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  New Single-Family Home Sales Fell 5.9% in May
Posted Under: Data Watch • Home Sales • Home Starts • Housing • Inflation • COVID-19

Implications:  New home sales continued to disappoint in May, falling for the second month in a row and coming in below even the most pessimistic forecast by any economics group surveyed.  Sales have generally been decelerating since January, as rapid price growth and a lack of completed homes available for sale continue to weigh on closings.  While sales are now back to about where they were in February 2020 before the pandemic erupted, there has been an extreme amount of volatility in sales since then.  A good way to cut through some of that volatility and get a better picture of the health of the housing market is to look at a 12-month moving average, which shows sales are currently at the fastest pace since 2007 despite recent declines.  One obvious reason for the recent slowdown in sales has been the relentless growth in prices, with the median price of a new home now up 18.1% from a year ago. Moreover, buyers that are willing to brave these price gains are dealing with very few options when it comes to completed homes. It's true that overall inventories have been rising recently and now sit at the highest level since mid-2019. This has pushed up the months' supply (how long it would take to sell current inventory at today's sales pace) to 5.1 from record low readings of 3.5 in late 2020. However, almost all of this inventory gain continues to come from homes where construction has either not yet started or is still under way. Doing a similar calculation with just completed homes on the market shows a months' supply of just 0.6, near record lows going back to 1999. The good news is that the inventory of completed homes rose in May for the first time in thirteen months, and while it's too early to say if this represents a new trend, there are reasons to be optimistic. As we reported in our recent report on housing starts, builders have plenty of projects in the pipeline to meet this demand and keep construction activity running on all cylinders for the foreseeable future. As more homes become available, we expect demand will remain strong and help maintain a rapid pace of sales in 2021.

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Posted on Wednesday, June 23, 2021 @ 12:09 PM • Post Link Share: 
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  Recovery Tracker 6/22/2021
Posted Under: Bullish • COVID-19

The table and charts above track high frequency data, which are published either weekly or daily. With most states reopening their economies and widespread distribution of a vaccine, these indicators show continued improvement in economic activity.  From an economic standpoint the worst is over and activity continues to improve. It won't improve in a straight line, but the trend should remain positive over the coming months and quarters. The charts highlight where the high frequency indicators were in 2019, 2020,and in 2021.

The enlarged data can be found here
Posted on Tuesday, June 22, 2021 @ 6:45 PM • Post Link Share: 
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  Existing Home Sales Declined 0.9% in May
Posted Under: Data Watch • Home Sales • Housing • Inflation • COVID-19

Implications: Existing home sales fell for a fourth consecutive month in May, as low inventories and elevated prices continued to weigh on closings.  Notably, even with recent declines existing home sales are up 1.8% from the February 2020 pre-pandemic high.  There are reasons to believe the worst of the inventory crunch may be behind us.  New home construction remains strong, and now that the pandemic seems to be ending and vaccines are widely available, it's likely that more sellers will feel comfortable listing their homes.  In fact, inventories jumped 7.0% in May, the third consecutive month of gains.  While inventories are still down 20.6% from a year ago (the most accurate measure for inventories given the seasonality of the data) that rate of decline is slowing. The months' supply (how long it would take to sell today's inventory at the current sales pace) of existing homes for sale rose to 2.5 in May from April's reading of 2.4, though these readings still remain near record lows.  Despite the shortage of listings, it looks like there is still significant pent-up demand from the pandemic, with buyer urgency so strong in May that 89% of the existing homes sold were on the market for less than a month. The combination of strong demand and sparse supply has pushed median prices up 23.6% in the past year, the fastest rate on record going back to 2000.  However, despite these issues we expect sales in 2021 to ultimately post the best year since 2006.  Why?  First, more construction and listings as the pandemic ends should help alleviate the worst of the supply crunch and help keep a lid on price growth.  Moreover, a trend toward work-from-home is likely to remain in place even as pandemic-related measures are eased around the country.  That means people who were previously tied to specific locations, typically in urban areas, will have more flexibility, making more space in the suburbs an attractive proposition.  Finally, there are significant demographic tailwinds coming together for home sales for the foreseeable future.  Census Bureau population projections show that the key homebuying population of those 30-49 years old is set to grow significantly through 2039.  In other news today on the manufacturing front, the Richmond Fed Manufacturing Index, which measures mid-Atlantic manufacturing sentiment, rose to a very strong reading of 22 in June from 18 in May.

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Posted on Tuesday, June 22, 2021 @ 2:51 PM • Post Link Share: 
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  The “Fake Tight” Labor Market
Posted Under: Employment • Government • Inflation • Monday Morning Outlook • Fed Reserve • Interest Rates • Spending • COVID-19
Is the United States' job market tight?  Well, that totally depends on your perspective.

From a national perspective, it certainly isn't tight.  Total nonfarm payrolls were 144.9 million in May 2021, still down 7.6 million from February 2020, right before the COVID shutdowns.  In addition, when asked, 9.3 million American workers say they are still looking for a job, up 3.6 million during the same timeframe.

The labor force participation rate, which is the share of those age 16+ who are either working or looking for work, was only 61.6% in May.  Pre-COVID, you'd have to go back to 1977 to find a level that low.  Immediately prior to COVID, the participation rate was 63.3%.  In other words, the United States is awash in unemployed and available workers.

But none of this seems to matter if you're an employer.  Average hourly earnings are up a rapid 6.4% versus February 2020, while companies have roughly 9.3 million open jobs.  Almost 4 million people quit their jobs in April, the highest on record, and a record-high 2.7% of total employment.  If you're an employer and, even after raising wages, it's hard to find workers for open positions and keep the workers you have, it certainly is a "tight" labor market.

So, what is going on?  Is the job market tight, or not?  We think the best way to describe it is "fake tight."

The key problem with the labor market right now is that the government is still giving out unemployment benefits far in excess of what the situation demands.  Sending out these jobless benefits might have made sense in the early days of the pandemic, back when the government's shutdown-heavy response to COVID-19 amounted to a "taking" of many people's businesses and livelihoods.  That was an incredibly unusual situation.  And while we think it was a mistake, if the government "takes" away your job for public health reasons, it's logically consistent to "compensate" you for it.

But, at this point, with the economy open, and baseball stadiums packed with unmasked people in Los Angeles and Chicago, the time for excess benefits has long passed; it's time to get back to normal.

In fact, the entire government response needs to be rethought.  The Federal Reserve is still holding interest rates near 0% and buying $120 billion worth of bonds every month, as if the US were still in a financial crisis.  If there is a problem with the economy, the Fed is exacerbating it by helping to finance the governments competition with the private sector.  The Fed's buying government debt to finance redistribution, perpetuates the unemployment problem and hurts business.

And this may be worse than many investors think.  While there are 9.3 million people counted as unemployed, current regular and special pandemic-relief programs are paying 14.8 million people unemployment benefits.  The difference is largely due to the special temporary laws allowing people to collect jobless benefits even if they're not looking for work.  Usually that's a No-No, but Congress decided to waive the job seeking requirement due to COVID.

No one knows the end result of all these "unprecedented" policies.  And since they were started in response to economic shutdowns, they should end as the economy opens up.  What the US should do is either cancel them immediately or repurpose this money to "infrastructure" so that economy-killing tax hikes are not part of the current budget plans.

In the meantime, the system is awash in money.  This lifts asset values, in spite of problems in the labor market.  Moreover, interfering with the dynamics of the labor market reduces output while increasing consumption, which is a recipe for inflation.  We think all these problems are easy to see.  If the labor market really was "tight," the Fed would not need to be so easy.  And a "fake tight" labor market needs less accommodation, too.

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Posted on Monday, June 21, 2021 @ 10:43 AM • Post Link Share: 
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  COVID-19 Tracker 6/17/2021
Posted Under: COVID-19
The narrative around COVID-19 is constantly changing, so we thought we would put a one-pager out once a week with some of the charts and data that we think are important to keep an eye on to help gain some perspective.

Click here to view the one page report

Posted on Thursday, June 17, 2021 @ 3:52 PM • Post Link Share: 
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  Fed Hawks Hatch
Posted Under: Government • Inflation • Research Reports • Fed Reserve • Interest Rates

As expected, the Federal Reserve made no significant changes to monetary policy today.  However, the Fed took some big steps toward laying the groundwork for changes to policy it will make in the future.

When it comes to short-term interest rates, the "dot plot" from the Fed now shows seven policymakers in favor of at least one 25 basis point rate hike in 2022, up from only four policymakers back in March.  While those seven are still a minority of Fed policymakers, that was not the case for the following year.  For 2023, a majority of policymakers – thirteen of eighteen – think the Fed will raise interest rates versus only seven of eighteen back in March.  Moreover, the "median dot" now suggests the Fed would raise rates twice (for a total of 50 bp) in 2023.

In addition, according to Chairman Jerome Powell, the Fed is now officially "talking about talking" about tapering its balance sheet purchases.  For the time being it will keep buying a total of $120 billion in Treasury and mortgage securities per month and Powell made it clear at the press conference that the Fed will only start tapering after it provides notice "as far in advance as possible."  We think that notice will be provided by this Fall, with tapering starting by the beginning of 2022, maybe sooner.

These changes by the Fed, its willingness to signal some rate hikes in 2023 and to talk more openly about the possibility of tapering, are consistent with some changes to its economic forecast, which showed upward revisions to its projections for both real economic growth and inflation for 2021.  The Fed lifted its real GDP forecast for this year to 7.0% (previously 6.5%) and its PCE inflation forecast to 3.4% (previously 2.4%).  Forecasts for other years were little changed.

In terms of the Fed statement, policymakers made the language more optimistic by deleting some older stale wording about "tremendous human and economic hardship" as well as the "ongoing" public health crisis. 

In addition, the Fed made some changes that hinted at problems with all the liquidity in the financial system, including lifting the interest rate it pays banks on reserves to 0.15% (previously 0.10%).  The Fed said the goal was to help it keep trading in the federal funds market near the Fed's target for short-term rates.  But we think the goal is to make it more attractive for banks to hold cash, given that, in the current environment, with massive liquidity swirling around the financial system, when banks hold more cash they have a greater risk of running afoul of regulatory guidelines.

Another notable part of today's Fed activity was that at the press conference Chairman Powell raised the possibility of inflation outstripping the Fed's projections on multiple occasions, stressing that "higher and more persistent" inflation could goad the Fed into adjusting the stance of monetary policy.

It's important to keep today's news in perspective.  The Fed is not going to raise short-term interest rates in 2021 and the bar to doing so in 2022 is still very high.  The Fed's projections for economic growth and inflation for this year are now very close to our own.  Where we differ is on 2022.  But it won't be clear who is more accurate about 2022 until deep in that year, which gives the Fed plenty of time to wait to further adjust the projected path of short-term rates.

The bottom line is that there are now some real live hawks in the nest at the Fed.  However, they are very young and it will be a long time before they get to spread their wings and fly.

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Posted on Wednesday, June 16, 2021 @ 4:34 PM • Post Link Share: 
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  Housing Starts Increased 3.6% in May
Posted Under: Data Watch • Home Starts • Housing • Inflation

Implications: Housing construction rebounded in May, continuing a recent volatile ride as builders try to find their footing in a post-pandemic economy. Supply chain constraints for key inputs such as lumber – paired with difficulty in finding qualified workers – have moderated the pace of building since late 2020.  That said, the 12-month moving average, which sifts through the recent volatility, shows construction now stands at the fastest pace since 2007.  The monthly pace of activity will ebb and flow as the recovery continues, but we expect housing starts to remain in an upward trend.  Why the confidence?  Permits for future construction have now outpaced new construction for fifteen consecutive months. This has resulted in a backlog of projects that have been authorized but not yet started, which stands at the highest reading since the series began back in 1999.  There has been a long running deficit in new home construction in the US, which needs roughly 1.5 million housing starts per year based on population growth and scrappage (voluntary knockdowns, natural disasters, etc.).  However, we haven't built that many new homes in any calendar year since 2006.  Now, with plenty of future building activity in the pipeline and builders looking to boost the inventory of homes as well as meet consumer demand, it looks likely construction in 2021 will surpass the 1.5 million unit benchmark.  This positive outlook is reinforced by yesterday's NAHB index, a gauge of homebuilder sentiment, which declined to 81 in June from 83 in May, but remained at a very high level.  Strong consumer demand for homes and low mortgage rates are helping offset impacts from rising materials costs.  While some analysts may bemoan the fact that this reading now sits at a 10-month low, it's important to keep in context that, until the red-hot housing market at the tail-end of 2020, readings above 80 had never happened in the history of this indicator going back to the mid-1980s.  The recent declines have been driven by rising costs and declining availability for labor and building materials.  Speaking of rising costs, we also got trade inflation data this morning.  Import prices rose 1.1% in May while export prices increased 2.2%, both above consensus expectations.  In the past year, import prices are up 11.3%, while export prices are up 17.4%.

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Posted on Wednesday, June 16, 2021 @ 12:26 PM • Post Link Share: 
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  Recovery Tracker 6/15/2021
Posted Under: Bullish • COVID-19

The table and charts above track high frequency data, which are published either weekly or daily. With most states reopening their economies and widespread distribution of a vaccine, these indicators show continued improvement in economic activity.  From an economic standpoint the worst is over and activity continues to improve. It won't improve in a straight line, but the trend should remain positive over the coming months and quarters. The charts highlight where the high frequency indicators were in 2019, 2020,and in 2021.

The enlarged data can be found here
Posted on Tuesday, June 15, 2021 @ 1:34 PM • Post Link Share: 
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  Industrial Production Increased 0.8% in May
Posted Under: Data Watch • Industrial Production - Cap Utilization • Inflation • COVID-19

Implications:  Industrial production rose for a third consecutive month in May, powered higher by increases in every major category.  But keep in mind, the production side of the economy still has a way to go.  Yes, both industrial production and manufacturing activity are now up substantially from a year ago, but remain down 1.4% and 0.5%, respectively, from the pre-pandemic highs in February of 2020. Given that this morning's report on retail sales shows that spending is up 18.0% over the same period, there continues to be a wide gulf between the production and consumption sides of the US economy, and that gulf creates inflationary conditions.  Looking at the details, the biggest positive contribution to today's report came from the manufacturing sector where output rose 0.8%.  Notably, the auto manufacturing posted a gain of 6.7% in May, signaling that the semiconductor shortage that has kept finished vehicles from rolling off assembly lines may be beginning to ease.  Meanwhile, manufacturing outside the auto sector rose 0.5%.  The manufacturing sector continues to be hamstrung by not only supply chain issues, but also a severe labor shortage, with job openings in that sector at a record high and more than double pre-pandemic levels.  Mining activity also continued to recover in May, rising 1.2%, and is likely to be an ongoing tailwind in the months ahead.  Oil prices are now above where they were pre-pandemic and nearing levels not seen since 2014.  With upward pressure on prices likely to continue as the US reopens, extraction activity has begun to rebound.  This is reflected in the number of active oil and gas rigs in operation, which have doubled from the bottom in August of 2020, but still need to nearly double again to get back to pre-pandemic levels.  Look for a continued upward trend in industrial production in the months ahead as reopening continues, supply chain issues are ironed out, labor disincentives dissipate, and factories continue to ramp up production.  In other factory related news this morning, the Empire State Index, a measure of New York factory sentiment, fell to a still strong +17.4 in June from +24.3 in May.  The drop was largely driven by declines in new orders and shipments which were partially offset by delivery delays rising to the highest level on record, signaling ongoing supply chain issues.

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Posted on Tuesday, June 15, 2021 @ 1:24 PM • Post Link Share: 
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  The Producer Price Index (PPI) Rose 0.8% in May
Posted Under: Data Watch • Government • Inflation • PPI • Fed Reserve • Interest Rates • COVID-19

Implications:  Producer prices continue to rise at an outsized pace, as the decade-old discussion of whether the Fed can induce 2% inflation shifts to a question of if they can contain it.  The producer price index once again outpaced expectations, rising 0.8% in May and pushing the headline reading to 6.6% year-to-year, the highest in more than a decade.  And prices are accelerating, up at a 9.2% annualized pace in the past six months.  While the Fed has continued the line that this inflation is "transitory," it's getting more difficult to play down rising numbers.  Extensive "supply-chain" issues continue to be a significant pressure on prices, with no end in sight.  From the shortage in semiconductors that has slowed production of everything from cars and trucks to household appliances, to difficulties finding labor to fill the record number of job openings in the US, supply simply hasn't kept up with demand.  And that demand is being supported by an M2 money supply that stands 30% above pre-COVID levels, leaving both consumer and corporate pockets flush with cash.  While supply-chain issues are temporary, the huge increase in the money supply, will affect inflation over the long term.  The Fed seems to anticipate that inflation will subside later this year and into 2022.  We think any waning in inflation later this year will be temporary, as the increase in the money supply continues to gain traction.  In terms of the details for May, prices for goods led the overall index higher, rising 1.5%.  The most notable increases were in metals, autos, and food.  The index for services also increased, up 0.6% in May.  Margins for wholesalers and resellers (particularly in auto retailing, where a significant supply/demand mismatch paired with consumer cash to spend has created massive seller pricing power), costs for warehousing, and transportation rates all rising.  Energy prices rebounded 2.2% in May following a similar decline in April.  Stripping out the volatile food and energy components shows "core" prices rose 0.7% in May and are up 4.8% in the past year.  In spite of inflation running well above the 2% target no matter how you cut it, we don't expect the Fed to signal any change in the plan to keep short-term rates near zero for the foreseeable future.  The Fed wants inflation to trend above the 2% target for a prolonged period, while the labor market – the other side of the Fed's dual mandate – also has to heal considerably further to get the Fed to seriously consider a move higher.  Discussions on tapering are likely to take center stage in the Q&A portion of Powell's press conference following this week's Fed statement tomorrow, but as we noted in this week's MMO, tapering is not tightening.

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Posted on Tuesday, June 15, 2021 @ 12:48 PM • Post Link Share: 
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