Housing Starts Tumble U.S. housing starts declined in February, returning to a long-term trend of modest improvement in single-family construction and a slowdown in apartment building.
Total housing starts fell 7% in February from the previous month to a seasonally adjusted annual rate of 1.236 million, the Commerce Department said Friday.
Multifamily construction plummeted 26.1% in February, after activity in this segment increased robustly in January. Single-family starts, meanwhile, rose 2.9% compared with a month earlier.
Residential building permits, which can signal how much construction is in the pipeline, declined 5.7% to an annual pace of 1.298 million last month.
Year-to-date housing starts are up 3.5% compared with the same period last year. Single-family starts rose 7.8% during that period and starts for buildings with five or more units were down 5.8%. (…)
The U.S.housing market is really a South/West story which now account for nearly 80% of all starts (62% of the population), up from 73% at both the trough in 2009 and the peak in 2006 (60% of the population). There is a clear secular decline in housing demand in the Midwest/Northeast regions. Since the end of the 2008-09 crisis, starts in the Midwest/Northeast regions are up 43.5% (population +2.3%) while starts in the South/West regions are up 142% (population +8.8%).
It seems doubtful that housing will provide much more impetus to the economy this cycle given that the South/West regions are almost back to their levels pre-2005 mania and that mortgage rates are on the upswing.
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Next Real-Estate Crisis: Shortage of New Homes A decade after the construction boom, fewer new houses are being built in America than at almost any time before. “It’s a good time to be here in Grand Rapids, if you can get a house.”
Home construction per household a decade after the bust remains near the lowest level in 60 years of record-keeping, according to the Federal Reserve Bank of Kansas City. (…)
A combination of tightened housing regulations, a lack of construction labor and a land shortage in highly prized areas is driving the crisis, according to industry experts. (…)
The National Association of Home Builders estimates builders will start fewer than 900,000 new homes in 2018, less than the roughly 1.3 million homes needed to keep up with population growth. The overall inventory of new and existing homes for sale hit its lowest level on record in the fourth quarter of 2017, at 1.48 million, according to the National Association of Realtors.
That, in turn, is pushing up prices at what economists say is an unsustainable pace. The S&P CoreLogic Case-Shiller National Home Price Index rose 6.3% in 2017. That was roughly twice the rate of income growth and three times the rate of inflation. (…)
In 2016, the National Association of Home Builders estimated regulatory costs added nearly $85,000 to the cost of a home, up more than 30% since 2011. (…) The construction workforce in the U.S. declined to 10.5 million in 2016, from 10.6 million in 2010, when the real-estate market was near bottom, according to an analysis of U.S. Census data by Issi Romem, an economist at BuildZoom, a startup that tracks construction data for building contractors. (…)
Is America Running Out of Unemployed People to Fill Jobs? The number of job openings in the U.S. has touched another record high while the number of Americans readily available to fill those roles trends lower, according to Labor Department data released Friday.
For every job opening in America, there’s now barely more than one unemployed person available to take it.
The number of job openings in the U.S. has touched another record high while the number of Americans readily available to fill those roles trends lower, according to Labor Department data released Friday. (…)
In mid-2015, there were 2.3 million more unemployed people than open jobs. By January, the gap had narrowed to 372,000. (…)
We can hope for a rise in the participation rate but unless we corral a large part of the 65+ age group, there is barely enough people to fill the current openings:
Openings are now substantially exceeding hires, unseen in the 2 previous cycles:
The February job report surprised by the huge 800k jump in the labor force, a very rare occurrence:
Many economists suggested that rising wages were finally getting people back to the labor force but Barron’s Randall W. Forsyth has another explanation:
(…) It appeared the labor force participation rose in response to improved labor market conditions. In other words, stronger labor demand was eliciting more labor supply.
Not so fast, argues Charles Lieberman, chief investment officer of Advisors Capital Management after stints as chief economist at a number of big New York money-center banks. Much of the increase in the workforce appears to have resulted from Puerto Ricans emigrating to the U.S. mainland from the hurricane-devastated island.
Lieberman cites some persuasive data in the last two jobs reports. Among them, the total U.S. labor force grew by 1,324,000 in the past two months. And the Latino labor force rose by 523,000, accounting for 39.5% of the total national gain. But Latinos account for just 16.5% of the U.S. population, so these percentages “are completely out of line.” (…)
Reuters after the hurricanes that devastated Puerto Rico last fall:
About 300,000 island residents have arrived in the state since early October, according to Florida’s Division of Emergency Management.
This last chart plots jobs openings against people who are not in the labor force but want a job. Whatever slack there is, this sure looks lie a sellers’ market.
The odds are very much tilted towards accelerating wages.
N.Y. Fed Business Leaders Survey
(Covering service firms in New York, northern New Jersey, and southwestern Connecticut)
Activity in the region’s service sector expanded modestly, according to firms responding to the Federal Reserve Bank of New York’s March 2018 Business Leaders Survey. The survey’s headline business activity index moved down five points to 11.2, pointing to a somewhat slower pace of growth than in February. The business climate index fell thirteen points to 7.7, signaling that firms, on balance, regarded the business climate as better than normal, though to a lesser extent than last month. The employment index edged up to 17.9, indicating that employment continued to increase at a solid clip.
After reaching its highest level in more than a year last month, the wages index was little changed at 43.1, suggesting wages continued to climb. (…)
After reaching a multiyear high last month, the prices paid index fell seven points to 49.1, pointing to ongoing input price increases, though such increases were not quite as widespread as last month. The prices received index inched up to 21.5, again reaching its highest level in more than six years. The capital spending index came in at 17.2, suggesting that capital spending continued to increase.
The next 2 charts, courtesy of David Rosenberg, illustrate the inflationary pressures coming from U.S. manufacturers. The first chart shows the current pricing power at manufacturers in the N.Y. area.
The next chart reveals that more than 50% of Philadelphia area manufacturers expect to raise prices during the next 6 months, highlighting their own cost pressures but also their perceived capability to pass these costs on to their clients. The current reading is the strongest since 1988. FYI, core CPI inflation was +3.6% in January 1987. It reached +4.7% in February 1989.
Keep in mind that inflation on goods has been very subdued in recent years, pressuring total inflation. U.S. manufacturers seem set to change this dynamic which, coupled with rising import prices, could cause surprises on the inflation front this year.
U.S. Industrial Production Strengthens
EMU Inflation Continues to Stay Under Wraps. While the ECB Waits for the World to Change…Will It?
EMU inflation is even weaker upon its final revision. In February the HICP fell by 0.1% with core inflation up by 0.1% even the three-month pace of inflation is below 1.5% at 1.4% with the core pace even weaker at 1.2%. In February the policy-targeted twelve month change in the headline HICP weakened to 1.1% from 1.3% last month and the year-on-year core HICP stayed at 1.2% for the second month in a row. (…)
Inflation really is not gaining traction anywhere even when broken down into 3-month and six month periods. EMU total and core inflation are no higher than 1.6% on these horizons. And the 1.6% gain is for the headline over 6-months and that pace falls to 1.4% over three-months. Core inflation is not accelerating as it is up by 1.2% over 12-months and over three-months and it does dip to a 1% pace over six-months.
Looking at the largest four economies a bit more closely, Spain shows headline inflation rising from 1.2% over 12-months to 2.3% over 6-months to a 3.3% pace over 3-months. France has inflation at 1.9% over 6-months but the toothpaste goes back into the tube with a pace tailing off to 1.7% over three-months. German inflation is steady at 1.2% then dips to a 0.4% pace over three-months. Italy’s pace of inflation is below 1% throughout these various horizons.
The ECB has been helped to keep inflation in line by labor costs. Wages and salaries have risen at a 2% pace over the last year with wages and salaries in industry at a 1.7% pace. Meanwhile, adjusted for productivity gains, unit labor costs show a rise of just 1% overall and they are falling at 0.5% annualized rate for industry excluding construction. Although unemployment across Europe has been falling and in Germany the unemployment rate is at a post reunification low, labor market pressures simply are not building. (…)
THE TRUMP TRADE TIRADE
This is from Evergreen/Gavekal:
(…) Bubbling Below the Surface: An Economic and Technological Cold War The chief goals of Trump’s protectionist ambitions are to limit China’s influence on bilateral trade and ensure the US has an upper-hand on critical technologies. China currently accounts for half of the US non-oil trade deficit and, while Trump’s initial tariff tantrum missed the mark on curtailing this deficit, it’s likely that subsequent tariffs will directly target China.
The more important long-term outcome of recent trade-related events is that the White House is working to ensure “America First” rhetoric translates into concrete policy around foreign-controlled technologies. This week’s swift rejection of Singapore-based Broadcom’s hostile takeover efforts of Qualcomm sent that message loud and clear. In a release sent from Washington on Monday evening, Trump stated: “There is credible evidence that leads me to believe that Broadcom [by acquiring Qualcomm] might take action that threatens to impair the national security of the United States.”
This marks the fifth time since 1990 that a takeover of an American firm has been blocked on grounds of national security. Two of those blockages have come under President Trump over the last six months. Additionally, several Chinese-related deals have been killed since Trump took office:
The main takeaway here is that Trump and his national security team are gearing up to take down any takeover attempts that give China an upper hand technologically. (…)
The jury is still out on the economic repercussions of such actions, but the purpose is clear: Washington is gearing up to take on Beijing in the fight for technological supremacy. When two titans fight, the world tends to shake. Yet, with so many asset classes priced for perfection there seems to be precious little margin-of-safety to insulate investors should these initial skirmishes escalate into a full-blown trade war. Let’s hope cooler heads prevail.
SENTIMENT WATCH
What Is Jeffrey Gundlach Worried About Now? The CEO of DoubleLine Capital called the subprime debt crisis 10 years ago. Today he sees “magical thinking” in cryptoocurrencies and bets on a low VIX.
(…) The Federal Reserve has moved into tightening mode. In fact, it has returned to autopilot. The Fed previously had pledged that monetary policy would depend on the strength of economic data. Last year it switched gears and indicated it would tighten credit as much as four times this year even if the data don’t change. That could be dangerous when the Fed is also engaged in quantitative tightening [not buying new bonds when old bonds mature, thereby shrinking its balance sheet] that could add up to $600 billion in fiscal 2019.
And, thanks to the new tax law, it is plausible that the federal budget deficit could double to $1.25 trillion in the fiscal year that begins in October. We could be looking at roughly $2 trillion of government paper being issued in fiscal ’19.
(…) Interest rates are starting to matter because the price/earnings ratio on stocks is so high.
I expect the market to close the year down. I had thought the trouble would come later in the year, but rates rose pretty quickly. I don’t have a ton of conviction about interest rates. The bond market and the dollar got oversold and are working that off, but neither seems able to rally, which isn’t a good sign. It suggests the dollar’s next move will be down and the next move in rates will be higher. With correlations having become positive, the rise in bond yields likely will lead to a decline in stocks. (…)
Gold is very near a breakout level of around $1,350 [per ounce] or so. The dollar has declined over the past 14 months, and has now met its downtrend line going back to 1984. If it breaks down, it’s a pretty major breakdown. Then there is the ratio of the 10-year Treasury yield to the price of the S&P 500—an esoteric measure. It too is on the verge of breaking to the upside. If a break to the upside in yields creates too much pressure on the stock market’s P/E ratio, that ratio would explode to the upside.
That’s a big “if,” however. If rates go higher, stocks can hang in until such time as we break the higher end of the yield range. Because the level is so critical and the base is so big, a break in the long-bond yield above 3.22% likely would lead to a big move up in yields. It wouldn’t stop at 3.5%.
I don’t have massive conviction that yields are going to break to the upside. On a scale of one to 10, my conviction level is a six. I am going to let the market do the talking. (…)
More Companies Stumble Under Debt Load
(…) Bain Capital and Thomas H. Lee Partners bought iHeart, then known as Clear Channel Communications, for about $24 billion in 2008, saddling it with debt. Its bankruptcy followed the announcement by bankrupt Toys ‘R’ Us that it would close or sell all of its 800 U.S. stores, which followed news that Claire’s Stores is exploring restructuring.
All this follows 2017’s trajectory, when private-equity-backed, debt-laden retail companies from Rue21 to Gymboree to Payless ShoeSource filed for bankruptcy.
For years, friendly debt markets have allowed issuers to push the “maturity wall”—where tons of bonds come due simultaneously across the high-yield market. Right now, that peak is about 2022. (…)
U.S. national debt exceeds $21 trillion for first time
The national debt has exceeded $21 trillion for the first time, according to the U.S. government. It had hit $20 trillion in September. President Donald Trump signed a debt-limit suspension in February, allowing unlimited borrowing until March 1, 2019. Economists are expecting the U.S. to run wider budget deficits due to the tax cut Trump signed into law in December. The government had a monthly deficit of $215 billion in February, up 12% from the same month last year due to lower revenue and higher spending.
So the U.S. national debt jumped by $1T in 6 months! Much more to come.
Corps are in no better shape as David Rosenberg demonstrates:
- Nearly Half of Investment-Grade Companies are Rated BBB
- And it’s not just high yield. The triple-B share of the investment-grade bond market is at an all-time high of 48%.
We’ve been there before:
TECHNICALS WATCH
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Good News for the Bulls, Charts Say A technical analysis of the S&P 500 suggests it’s the bears who need to worry. Keep an eye on the SPY.
(…) bulls should remember a basic tenet of Dow Theory, which has maintained its relevance among market watchers for over a century: “A [market] trend is assumed to be in effect until it gives definite signals that it has reversed.”
One of the simplest definitions of a downtrend, as explained by Dow Theory, is a pattern of lower lows and lower highs. Not only did the S&P 500 not start a new downtrend pattern, it didn’t come close to breaking the long-term trendline that has defined the nine-year uptrend.
In addition, the index fell to test its 200-day simple moving average, which many chart watchers view as a dividing line between longer-term uptrends and downtrends, but bounced sharply to confirm that the moving average was providing strong support.
(…) the S&P 500 closed last Friday at 2,786.57, higher than the Feb. 26 close of 2,779.60. That followed a bounce off the March 1 closing of 2,677.67, which was higher than the Feb. 8 close of 2,581.00.
That’s right, a pattern of higher highs and higher lows has been established, suggesting a new mini-uptrend to go with the long-term bull trend.
Market-breadth data also suggest bullish momentum has returned. Jonathan Krinsky, chief market technician at MKM Partners, notes that the S&P 500’s cumulative advancers-versus-decliners line has broken out to new highs, which suggests increasing participation among bulls.
Ari Wald, technical analyst at Oppenheimer, points out that recent market strength has had its effect on sentiment, as the 10-day ratio of bearish put options to bullish call options has turned up, after falling in February to one of the most pessimistic levels of the past two years. That should offer “contrarian firepower” for the next leg of the advance, he says. (…)
Another development that might appear to support the bear case, but could fuel the next leg higher, is heavy trading volume in the SPDR S&P 500 Trust exchange-traded fund [ticker: SPY] at the February lows.
Many view volume as a validator of a move, since it is a simple measure of participation. But history shows that volume at bottoms is always heavier than on the recovery, as the panic selling it depicts can reflect capitulation, or nervous investors giving up. The big increase in negative sentiment also suggests the pick-up in volume included new bears. (…)
Lowry’s Research remains very bullish seeing “across-the-board signs of strength in measures of breadth, Supply and Demand.”
BTW:
Source: JPMorgan, @tracyalloway (via The Daily Shot)