Even as energy continues to be a drag, a surprisingly strong housing market suggests that the U.S. economy may be picking up steam, says Morningstar's Bob Johnson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The market has obviously been focused on issues in China over the last few days, creating a lot of volatility in the equity markets. But how is the strength of the U.S. economy holding up? I'm here with Bob Johnson--he is our director of economic analysis--to look at some recent data on the state of housing and manufacturing in the U.S.
Bob, thanks for joining me today.
Bob Johnson: Great to be here today.
Glaser: Let's start with China. Obviously, that's the big worry now. But are there any signs that this weakness in China that's very much in focus now is having any impact on the United States or will have a major impact on at least the U.S. economy?
Johnson: It really hasn't, but you never want to say never. It can slowly seep into some of the data, especially if stock performance moves in a big way and changes high-income people's spending habits. But in general, the U.S. economy has done well. We've talked for a couple of weeks about retail sales being stronger than everybody had thought and being a very healthy number. That's a key part of the U.S. economy. Now, over the last couple of weeks, we've gotten a lot of data on housing that suggests that things aren't nearly as weak in the U.S. as people think. In fact, we're kind of picking up a little steam.
Glaser: You've talked about housing as being a driver of the growth before. Why is it so important, given it's a relatively modest part of GDP?
Johnson: To be really clear about it--it's right now running between 3% and 3.5% of GDP. That includes new-home construction, remodeling, and it includes brokerage commissions. When you sell a home, it's part of the package. So, those three categories are between 3% and 3.5%. It has typically been as much as 5%, and as high as 6% or 7%. So, there's plenty of room to go there yet, and there is some indication that it may be starting to move in that direction with the recent data reports that we've gotten.
Also, there are knock-on effects from the housing market--not just what you get from building the homes. It generates mortgage activity. It creates income for mortgage brokers. It creates income for real estate brokers. It creates furniture sales down the road, landscaping money, and remodeling money. We've seen Home Depot (HD) and Lowe's (LOW) do much better than expected because people are more interested in spending money on their homes again. So, yes, it's not a huge percentage of the U.S. economy at 3%. On the other hand, it has a lot of knock-on effects that people don't consider.
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Glaser Let's look at that data. What did new-home sales look like?
Johnson: New-home sales was the data that came out this week, and those have been on a tear most of the year. As readers know, I've been somewhat skeptical about that metric over time because it throws in homes that are on the drawing board and homes that are half-finished as well as homes that have been sitting on the lot for a couple of years. Actually, I've come around to liking the report because it's the only one that shows the number of homes that are purchased that aren't even started yet. So, it gives us a little bit of a flavor of where starts may go, and certainly the new-home-sales report has been incredibly strong.
In the last six months, we've averaged, on a three-month moving average, year-over-year basis, more than 20% growth. That's six months running that we've had that kind of total. We've also had, in the past five out of six months, more than 500,000 unit sales. We didn't hit that number for the first time this recovery until January. In fact, up through all of 2013, we didn't even get out of the 300,000s. Last year, we spent most of the year in the 400,000s. And now this year, we're up in the 500,000s. So, new-home sales have really done quite well. And again, because you can borrow to buy a home, the effect on the economy gets amplified. It's something that can grow faster than incomes are growing.
Glaser: And what about existing homes?
Johnson: Sometimes, you get strong new-home sales, and it means that existing sales don't do so well or vice versa. This time, we've got both doing well, which is that double-barrel. It really shows the greater interest and some of the demographic effects. Some of the pent-up-demand effects in the housing market are really starting to come through right now. So, we've really seen existing-home sales at a recovery high--in that 5.5 million to 5.6 million units. And last week when that data came out, it was really a nice surprise because some of the pending-home sales suggested that it maybe had creeped down just a little. It was unusually strong and they thought it would maybe go down 0.1%, but it actually went the other way. I think people trying to rush before school-time to close on homes may have had something to do with that; but it certainly was nice to see that strong as well. So, good news there.
Glaser: And then the starts data shows that this could continue?
Johnson: The starts data also continues to move along. That's a little bit more of a concurrent indicator. And again, we saw some really nice numbers last week on starts--also near recovery highs and way out of the league of where they had been just a year or two ago. We're certainly nowhere near the past peak of 2.2 million. But now we're rather consistently in the [1.2 million] or maybe even a little bit more in a given month in terms of sales. That's way off the 500,000 bottom.
So, again, we're making some progress, and we saw some particular strength in the single-family-home market in this latest report, which had been kind of slow. Most of the interest had been in apartment buildings, and that had been the real driver of growth. Single families had been doing OK, but we had a stellar month in single-family sales. They've been in the 600,000 type of range, and they got pretty close to 800,000 in the latest report. That was a big one-month jump. Maybe some of that gets revised away over time, but it still shows that finally we're showing some of the more typical patterns that we're used to seeing in housing creeping in--which makes me feel really good about the industry. That could really help us offset any weakness we might seek elsewhere in the economy.
Glaser: Speaking of weakness elsewhere, that's a good lead-in to manufacturing, which has been weak recently. Are you still seeing signs of stabilization?
Johnson: We have. This week, we got the durable-goods report. There, what we saw was another nice month-to-month increase. Depending on which way you measure--with or without airplanes and with or without capital goods--we've been up two or three months in a row sequentially. We're still down year over year--not massively like we'd see in a recession, but we're off 2% or 3% from a year ago in a lot of durable-goods categories. The reason for that is a weaker energy industry. Energy is kind of the secret sauce. The direct impact of energy looks kind of tiny. A few months ago, companies were talking about how it's a small percentage of their numbers. Now, as the quarterly earnings have come in and they're a little disappointing, companies are saying, "Well, it's not a very big direct amount, but the little suppliers and the little guys that we sell to, I guess they were selling to energy guys, too." So, the impact of energy was a little bigger than some of the companies thought.
So, we're still down year over year. I think we've got a couple of bad months left on those year-over-year comparisons; but the month-to-month numbers, at least, seem to indicate we've stabilized a little bit--especially in non-energy. We may have one more energy bout with the recent price declines, but I think some of the other sectors may do a little better as the housing market does better, which requires a lot of manufactured goods as well. So, that'll be that offset that we talked about. We're very much hoping that improvement in the housing industry is going to offset some of the weakness in manufacturing. We spent a lot of time on the backward-looking stuff; but looking ahead at the housing market, certainly the demographics are right, in terms of the number of people turning 31. The first-time homebuyer is certainly positive. And certainly, there's been an unexpected lift because people have been fearful that interest rates would move considerably higher. Also, with all the hubbub about China and all the uncertainly around the rest of the world, the 10-year Treasury bill is way back down again, and that's how they usually price a mortgage. So, mortgage rates are back down again, giving people another shot.
Glaser: It sounds like there's plenty of turmoil in financial markets; but at least as far as the data shows, the economy is still steady as she goes.
Johnson: The U.S. economy is still steady as she goes.
Glaser: Bob, I certainly appreciate your insights today.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
