Building on disappointing hiring, production, and retail numbers this month, the housing data out last week provided another discouraging economic measure for us to absorb. New housing starts fell 8.8%, down from an annualized 1,194,000 in February to 1,089,000 in March. This was a surprising drop, with the consensus estimate calling for roughly 1,180,000 units being started for the month. Single-family activity slowed to a five-month low, with the highly volatile multifamily component decreasing to its slowest pace in 13 months. Housing permits were also soft in March, down from 1,177,000 at the annual rate to 1,086,000, its lowest level in 12 months.
With that said, residential construction has been one of the better aspects in the U.S. economy over the past year, and even with the sharp decline in this report, housing starts rose 14.2% year-over-year, up from 954,000 in March 2015. The bulk of that growth stemmed from the single-family segment, which has increased 22.6% year-over-year. Overall, the housing market has remained resilient even with some softer-than-desired data in recent months. We would expect to see better data moving forward, building to 1.25 million units by year’s end. Indeed, that optimism continues to fuel sentiment among homebuilders, which remain cautiously upbeat about single-family unit sales over the next six months. At the same time, the news on existing home sales was better, up 5.1% in March, with low inventories as the main challenge in that segment.
Meanwhile, the manufacturing releases out last week were also weak. For instance, U.S. manufacturing activity grew at the slowest pace since September 2009, with the Markit Flash U.S. Manufacturing PMI decreasing from 51.5 in March to 50.8 in April. Activity in the sector has decelerated significantly over the past 12 months, with the main PMI number down from 54.2 in April 2015. In addition, the Federal Reserve Bank of Philadelphia reported that manufacturing activity declined again after rebounding in March. These reports stand in sharp contrast to the better-than-expected sentiment from the Institute for Supply Management (ISM). In that release, new orders and output both grew surprisingly strong in March, lifting its manufacturing PMI value above 50 for the first time since August. It provided some encouragement after months of softness, even with ongoing challenges, and it helped to fuel the narrative that manufacturing activity was beginning to stabilize.
Looking abroad, the Markit Flash Eurozone Manufacturing PMI declined from 51.6 in March to 51.5 in April, with growth remaining somewhat subdued. The February level (51.2) was a 12-month low, with this latest figure not far from that level. Overall, Eurozone manufacturers have now reported expanding activity levels every month since June 2013, albeit with weaker growth than desired. More than anything, this report shows that Europe is not immune to the softening in manufacturing activity seen worldwide. Markit also released preliminary PMI data for France and Germany, which continue to move in opposite directions. French manufacturers reported a second straight contraction with new orders plunging, whereas German survey respondents noted rebounding demand and production in April. Even with very modest manufacturing growth on the continent, the European Central Bank is likely to continue its efforts to stimulate the economy.
The net result of the recent slew of discouraging economic news has been a downgrading of expectations on the part of many business leaders. Economists responding to the latest Business Conditions Survey from the National Association for Business Economics said that sales growth fell to its lowest level in seven years, with particular weakness for goods-producing firms, such as manufacturing. Hiring and capital spending activity also fell sharply for goods producers. Yet, businesses were somewhat upbeat about activity improving over the next three months, with 46% anticipating rising sales and 31% predicting improved profit margins. The Philadelphia Federal Reserve Bank’s survey also noted better sales and shipments growth moving forward, providing some encouragement for the future.
Other measures of the national economy were mixed. The Conference Board’s Leading Economic Index rebounded in March, boosted by stronger new orders in the above-mentioned ISM report, among other factors. In contrast, reduced industrial production served as a drag on the Chicago Federal Reserve Bank’s National Activity Index, which decreased from -0.38 in February to -0.44 in March. It fell for the second straight month, continuing to suggest that the U.S. economy is growing below its historical trend.
We will get our first look at first-quarter real GDP growth on Thursday, with consensus estimates of around 1% or lower. Still, the outlook is for roughly 2% growth for 2016 as a whole, which should signal some progress in economic output moving forward. We hope this includes better manufacturing data and will get a fresh look at how the sector is doing with surveys this week from the Kansas City and Richmond Federal Reserve Banks and from preliminary figures on durable goods orders and shipments for March.
Beyond those numbers, the largest headline will come from the Federal Open Market Committee (FOMC) meeting, which concludes on Wednesday. The Federal Reserve is not likely to make any changes to its monetary policies at that meeting, but analysts will be watching closely for signs on the pace of future normalization. I would expect for the FOMC to raise short-term rates again by 25 basis points at its June meeting. Other highlights week include the latest data on consumer confidence, employment costs, international trade in goods, new home sales and personal income and spending.
Report provided by Chad Moutray, PhD, NAM Chief Economist.