Housing Market Stumbles at the Beginning of Summer Nationwide home building declined sharply in June, a possible sign that construction labor shortages and rising material costs are causing more damage to the housing market than many analysts initially believed.
Housing starts declined 12.3% in June from the prior month to a seasonally adjusted annual rate of 1.173 million, the Commerce Department said Wednesday. This was the largest monthly percent drop in about a year and a half, driven by construction declines in all regions of the U.S. for almost all types of housing. (…)
Meanwhile, residential building permits, which can signal how much construction is in the pipeline, fell 2.2% from May to an annual pace of 1.273 million last month, which was a surprise, as economists had been expecting a 2.2% gain for permits in June. (…)
“There’s been a noticeable slowdown in [permit] activity this year,” said Freddie Mac Chief Economist Sam Khater. “It’s alarming that the single-family construction permit growth is decelerating at a time when home ownership is rising and millennials are reaching their peak age to really enter the market and buy their first home.” (…)
Economic Outlook from Freight’s Perspective
From both a volume and a pricing perspective, the U.S. freight economy continues to be extraordinarily strong. The Cass Freight Shipments and Expenditures Indices are clearly signaling that the U.S. economy, at least for now, is ignoring all of the angst coming out of Washington D.C. about the trade war. Despite concerns coming out of Wall Street about the increased threat of inflation or the continued increase in interest rates, these indices are displaying accelerating strength on top of increasingly difficult comparisons.
Demand is exceeding capacity in most modes of transportation by a significant margin. In turn, pricing power has erupted in those modes to levels that continue to spark overall inflationary concerns in the broader economy.
With all of this positive news taken into account, we are seeing signs that the transportation infrastructure has reached its limit, at least in the short-term, to accommodate higher rates of volume growth. (…) we are seeing more signs that ELDs (Electronic Logging Devices), which initially hurt the capacity/utilization of truckers (especially small truckers) are now beginning to contribute to gains in equipment utilization. This is especially true in the Dry Van and Reefer (temperature control) marketplaces of trucking, while the Flatbed segment of trucking is continuing to struggle with productivity since the adoption of ELDs.
(…) The current level of volume and pricing growth is signaling that the U.S. economy is growing, but that level of growth may have reached its short-term expansion limit. The 7.2% YoY increase in the June Cass Shipments Index is yet another data point confirming that the strength in the U.S. economy continues, albeit at a lower than the extraordinary 10.0%+ pace established in the January through May period. We are confident that the increased spending on equipment, technology, and people will result in increased capacity in most transportation modes. That said, many modes are reporting limited amounts of capacity or even no capacity at any price shippers are willing to pay. (…)
The DAT Dry Van Barometer is giving us real-time indications of stronger demand and tighter capacity in this key freight group, indicating that the consumer economy is not only alive and well, but growing robustly. (…)
We would note that indications of accelerating strength have been coming from several modes of transportation, but none more visibly than in flatbed trucking which we view as a key heavy industrial indicator. As long as WTI crude oil stays above the marginal cost of production (>$60 a barrel) in the major U.S. fracking fields, we expect to see continued strong industrial economic growth. (…) In June YoY, rates were up 26.7% on a spot basis and up 10.5% on a contract basis (not including the fuel surcharge, which was up 60.0%). (…)
With the recent strength in demand, it follows that the Cass Freight Expenditures Index also posted strong percentage increases throughout 2017, and that has continued into early 2018. (…) June’s 15.9% increase clearly signals that capacity is tight, demand is strong, and shippers are willing to pay up for services to get goods picked up and delivered in all modes throughout the transportation industry. (…)
We are also seeing some improvements in pricing power of truckers and intermodal shippers. As an example, the proprietary Cass Truckload Linehaul Index (which measures linehaul rates and does not include fuel) rose 9.5% on a YoY basis in the month of June, which is the strongest percentage increase it has posted in this recovery. The proprietary Cass Intermodal Price Index (which does include fuel), increased 10.9% in June.
Beige Book – July 18, 2018
Economic activity continued to expand across the United States, with 10 of the 12 Federal Reserve Districts reporting moderate or modest growth. The outliers were the Dallas District, which reported strong growth driven in part by the energy sector, and the St. Louis District where growth was described as slight. Manufacturers in all Districts expressed concern about tariffs and in many Districts reported higher prices and supply disruptions that they attributed to the new trade policies. All Districts reported that labor markets were tight and many said that the inability to find workers constrained growth. Consumer spending was up in all Districts with particular strength in Dallas and Richmond. Contacts reported higher input prices and shrinking margins. Six Districts specifically mentioned trucking capacity as an issue and attributed it to a shortage of commercial drivers. Contacts in several Districts reported slow growth in existing home sales but were not overly concerned about rising interest rates. Commercial real estate was largely unchanged.
Employment continued to rise at a modest to moderate pace in most Districts. Labor markets were described as tight (…). On balance, wage increases were modest to moderate, with some differences across sectors; a couple of Districts cited a pickup in the pace of wage growth.
Prices increased in all Districts at a pace that was modest to moderate on average; reports showed upticks in inflation in several Districts. (…) Tariffs contributed to the increases for metals and lumber. However, the extent of pass-through from input to consumer prices remained slight to moderate. (…) Pricing pressures are expected to intensify further moving forward in some Districts, while in others the outlook is for stable price increases at a modest to moderate pace.
Deficit Projected to Top $1 Trillion Starting Next Year
The Trump administration expects annual budget deficits to rise nearly $100 billion more than previously forecast in each of the next three years, pushing the federal deficit above $1 trillion starting next year.
The revisions, which went largely unnoticed when the White House submitted its annual update to Congress last week, reflect the cost of federal spending increases agreed to earlier this year and higher interest payments.
The budget proposal released in February showed annual deficits totaling $7.1 trillion over 10 years. The latest revisions increase these cumulative deficits by $926 billion, to $8 trillion.
(…) Administration officials have said stronger economic growth would allow recent tax cuts to generate more revenue over the long run, offsetting initial declines in receipts from rate cuts.
But the latest projections show the deficit rising even though the administration projected an even stronger uptick in federal revenue. (…)
The White House budget office now estimates that the deficit will rise to nearly $1.1 trillion in the fiscal year that begins this October, or 5.1% of gross domestic product, up from $984 billion projected in February’s budget proposal. The U.S. ran a deficit of $666 billion for the fiscal year that ended Sept. 30, 2017, or 3.4% of GDP.
“Gigantic deficits are not good, and we’re going to run, as a share of GDP, 4%, 5%,” said Lawrence Kudlow, director of the White House National Economic Council, at a conference hosted by CNBC on Wednesday. “That’s not bad. I’ve seen worse.” (…)
Yeah! We’ve all seen worse, but not often in the U.S. in the 9th year of a cycle.
Here’s a short list where we’re seeing it worse right now:
Annual inflation up to 2.0% in the euro area
Euro area annual inflation rate was 2.0% in June 2018, up from 1.9% in May 2018. A year earlier, the rate was 1.3%. European Union annual inflation was 2.0% in June 2018, stable compared with May 2018. A year earlier, the rate was 1.5%.
Core is behaving well however:
Oil Prices Fall Following U.S. Inventory Rise Oil prices fell on the back of rising U.S. petroleum stockpiles, part of the overall pressure related to ongoing concerns about the burgeoning global supply.
Trump Threatens Auto Tariffs Despite Broad Opposition President Donald Trump stood by his threats to levy sweeping tariffs on automobile imports as a way to extract concessions from trading partners, despite industry opposition and discontent in Congress with the plan.
Resistance to the tariffs is strong and growing. A coalition of foreign and domestic auto companies, along with auto dealers and auto-parts makers, released a letter on Wednesday urging Mr. Trump to refrain from the tariffs.
A bipartisan group of 149 House members also urged the president not to move forward with the tariffs. Auto unions were among the few industry players offering qualified support for the tariffs.
Still, at a cabinet meeting on Wednesday, Mr. Trump threatened “tremendous retribution” against the European Union, specifically mentioning auto tariffs, if his meeting with EU officials next week doesn’t yield what he considers a fair auto trade deal. (…)
The Commerce Department will make a determination on the security threat and what remedies should be proposed, a process that could take several months. No final decision can be made until the process is complete. (…)
Tariffs Threaten Retailers’ Inventory Discipline Proposed tariffs on Chinese goods are forcing retailers to buy early for the holidays to beat the tax but that could leave them with bloated inventories
(…) If retailers decide instead to wait and see whether tariffs actually take effect, they will either pass on the higher prices to consumers or eat the cost with lower margins. (…)
America’s Largest Aluminum Maker Is Getting Hit by U.S. Tariffs
Trade War Spills Into Uranium as U.S. Weighs Import Tariffs
China’s Yuan Hits One-Year Low China’s currency hit lows not seen since last July, and the gap between onshore and offshore rates widened, suggesting greater pessimism among foreign traders.
CRACKING
Asian Junk Bonds Are Being Treated Like Trash Asia’s $138 billion junk-bond market, anxious over China’s debt problem, is showing cracks after years of rampant growth. Yields are up sharply—leaving creditors nursing big paper losses, and promising to make refinancing harder.
(…) Measured by absolute increase in yields, the selloff is the worst since 2011, when doubts about the euro’s future shook markets.
When 2018 began, interest rates on dollar-denominated Asian junk bonds broadly matched the global market, according to ICE Bank of America Merrill Lynch indexes. Now the yield on the Asian index—representing $138.1 billion in government and corporate debt—runs nearly 2 percentage points above the world average, having recently topped 9%.
The divergence reflects Asia’s vulnerability both to global forces, like rising U.S. interest rates, a stronger dollar and trade conflict, and to homegrown challenges. As a mountain of debt nears maturity, the Chinese government isn’t preventing defaults as it once did. China accounts for nearly three-quarters of Asia’s maturing dollar-denominated junk bonds, according to Thomson Reuters, and almost as great a proportion of new issuance. (…)
Yields on dollar bonds from local-government financing vehicles have risen to 8.6% from 4.6% since the start of the year, according to ANZ Research, reflecting rising concern that Beijing won’t step in if they run into trouble. Like China Energy, these vehicles were previously believed to enjoy central-government support.
Defaults are also rising on debt denominated in yuan—a sign that the government is content to let market forces determine the fate of weaker companies, said Alejandro Arevalo, a fund manager at Jupiter Asset Management in London. (…)
CRACKING?
Chinese real estate, charted
Earlier this year famed short-seller Jim Chanos told Business Insider he believes Chinese real estate to be the most important single asset class in the world.
His reasoning was real estate represents nearly half of Chinese investment, and nearly half of the Peoples Republic’s GDP is investment. Chinese GDP is $12trn, according to the World Bank, so with global GDP a smidgen over $80trn, this one market accounts for between 3-4 per cent of global GDP, depending how you cut it.
The doom and gloom technocrats of the IMF are also concerned. In April they published a report named “ Stabilising China’s Housing Market”, which noted “a crisis in China’s housing market would be of considerable global concern”. (…)
EARNINGS WATCH
48 companies in. Beat rate is 88% and surprise factor +5.0%. Q2e now +21.4% (+17.6% ex-Energy) from +20.7% on July 1st.
Margin squeeze in the air:
Source: Capital Economics (via The Daily Shot)