Spring Has Come To The Economy – Market Update

Spring has sprung and with it comes some optimism within the economy and in the pandemic. With vaccinations on the rise, we might be beginning to turn the corner on COVID-19. The housing market has taken a step back, but there’s plenty of reason for good feelings about other areas.

As always, this portion of the report was put together with the assistance of our friends at Econoday.¹

Employment Situation

Because we try to write this report the first week of the month, very occasionally, two jobs reports are going to come out since the last time we wrote. In February, nonfarm payrolls were up 379,000 positions. An additional 916,000 positions were added in March. Since January, the unemployment rate has fallen from 6.3% to an even 6%.
 
Looking at private payrolls, 465,000 jobs were added in February and 780,000 jobs were picked up in March. In the key manufacturing sector, 21,000 jobs were added in February to go along with 53,000 in March. The labor force participation rate was up to 61.5% in March after dipping 0.1% in February at 61.4%.
 
After rising 0.2% in February, wages were actually down 0.1% in March, but they’ve gone up 4.2% this year. Meanwhile, the average workweek kicked up by 18 minutes in March to 34 hours, 54 minutes. This is a good sign that there’s more work to do.
 
Looking at the March employment breakdown, 597,000 jobs were added in services with 183,000 added in positions that produce goods. Meanwhile, there were 136,000 jobs added in the government sector. In addition to the manufacturing jobs mentioned earlier, on the goods side, there were 110,000 jobs added in construction.

Leisure and hospitality added 280,000 jobs with education adding a total of 190,000 jobs.

ISM Manufacturing Index

This manufacturing index is another one that’s been released twice since the first Monday of last month. In this case, manufacturing is fairly robust in comparison to earlier this year.
 
This index measures growth, so it’s easier to pick up from lower manufacturing levels earlier in the year. However, the numbers being posted by this index are still notable at a height not seen in almost 40 years. The number was 64.7 overall in March, while new orders came in at 68. Even better, employment is up better than 5 points to 59.6.

However, there are delays in getting materials and prices are way up across the sector at 85.6 in March, which could slow the pace of growth. It’ll be interesting to see how the Suez Canal incident of late March impacts April numbers. It certainly appears that it’s already hard enough to get materials.

International Trade In Goods And Services

The U.S. trade deficit in January was up $1.2 billion at $68.2 billion. In addition, the December deficits was revised up to $67 billion from $66.6 billion. Imports were up 1.2% to begin the year which was enough to outpace a 1% increase in the level of exports. Annually, the picture is bleaker with imports up 3.2% and exports falling 7.6%.
 
Turning back to January, services were down 0.5% and have fallen 20.3% annually. Meanwhile, goods exports were up 1.6% for the month and have fallen 1% annually. Meanwhile, imports of goods are 1.6% higher and up 8.5% on the year.
 
Looking at specific industries, exports of capital goods were up as well as industrial supplies. However, food was down 3.9% and vehicle exports fell also. On the downside, imports of consumer goods were up 6.3% for the month and have gone up 19.8% on the year. We have a $27.1 billion goods deficit with China alone.

Consumer Price Index (CPI)

Prices were up 0.4% in February, but they are only up 1.7% on the year, well below the Federal Reserve’s goal of long-term 2% inflation in order to encourage people to buy now rather than waiting until later. When food and energy were excluded, prices were only up 0.1% and 1.3% since last February.
 
There was a big jump in gasoline prices, up 6.4%. Energy was up 3.9% overall and prices have gone up 2.4% since February of last year, the first time in a while that we’ve seen an annual increase.
 
The price of food was up 0.2% and has risen 3.6% since last February.

Prices for shelter were up 0.2%, while the cost of recreation was up 0.6% after having fallen the month prior with virus restrictions to blame.

Producer Price Index (PPI)

On the production side, prices are rising a little faster, up 0.5% in February and rising 2.8% over the last 12 months. When food and energy were taken out, prices were up 0.2% for the month and 2.5% for the year. This figure also held when excluding trade services, which include sales from retail and wholesale. Annually, prices were up 2.2%.
 
Part of the reason for the steeper prices is that back in February 2020, we were just entering virus restrictions and prices were running lower. However, this is still something to keep an eye on as the Federal Reserve tries to boost inflation in a controlled manner.
 
Energy prices were up 6% overall which helped push the cost of goods up 1.4% on the production side. Services were only up 0.1%. Meanwhile, gains in trade services were also only up 0.1%, but they have gone up 3.3% for the year.

Rocket Companies Home Value Index

The Home Value Index from Rocket Companies measures home values on a monthly basis across 27 major metropolitan areas. In February, home values were up 1.17% and 9.04% since last February.
 
On a regional basis, the Northeast rose 2.72%, with 1.92% gains in the South and 1.7% price upticks in the Midwest. Finally, in the West, prices were down 0.15% in February, but they’ve gone up 10.81% for the year. Price increases across all other regions have been in the 7% – 8% range.

Retail Sales

Retail sales fell 3% in February. Analysts are careful not to lend much credence to this on the strength of the sector overall. The reason for that is that January was boosted by stimulus payments to many Americans with another round having hit in March. A down month between the two was probably inevitable.
 
When vehicles were taken out, sales were down 2.7%. However, when further excluding gas, sales were down 3.3%. Sales were up 3.6% at gas stations, driven by higher prices. General merchandise sales were down 5.4%, matching a similar decline at nonstore retailers, which is mostly e-commerce at this point.
 
Sales of vehicles were down 4.2%, while restaurant sales were down 2.5%. Finally, sales were down 3.5% in a control group that’s not as prone to seasonal fluctuations.

Industrial Production

Industrial production was down 2.2% in February with manufacturing output falling 3.1%. Meanwhile, capacity utilization in factories was down 1.7% to 73.8%. A big reason for the declines rests with the state power shutdown in Texas due to the big winter storm that hit in February.
 
Petroleum refineries and other related production facilities were down for much of February. Still, utility production was up 7.4% for the month given a cold weather snap.
 
Mining output continues to fall given the pandemic, down 15.3% year-to-year. Meanwhile, manufacturing is down 4.1% annually. Utility production is up 10.1% since last February.

Everyone is home and they’re using more power presumably. Total production is down 1.2% over the last year.

Housing Market Index

In March, confidence among homebuilders took a slight step back at 82. This is thought to be due to an increase in mortgage rates, but builder confidence is generally elevated. The index remains near records.
 
Present sales were down 3 points at 87. However, this was partially offset by a 3-point increase in expectations for sales over the next 6 months at 83. Traffic of prospective buyers walking through homes remained flat at 72.

New Residential Construction

Completed construction was up 2.9% in February, 1.362 million on a seasonally adjusted annual basis and up 5% on the year. In the single-family category, completions were up 2.8% to 1.042 million. Builders were on pace to have 314,000 multifamily units built.
 
Housing starts in February were 10.3% off their January pace at 1.421 million. There’s a good chance this has to do with rising prices and shortages of construction supplies. It’s 9.3% below February of last year. Again, we’ll be keeping an eye on how the Suez Canal backup impacts this. Single-family starts fell by 8.5% at a 1.136 million annual pace. Multifamily starts came in at 372,000.
 
Building permits were down 10.8% at 1.886 million but remain 17% higher than they were a year ago. On the single-family side, these authorizations were down 10% at 1.143 million on an annual basis. Multifamily units were authorized at a rate of 495,000 in February.

Existing Home Sales

Existing home sales were down 6.6% at a seasonally adjusted annual rate of 6.22 million in February. Despite the dip, sales are still at 9.1% on the year.
 
The reasons for the slowdown are thought to be twofold: On one hand, mortgage rates are up. At the same time, prices continue to rise, up 15.8% at $313,000, which is the highest it’s been since the beginning of the pandemic. Supply remains short at 2 months relative to the current pace of sales.
 
Breaking down single-family and condo sales, on the single-family side, these were down 6.6% at 5.52 million. Condo sales were down 6.7% at 700,000. The annual growth rate is 18.6% for condos and 8% for single-family homes.

New Home Sales

New home sales were down almost 20% to 775,000 in February. The decrease is again blamed on rising mortgage rates. Still, contained in this time last year, sales of new homes up 8.2%. However, that pace of appreciation is down from as high as 50%.
 
The median price of a new home was down 1.1% at $349,000. There were declines across to all four regions and sales with the steepest drop coming in the Midwest. The only good news in this report is that supply was up to 4.8 months of the current pace of sales as compared to 4.2 months in January.

Durable Goods Orders

Orders of durable goods for February were down 1.1% and fell 0.9% when transportation was taken out. When looking specifically at core capital goods, orders were down 0.8%. February is the first month orders have declined since April of last year.
 
There was a 1.6% decrease in orders of transportation equipment. The decline for core capital goods also doesn’t bode well for future business investment. Shipments of durable goods were down 3.5% for the month, but unfilled orders did pick up 0.3% and inventories were up 0.7%.

Gross Domestic Product (GDP)

Overall economic growth was up 4.3% in the final reading of the fourth quarter, an increase from prior estimates of 4.1% growth. Personal consumption expenditures were revised downward to 2.3% from 2.4% in prior readings.
 
The reasoning for the increase in growth was an increase in inventories which contributed 1.37% to overall growth. Meanwhile, personal consumption expenditures growing by 2.3% added 1.58% to overall growth in the economy. Finally, business investment slowed a bit despite the fact that it was up 18.6% annually. This led to a 1.65% contribution to GDP.

Personal Income And Outlays

In what can be chalked up to stimulus check effects, personal incomes were down 7.1% in February. Meanwhile, personal consumption expenditures were down 1%. Looking at prices, they were up 0.2% for the month and 1.6% for the year overall. When only looking at core categories, prices were up 0.1% in February and 1.4% annually.
 
Among other notable data points, the savings rate was down 6.2% to 13.6% as people didn’t have a stimulus check to save.

Case-Shiller Home Price Index

This index takes a look at a rolling 3-month average of all home prices across 20 cities. In January, prices were up 1.2% on a seasonally adjusted basis and have gone up 0.9% overall. The pace of yearly appreciation was 11.1%. This is January data, so it doesn’t have the effects of the jump in mortgage rates we’ve seen recently.
 

FHFA House Price Index

As opposed to the preceding index, this one isn’t a 3-month average and they only look at conventional loans backed by Fannie Mae and Freddie Mac. However, there was a 1% gain in home prices according to this index in January. Additionally, the pace of annual appreciation was up 0.6% to 12%, which is a record.

Consumer Confidence

Consumer confidence was up almost 20 points to come in at 109.7. Among other good readings, there was a decrease of almost 4% in those that say jobs are hard to get at 18.5%.

Meanwhile, 26.3% of people say that jobs are plentiful, up 5 percentage points. Additionally, 36.1% of people see more jobs ahead, up 9 points. Meanwhile, a smaller percentage of people see fewer jobs ahead, down almost 8 points to 13.4%.
 
Expectations for increased income in the future are held by 15.5% of people. People who are pessimistic on income represent only 13.3% of those surveyed.
 
Plans to buy a house over the next 6 months were up 2.4% to 8.4% which represents the best result since the pandemic started. People think inflation and interest rates will be higher. When looking at the stock market, 35.9% of those surveyed think it will go higher in the near future and 31.2% see it dropping back.

Nothing the Federal Reserve said at its most recent meeting last month would lead you to believe that short-term interest rates are moving up anytime soon. Rather, what’s driving the most recent uptick in mortgage rates is a move toward stocks. The reasoning for this is based on a couple of factors.
 
First, people are much more optimistic that there’s a light at the end of the tunnel when it comes to COVID-19. More and more of the population is getting vaccinated every day and if that happens, there’s a higher likelihood of getting back to something approximating normal sooner rather than later.
 
The second piece of this is that with so much stimulus money going into the economy, there’s a persistent worry that inflation could rise quite quickly. If that happens, it makes more sense to try for the higher return offered by stocks. If people think that the economy will be better in the future, they’re more likely to not be as worried about the increased risk that comes with stocks.
The bottom line here is that if you see a rate you like and you’re in the market to purchase or refi, you may not want to wait around to apply for the mortgage.
 
Last week, the average rate on the 30-year fixed mortgage was up just a single basis point to 3.18% with 0.7 points paid in fees. This is still down from 3.33% a year ago.
 
Looking at shorter terms, the average rate on a 15-year fixed mortgage was flat at 2.45% with 0.6 points paid. This is down from 2.92% last year.
 
Finally, the average rate on a 5-year treasury-indexed, hybrid adjustable-rate mortgage was unchanged at 2.84% with 0.3 points paid. This has fallen from 3.4% last year.