United States
The August Markit US manufacturing and services composite index rose 1.4 pts to 56, the best since May 2015. The breakdown though was mixed as manufacturing fell .8 pts to 52.5 but was more than offset by a 2.2 pt increase in the services component to 56.9. Driving services was a 25 month high in new orders. Employment moderated a hair from July. Price pressures rose “slightly” as “reports from panelists indicated that greater costs for raw materials was a key driver of inflation in the latest survey period.” Prices charged also rose in August to the highest level since September 2014 “with some companies mentioning that stronger client demand had enabled them to raise their prices.” Interesting.
Keeping a lid on manufacturing were “weaker increases in both output and new orders” and there was a slower rise in inventory accumulation. Here also there was a rise in inflation, “average cost burdens rose at a solid pace that was the quickest recorded for 4 months. According to panelists, higher prices for raw materials such as metals, oil and electrical components had contributed to higher production costs.” The margin challenge though: “factory gate charges continued to rise at only a modest pace.”
Bottom line, Markit highlight the bifurcation in the release by saying “The US economic growth story remained a tale of 2 sectors in August.” One interesting comment was on exports. “The principal weak spot in the economy placing downside risk on that outcome remains exports. Foreign goods orders fell, albeit only marginally, for the 2nd month in a row, often blamed on the strength of the dollar.” As the dollar has done nothing but fall this year by about 10%, I have no idea what Markit is surveying and talking about. If the export weakness is legitimately due to something else like weaker demand from overseas, that of course really matters. The economic data particularly out of China and Germany over the past month has been somewhat soft relative to expectations. Either way, this data point is never market moving because US markets prefer the ISM data. Also, confidence numbers never tell us the degree of change, only the direction.
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July new home sales totaled 571k, about 40k less than expected and half way offset by a 20k home increase upward to the June revision to 630k. With the monthly volatility in this data set, the 3 month average is 606k vs the year to date average is 609k. Both are up about 8.5% above the 2016 average of 561k which happens to be similar to the y/o/y gains in mortgage applications. This July print though is the lowest since January. Interestingly with all the talk of not enough supply, ‘homes for sale’ rose to the most since June ’09 and combined with the m/o/m sales drop sent months’ supply up to 5.8. The median home price rose 6.3% y/o/y to $313,700. There is still no pickup in sales for homes priced below $300k and this is where most of the first time households would be shopping in.
Bottom line, averaging out this volatile data point has sales remaining on track with its year to date average which is an improvement vs 2016 trends although July was a 7 month low in sales. We still remain well below the 25 year average of 716k which reflects both the aftermath of an epic bubble but hope that there is a lot of catch up work to do. I repeat that the housing industry needs a moderation in home price gains in order to better compete with renting where rents increases are now moderating. The home builder ETF is at the low of the day in response to the data miss.
NEW HOME SALES
Peter is the Chief Market Analyst with The Lindsey Group. He is Co-CIO at Bookmark Advisors, a member of the Advisory Services Network and a regular CNBC Contributor.