The U.S. Economy:
The once red-hot housing market has fizzled out and that means prices are finally cooling down. Data published from the Cass-Shiller House Price Index showed the average price continued to tick down but remains at a high level. The Cass-Shiller Home Price Index rose 0.3% in June, a big step down from the 1.7% average monthly rise during the first five months of the year. The headline index came in at 18% year-over-year in June, down from 19.9% in May. The index spotlights an industry losing steam as it moves through the summer peak months, with affordability becoming a major issue for potential customers. A survey by Realtor.Com found that 92% of home sellers had to accept concessions in a changing market, a sign that the buyers are gaining pricing power. Unlike last year, a majority of homebuyers now want house inspections and expect to have house repairs completed before closing. For June, house prices rose in 13 metro areas, but the price fell in six. As demand continues to weaken, pricing power will continue to erode, but getting house prices back to an affordable level will be a prolonged struggle.
The ISM Manufacturing Index was unchanged in August at 52.8%. The New Orders index increased by 3.3 percentage points to 51.3 in August, up from 48% in July. Of 18 manufacturing industries, 6 reported growth in new orders, for the month. August marked the first increase in orders following two months of declines. Lead times remain elevated. August did see a decrease in capital expenditures, raw materials and maintenance, repair and operating supplies, factors that will slow production in coming months. Production fell by 3.1 percentage points to 50.4, with six industries reporting greater production. Materials availability and the labor supply continue to recover, with quits easing and supplier deliveries improving, conditions that should bring on greater production in September. The Employment Index improved by 4.3 percentage points to 54.2 in August, returning to the expansion after three months of declines. Of the eighteen industries, nine reported greater employment growth in August. The Supplier Delivery Index declined by 0.1 of a percentage point to 55.1%, indicating slower deliveries. Nine industries reported slower deliveries, but it was the best reading of the index since January 2020. The Inventory Index registered 53.1% in August, down 4.2 percentage points from July. Eight industries reported higher inventories. With slowing demand, manufacturing industries are now watching inventories more closely amid greater supply management concerns. The price index fell to 52.5%, down 7.5 percentage points from July and the first reading below 60 since August 2020. In the last five months, the index has decreased 34.6 percentage points. The decrease is being driven by a relaxation of the energy markets, the softness of the copper, steel, and aluminum markets, and continued sluggishness in the chemical industries. Backlogs increased by 1.7 percentage points to 53. New export orders fell by 1.7 percentage points to 49.4 and imports fell by 1.9 percentage points to 52.5.
The ISM report shows that manufacturing activity is expanding at about the same rate as in the last two months. New orders returned to expansion mode. Supplier deliveries are about at the right tension mode and pricing softening again, suggesting the supply-demand ratio continues to move towards balance. Companies continued to hire at a healthy rate in August, with few layoffs. The retreat in pricing is bringing buyers back into the market. There are concerns about the softening economy and order book corrections. Opinions among respondents were mixed. Some industries are still reporting strong sales (computers and transportation equipment) and others are seeing a softening in demand (primary metals and chemicals.) Some industries are reporting inventories are too high (food and beverage and electronic products.) The mixed view is reflective of an industrial sector in a transition phase from a super-charged demand position to a slower but still positive rate of expansion. We expect the industrial side will continue this path to a slower output but a weaker inflation environment.
Factory orders fell 1.0% in July, following a revised 1.8% advance in June. July was the first decline after nine months of increases. Transportation orders fell 0.7% in July after a 6.1% jump in June. Excluding transportation, orders were down 1.1% in July, more than reversing the June gain. Core capital goods orders advanced 0.3% in July, but at a weaker pace than in the last few months. Part of the reason that industrial activity has been restrained is that the auto Industrial has seen a widespread shortage of computer chips and other parts that have restrained production.
Construction spending fell 0.4% in July to a seasonal adjusted annual rate of $1,777.3 billion. Total nonresidential construction spending increased 0.9% to $503.9 billion% but was offset by a 1.5% reduction in residential outlays to $920.4 billion. The public sector saw a strong 1.5% increase in construction spending to $353.1 billion. Total construction spending was up 8.5% above year-earlier levels. Total construction spending for the first seven months of the year amounted to $1,013.7 billion, 10.8% above the $915.2 billion for the same period in 2021. The outlook for construction spending is not favorable in the near term. The residential side will continue to show weakness. There is pent-up demand and a strong labor market and some suggestions a bottom may be forming, but the trend for single0g=family housing is negative in tone. The non-residential sector will show weakness, despite July’s positive energy. The public side will turn in flat, or slightly negative.
Factory orders fell 1.0% in July, following a revised 1.8% advance in June. July was the first decline after nine months of increases. Transportation orders fell 0.7% in July after a 6.1% jump in June. Excluding transportation, orders were down 1.1% in July, more than reversing the June gain. Core capital goods orders advanced 0.3% in July, but at a weaker pace than in the last few months. Total shipments declined 0.9%, while inventories edged higher by 0.1%. It was the first monthly decline in shipments, after 16 months of increases. The report shows that the industrial side is downshifting from a super-charged demand-dominated environment to a slower expanding pace. The industrial side should stay positive, but as the impact of rising rates continues, the industrial activity could turn mildly recessionary as the consumer retrenches.
Sales of light trucks and autos totaled 13.2 million at an annual rate in August, little changed from the 13.3 million rates in July. Component shortages are responsible for the weak sales pace of the last two years. Sales by domestic producers decreased to 10.3 million units versus 10.7 million in July, a drop of 3.9%. Imports jumped 10.3% to 2.88 million units. Domestic sales have been in the 13 to 14 million range in the period before the pandemic, averaging 13.3 million for the six years through 2019. Domestic assemblies jumped in July, coming in at 10.72 million at a seasonal adjusted annual rate, up 6.9% from the 10.92 million rates in June and still slightly below the three years through December 2019. Component shortages, especially computer chips, continue to restrain production causing scarcity of some models and low inventories, and the high prices we see today. Ward’s estimate of auto inventory came in at 97,000 in July, down from 114,100 in June and a new all-time low. The Bureau of Economic Analysis (BEA) estimates the inventory-to-sales ratio fell to 0.505 in July, down from 0.558 in June, but above the February low of 0.368. Low inventories continue to push prices up. The average expenditure for a car equaled $34,962 in July, up 0.6% from June and a new record high. The average price for a light truck was $50,320 in July, up 0.4% from $50,143 in June and also a record high. Although there is pent-up demand for cars and trucks, affordability will limit sales in the coming months.
Payrolls grew by 315,000 in August, a stronger-than-expected number. Nonfarm employment has increased by 5.8 million in the last twelve months. This growth has brought employment growth 240,000 higher than when the pandemic struck in February 2020. Professional and business services added 68,000 jobs. Over the past year, professional and business employment added 1.1 million jobs. Health care added 48,000 in August and retail trade added 44,000. Manufacturing added 22,000. In August, the unemployment rate rose by 0.2 of a percentage point to 3.7%. Although the unemployment rate increased, it increased for the right reason, more people entered the workforce. The labor participation rate increased by 0.3 of a percent to 62.4%, 1% below the February 2020 level. The average wage rose 0.3%, up 5.2% from a year earlier. The average workweek fell by 0.1 of an hour to 34.5 hours. There were sizable revisions to the preceding months. The growth estimate for June was revised down by 105,000 to 293,000 and July was revised down to $2,000 to 526,000. The report is showing a job market slowing towards the trend.
Important Data Releases This Week
- The August ISM services index will be released on Tuesday, September 6 at 10::00 AM. The ISM manufacturing index came in a little better than expected even though the index was unchanged every month. The manufacturing index showed an increase in employment, new orders went positive, and pricing made a large decline. We look for the services index to fall from the current 56.7 reading to 55.8. The manufacturing sector showed widespread differences between industries, in terms of sales, inventories, and production. Some industries are still seeing strong sales, and some are seeing a cooling trend. Some industries are reporting excessive inventories and others reporting stocks are still low. These mixed reactions across industries are reflective of an economy that is transitioning to a slower speed. For service industries, some of the same issues that manufacturing is facing will surface in services as the economy downshifts. The service sector should stay positive unless we fall into a more pronounced slowdown in economic activity.
- The July trade balance report will be released on Wednesday, September 7 at 10:00 AM. For the better part of two years, trade has weighed on GDP growth. There was strong demand for goods and the U.S. economy was outrunning the world in economic output. That economic environment favors imports and translates into a slow start for exports. Now, the global economy is picking up and the U.S. economy is slowing and which means more exports and slower growth in imports. Exports had increased for five months ending in June. The U.S. is exporting a lot of commodities to Europe, including LNG. This trend will continue in the coming months and the trade balance should shift from the $79.68 billion reading in June to $70.18 billion in July.