Housing, manufacturing data show weakness

Existing home sales and the Federal Reserve Bank of Richmond’s manufacturing index suggested economic weakness, supporting a 25 basis point Fed rate cut next week.

Existing home sales fell 1.7% in June to a seasonally adjusted annual rate of 5.27 million, and are down 2.2% from the 5.39 million pace of June 2018. This was the 16th consecutive month the year-over-year number fell, and came despite declining interest rates.

Economists polled by IFR Markets expected a 5.34 million rate.

“Existing-home sales data continue to paint a weaker picture of the housing market than other market data suggests," according to Mortgage Bankers Association Chief Economist Mike Fratantoni. "The job market and consumer spending remain quite strong, but for housing, inventory remains tight — leading to a constrained sales pace, particularly in markets in the West and the South.”

existing home sales

First-time homebuyers accounted for 35% of sales in the month, which Fratantoni called “the one bright spot.”

The pace of sales is near 2015 levels, according to NAR Chief Economist Lawrence Yun, despite “exceptionally low mortgage rates, a record number of jobs and a record high net worth in the country.”

Since supply for low- and mid-priced homes is low and demand is high, it’s creating an “imbalance” that is “consequently pushing up home prices,” he said.

Other factors could be behind the drop in sales, Yun suggested. “Either a strong pent-up demand will show in the upcoming months, or there is a lack of confidence that is keeping buyers from this major expenditure. It’s too soon to know how much of a pullback is related to the reduction in the homeowner tax incentive.”

The Richmond Fed manufacturing survey composite index fell to a contractionary negative 12 reading in July, its lowest level since January 2013. In June the index was positive 2.

Shipments dropped to negative 13 from positive 5, new orders widened to negative 18 from negative 2 and the number of employees declined to negative 3 from positive 4.

The expectations index for shipment improved to 32 from 23, while new orders rose to 36 from 27 and the number of employees grew to 13 from 12.

However, the services sector fared better. The Richmond Fed services survey reported “solid” activity in July, as the demand index gained to 18 from 12 in June, while revenues fell to 11 from 16. Both indexes dipped in the expectations sector, with revenues down to 33 from 36 and demand at 29 from 35.

“Firms also reported growth in spending and were optimistic that business would stay strong in the next six months,” the report said.

The Federal Reserve Bank of Philadelphia’s non-manufacturing index suggested expansion, with current activity at the firm level climbing to 24.6 in July from 12.2 in June, and regionally to 21.4 from 8.2. The six months from now index also rose to 36.0 for firm-level from 26.4 and to 21.7 from 10.9 for regional level.

The International Monetary Fund lowered its projections for global growth to 3.2% this year and 3.5% next year. Tuesday’s revised projections were 0.1-percentage point lower than its previous estimate.

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Economic indicators Monetary policy Housing Federal Reserve Bank of Philadelphia Federal Reserve Bank of Richmond
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