Weak Housing Data, Declining Manufacturing Activity, International Concerns

This morning, housing starts dropped 9.6% in July, pulling the annual pace down from 1.6M to 1.45M, the lowest since February 2021. Starts were expected to decline 2.1% in July, according to the median forecast on?Bloomberg.?Year-over-year, housing starts fell 8.1% in July, the third consecutive month of decline.

In the details, single family starts dropped 10.1% and fell 18.5% over the past 12 months. Multi-family permits, meanwhile, declined 8.6% in July, but rose 18.0% over the past 12 months.

On a regional basis, starts declined in three of the four regions of the country last month: Starts dropped 33.8% in the Midwest, declined 18.7% in the South and fell 2.7% in the West. On the other hand, starts jumped 65.5% in the Northeast.

Building permits, meanwhile, fell 1.3% in July, pulling the annual pace down from 1.7M to 1.67M, a ten-month low. Building permits were expected to decline 3.3%, according to?Bloomberg. Single family permits dropped 4.3%, while multi-family permits rose 2.8%. Year-over-year, building permits climbed 1.2% in July, following a 2.1% annual increase in June.

Bottom Line:?Rising costs, declining real income growth, and a limited access to labor, particularly skilled labor, are undermining growth in the U.S. housing market. While demand is still positive and supply still limited keeping prices elevated, momentum in activity is clearly slowing, and likely to slow further as the broader economy moves into – or further into – recession.?

In international news, at least some international policy makers are warning of the U.S. and China potentially?“sleepwalking”?into conflict?if the two superpowers do not actively engage with each other to deescalate tensions over Taiwan. Recall, on August 2, House Speaker Nancy Pelosi made a visit to Taiwan, the highest-ranking American politician to visit the island in 25 years. While the White House has been clear the speaker’s trip does not signal a change in its 'One China' policy, Chinese authorities warned of ‘consequences’ including a potential militarily conflict including the U.S. and our allies, which coupled with the negative ramifications of military action would only exacerbate market turmoil, not to mention complicate already stressed international supply chains and trade relationships.?

The latest data from China showed ongoing complications – and weakness – as a result of stronger Covid policy restrictions and declining momentum in key sectors such as housing. According to reports, Chinese industrial production rose 3.8% in July, down from a 3.9% annual pace reported in June and even further below a 4.6% expectation. Chinese retail sales, meanwhile, rose 2.7% in July from a year earlier following a 3.1% rise the month prior, and falling well below a 5% forecast. Finally, China's jobless rate for primary age workers rose near 20%, the highest rate on record, while new home prices fell 0.9% over the last 12 months.

Following a slew of disappointing data, unlike much of the rest of the world engaged in policy tightening, the People's Bank of China cut its one-year lending facility rate from 2.85% to 2.75% and cut the seven-day lending rate from 2.1% to 2% on Monday. Additionally, in an effort to further stimulate growth, the People’s Bank of China injected more cash – 2 billion yuan – into its economy.

Markets appear to be somewhat mixed this morning as investors focus on a myriad of global and domestic factors. U.S. equities are trading lower with the Dow down 0.12% at 33,833 as of 8:52 a.m. ET.

The Shanghai Composite Index, however, rose 0.06% to close at 3,277.88.

U.S. Treasury yields are trading higher with the 10-year up 5bps at 2.84% as of 8:55 a.m. ET.

Yesterday, the Empire Manufacturing Index dropped from 11.1 to -31.3 in August, the most severe drop since the 2020 recession. According to the median estimate on?Bloomberg, the index was expected to decline to 5.0.

In the details of the report, new orders fell from 6.2 to -29.6, and shipments tumbled from 25.3 to -24.1, both the weakest readings since May 2020. Also, prices paid declined from 64.3 to 55.5, and the number of employees dropped to 7.4 from 18.0 in July. On the other hand, the six-month outlook index improved from -6.2 to 2.1 in August.

Also yesterday, the NAHB Housing Market Index dropped six points to a reading of 49 in August, more than the expected decline to 54 and the lowest reading since May 2020.

Also this morning, industrial production rose 0.6% in July, double the 0.3% gain expected and first monthly increase in three months. Capacity utilization, meanwhile, rose from 79.9% to 80.3% in July, also a three-month high.

Arguably, the key report for the week, however, comes on Wednesday with the latest look at the consumer. July retail sales are expected to rise 0.1% following a 1.0% increase the month prior.?

Of course, while the consumer is still spending, inflation is complicating the picture. After adjusting for inflation, the downward trend in real retail expenditures has been well established since April 2021, falling into negative territory as of March this year.??Going forward, should real income growth continue to trend lower, without an offset with other sources of wealth or debt accumulation, spending is likely to slow further.

Also tomorrow, the July 27 FOMC meeting minutes are scheduled to be released. In July, Fed Chairman Jerome Powell made a material deviation from an earlier characterization of strength regarding the U.S. economy, instead highlighting the domestic economy’s loss of momentum, noting spending and production specifically have?"softened.”?This more sour sentiment buoyed expectations for a more benign policy pathway going forward. Thus, the minutes are likely to reveal any further indication of concern among Committee members regarding the strength of the recovery – or not – and the impact emerging weakness could have on future policy decisions.?

Later this week, on Thursday, initial jobless claims are expected to rise slightly from 262k to 264k, the third consecutive weekly increase, and existing home sales are expected to drop 4.9% in July following a 5.4% decline in June.

-Lindsey Piegza, Ph.D., Chief Economist