Europe Does Better Than Expected

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser, joined today by Bob Johnson, he's our director of economic analysis. We're going to get a first look at some March data to see how the economy is going. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So we did get this early look with March, with this flash PMI data. What is it showing us? Is the global economy still moving along here at the end of the first quarter?

Johnson: Well, the data from Markit, which is collected from individual purchasing managers, came out for both the United States and for the European markets. And we're particularly pleased with the European numbers. They've been very worried about the European economy, and we had a couple of bad months, or down months I should say, in the PMI readings for Europe. And this month, not a big number, but we actually managed to tick back up again for the PMI for Europe on the manufacturing side of the house. So that was very good to see because that's a bigger part of their economy than it is here in the US.

And on top of the PMI numbers, also came out for the services side of the house and those did even better, as they have for some time, but also showed improvement that suggests that Europe is not maybe as bad off as maybe the ECB thought when they made some of their easing moves. But they're all very cautious. Even though these number look good, it's like, "Well, maybe weather helped a little bit or maybe... " They're all fearful, but it has to be next quarter that we kind of hit the wall. But it's looking like they're sequentially going to grow three tenths, as much as four tenths of a percent in the fourth quarter, and you annualize that you're at 1.2% to 1.6% annualized growth, which is how we calculate it in the US. And so not a horrible number. And given all the bad easing, you would think that the numbers would have been falling apart. This was another demonstration that it's more about fears of what might be coming than what's here today.

Glaser: And then what about the US numbers?

Johnson: The US number, again, we're not fans of the Markit version of it, it doesn't seem to have as long a track record and they interviewed different sets of folks, but it was also basically flat with the previous month, little change at all. So no new news there. We watched the ISM numbers a little bit more closely, and those numbers have kind of bottomed and have ticked up two months in a row here. Not a huge trend, but we expect continued improvement in some of the manufacturing numbers here in the US.

Glaser: Staying in the US, we got some housing data this week, and it seems to be the tale of two worlds between existings and new homes. Why is there divergence here? Why do existings look weak and new home sales look stronger?

Johnson: Yup. It's an inventory story, frankly. Right now on the existing homes, inventories are still very, very low compared to historical averages. We're in the low four months of supply, versus six, which is considered fully healthy and a normally functioning market. So clearly, there isn't really enough out there. And so that's kind of created a vicious circle here, where the prices are... There aren't many, so the prices go higher, so that means less people can afford them, and you kind of get this thing snowballing each other. But the existing home market is indeed weak, but more of it's inventory-related. Frankly, the evidence kind of suggests that if you put a home on the market, it can move relatively quickly, but there aren't that many homes going on the market. So it's that supply side of the issue that's hurting us more than lacking buyers.

Glaser: And the builders are putting more new homes out there?

Johnson: They absolutely are. And that was what we saw in the new homes report. The interesting thing to me was that the inventory there is at the highest level since 2009. Still not at scary levels, but certainly, it's good to see the higher inventory there. And then on top of that, the homes under construction by new-home builders is at the highest level since 2008. So there's more coming down the pipe here that's going to be available for sale. So that's good news on that market. And again, this is the year where we think new homes may grow as much as 10%; meanwhile, existing-home sales may only be up 3%. Even the realtors, who are normally thought to be maybe a little bit cheerleader-ish, are agreeing that there really won't be much growth in existing-home sales this year because of that lack of supply and the higher prices. 

That's not all bad news for the economy, by the way. Existing-home sales are nice, and there's certainly the transaction value and the commissions do aid GDP, and it's going to hurt this year if they're not growing. But on the other hand, they also generate furniture sales and add-on sales, so that's also going to hurt a little bit. But on a new-home sale, you've got all the workers building the new home, and it generates a whole flow of additional activity that you don't see from the existings. So we're pleased to see the new-home sales doing well. And again, just month to month, the numbers are down 7% for existing-home sales and up 2% for new-home sales. So that transition that we've been talking about for a long time to more interest in new-home sales is really there in this week's numbers. 

Again, I caution, don't read too much into any one month's numbers, though. There's been these paperwork requirements, in one month it seems like they think they understand what they are and the sales come booming back, and then it's like everybody figures out they need more paper and so that slows down the process, so the sales slump, and then we speed up again. Even if you look at January and February in existing home sales, well, we had one month close to 5 million even, namely this month, and we had another one that was about 5.5 million units, and you average them together and you're at 5.25 million units, which is probably a better representation of where we're at. So we've got this volatility, and that works on both sides of the house. You had to sign all this paperwork for a new or an existing home, so it's certainly a problem on both sides of the house.

Glaser: Bob, thanks for your update on the PMIs and on housing today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser; thanks for watching.