall construction spending, but also showing a significant impact on GDP, employment and earnings over the previous three-year study period.

More specifically, this growth would support an additional 3.9 million jobs and generate over $303 billion to GDP.

Green building is also a great investment in the future.  According to a report to the California Sustainable Building Task Force, upfront spending of two percent of overall construction costs can, over a structure’s lifetime, yield savings of more than ten times the initial outlay.

For new homes, estimates during the first quarter of 2018 would indicate year-over-year sales activity up by about 0.5 percent, with prices rising by 4.6 percent.

In the larger, existing home sales market, with February’s pending home sales activity falling by just over four percent year-over-year, NAR is adjusting their estimates for 2018 accordingly.  The group is now calling for annual sales to be flat versus 2017, and for home prices to rise by 4.2 percent following a 5.8-percent increase in 2017.

Still, the 4.2 percent growth rate would imply that Americans continue to view owning a home as an important investment, even if tax reform removed some of the benefits.  The homeownership dream lives on.

Initial unemployment claims decrease 9,000 in weekly report

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Total nonfarm payroll employment edged up by 103,000 in March, and the unemployment rate was unchanged at 4.1 percent.   This was the lowest rate of job growth since September 2017. Employment increased in manufacturing, health care, and mining.

The labor force participation rate, at 62.9 percent, changed little in March, and the employment-population ratio held at 60.4 percent.

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Private-sector employment increased by 241,000 from February to March, on a seasonally adjusted basis. This compares to 246,000 in February and 122,000 during the same month of 2017.

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Total nonfarm payroll employment increased by 313,000 in February (versus 200,000 expected), and the unemployment rate was unchanged at 4.1 percent. Employment rose in construction, retail trade, professional and business services, manufacturing, financial activities, and mining.

The number of long-term unemployed (those jobless for 27 weeks or more) was essentially unchanged at 1.4 million in February and accounted for 20.7 percent of the unemployed. Over the year, the number of long-term unemployed was down by 369,000.

The civilian labor force rose by 806,000 in February. The labor force participation rate increased by 0.3 percentage point over the month to 63.0 percent but changed little over the year.

In February, total employment, as measured by the household survey, rose by 785,000. The employment-population ratio increased by 0.3 percentage point to 60.4 percent in February, following 4 months of little change.

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ADP: Private sector jobs rose by 235,000 in February

According to ADP, private sector employment increased by 235,000 jobs from January to February. This compares to 244,000 the previous month and 280,000 in February 2017.

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Non-Employment Index edges down to 7.9 percent in February

The Hornstein-Kudlyak-Lange Non-Employment Index (NEI) was 7.9 percent in January 2018, edging down from December 2017. It has declined by 0.4 percentage points since January 2017. The NEI including workers who are part time for economic reasons (PTER) was 8.9 percent in January 2018, unchanged compared to the previous month. That index has declined by 0.6 percentage points since January 2017.

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January employment rose by 200,000, unemployment rate unchanged at 4.1 percent

Total nonfarm payroll employment increased by 200,000 in January, and the unemployment rate was unchanged at 4.1 percent. Employment continued to trend up in construction, food services and drinking places, health care, and manufacturing.

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