The Boock Report

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Manufacturing, services, and housing

United States

The Markit US manufacturing and services composite index for May rose to 53.9 from 53.2 but the components were mixed. Manufacturing fell .3 pts to 52.5, an 8 month low but was more than offset by a .9 pt increase on the service side to 54, a 4 month high. For perspective, the 53.9 print compares with the pre election level of 54.9 in October and 52.3 in September. It peaked at 55.8 this past January.

Here are some of things Markit said about the report: “May saw an encouraging upturn in service sector growth to the fastest so far this year, buoyed by rising domestic demand. Manufacturers, on the other hand, reported the smallest rise in production since last September amid lackluster export sales.” On the future, “There were mixed signals for the outlook. Optimism about the year ahead fell slightly, but hiring remained reassuringly solid, thanks to a step up in service sector recruitment.” On inflation, “Average prices charged for goods and services meanwhile showed one of the largest rises in the past two years.” Contributing to this came from the services side (as it always seems to do) “which firms linked to rising staff salaries and higher raw material costs (particularly food).” Food prices have risen recently but still remain subdued so I’m a bit confused on that comment. Prices pressures did cool on the manufacturing side.

Bottom line, we will certainly see a Q2 economic rebound with only the degree in question. The Atlanta Fed estimate has a 4 handle which if the case would lead to around a 2.5% first half run rate if Q1 is revised up to .9% as expected. Historically though according to Markit, a 53.9 composite index in their model equates to a 1.5% annualized rate of growth. The 2s/10s yield spread also says a lot about its view point as to how the US economy will handle more rate hikes from the Fed in the context of the current still mediocre growth environment. A 96 bps spread compares with 100 bps on the day of the US election. That spread also exactly equates to the level it stood on the day of the UK referendum vote on June 23rd, 2016.

After a weak NY manufacturing survey, a robust headline figure out of Philly but with crappy internals, the Richmond manufacturing index fell from 20 down to 1 and that is well below the estimate of 15. The Richmond Fed referred to this as “manufacturers were somewhat less upbeat in May than in the prior three months.” New orders fell from 26 to zero while shipments went negative. Employment was steady, wages rose slightly while the workweek went negative. Most of the forward looking components fell but encouragingly the capital spending index was higher.

Bottom line, taking the 3 survey’s seen so far (and the internals) and the Markit figure reflects a moderation in manufacturing in May from April. The national ISM report is out on June 1st and little changed is expected as of the last estimate from the lowest level since December last month. Exports should be good but the auto sector is now a growing drag on domestic manufacturing.

New home sales in April totaled 569k, 41k less than expected which were only partially offset by an upward revision of 21k for March. The biggest delta relative to expectations was a sharp drop in sales out West which fell to the weakest pace since October 2015. I can’t blame the weather for that. Sales fell in the other 3 regions as well. Months’ supply jumped to 5.7 from 4.9 and that is the most since September 2015 and is back to its 30 year average. In terms of pricing, there was a big drop in the number of sales for homes priced above $500k to the lowest since November. There was no change m/o/m in the number of homes sold priced below $300k which is the area of the market that most needs more supply. In terms of pricing, the median price fell 3.8% y/o/y but this number is very volatile month to month with respect to new homes.

Bottom line, this number is so volatile month to month that I’d rather smooth it out. This gives me a 4 month year to date average of 604k vs the 560k pace in 2016. Thus, I’m not going to make any conclusions yet to the headline miss relative to expectations. Also, the MBA still shows pretty good y/o/y sales gains this Spring. That sales pace remains though 15% below the 25 year average which points to the potential catch up ahead but also the still lackluster pace of sales. See chart: