The Markit US services and manufacturing composite index moderated in June to 53 from 53.6 in May with both components down m/o/m. The 53 print matches the lowest level since September and thus pre election territory. The services component fell to 53 from 53.6 while manufacturing was lower by .6 pts to 52.1. There was some mixed internals. New orders did rise to the most since January and optimism about future growth is also the best since the beginning of the year. Employment also improved to a 4 month high. Inflation was mixed as input costs fell for manufacturers to the lowest since March 2016 but were up for services to near a 2 yr high. Output prices rose at the quickest pace this year. “A number of survey respondents cited efforts to alleviate squeezed margins in June.” Of note for service companies, “input cost pressures intensified in June, which survey respondents linked to higher staff salaries and rising raw material prices.” The latter should moderate but the former is going to be more of a margin issue.
Bottom line, after a 1.2% growth rate in Q1, Q2 is just not seeing much of a robust rebound. In Markit’s eyes, “While official GDP data are expected to turn higher in Q2 after an especially weak start to the year, the relatively subdued PMI readings suggest there are some downside risks to the extent to which GDP will rebound.” Hopefully with the pick up in new orders and optimism about future months will translate into a better economic rebound in Q3. We hope so but we are late stage in this recovery and the US economic cycle is predominantly driven by credit and the Fed keeps tightening. It makes the implementation of tax and regulatory reform that much more important as an offset but it’s clear that the real impact from the fiscal side will not be felt until next year assuming big stuff is passed.
MANUFACTURING AND SERVICE COMP INDEX
New home sales in May totaled 610k, 20k more than expected and April was revised up by 24k to 593k. Smoothing out this volatile data point puts the 5 month year to date average to also 610k which is an improvement from the pace of 561k on average last year. Relative to the 25 year average though, sales remain 15% lower so the better housing market is still relative. The peak in the bubble was 1.389mm in July 2005. The median sales price spiked to 16.8% y/o/y growth to a record high of $345,800 and again, a lot was the mix. Home sales in the price range of $200-$299k plunged by 36% m/o/m and which is the area of the market that most needs new supply. Home sales were higher for the $300k+ range with gains particularly in the those homes priced above $500k. Notwithstanding the better home sales number, months’ supply held at 5.3 because the number of homes for sale rose the highest since July 2009 so yes, slowly but surely we are seeing some more supply both for new and existing homes.
Bottom line, while the timing of these data points in terms of activity are not uniform, we’ve seen softer housing starts, a slight moderation in builder sentiment, better than expected closings of existing homes, purchase applications for a mortgage just shy of the highest level since mid 2010 and better pace of new home sales year to date. I’ll repeat my belief that the robust price gains, while great for sellers, is sowing the seeds for a slowdown in transactions at some point. Yes, low mortgage rates can help the monthly payment impact but price gains running well above the rate of inflation is just not sustainable. Buyers aren’t blind, especially with many younger people struggling to come up with down payments and while renting has been expensive too, it has certainly grown in popularity in this economic recovery.
MEDIAN HOME PRICE OF A NEW HOME