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Economic Watch: Manufacturing Cools, New Homes Soar

September 24, 2015

By Evan Lockridge

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Economic watchers got a mixed bag of reports on Thursday. One showed an easing in part of the manufacturing sector, including a measure of business investment. However, two others were upbeat regarding housing and the upcoming holiday sales season.

The 2% decline in durable goods new orders last month follows a downwardly revised 1.9% increase in July, previously reported as a 2.2% gain, according to the U.S. Commerce Department. That followed a 4.1% jump in June. Year-over-year, headline orders are down 2.3%, the seventh consecutive month of negative growth. 


Excluding transportation, new orders were virtually unchanged from the month before. However, a closely watched indicator inside the report fell.

Orders of nondefense capital goods excluding aircraft edged down 0.2%, following solid gains of 2.1% and 1.5% in July and June, respectively, indicating future business investment may ease. Year-over-year, business investment is down 5.2%. However, with a short-lived sizable rebound in June and July, the three-month annualized gain is currently tracking a whopping 8.5%.

Shipments of durable goods posted a drop of less than a tenth of a percent, following increases the previous two months. Shipments of nondefense capital goods excluding aircraft, also an indicator of business investment, edged down 0.2% following gains in July and June.

Durable orders remain under pressure with underlying business investment cooling, according to Stifel Fixed Income Chief Economist Lindsey Piegza.

“After a brief period of relief, businesses have once again begun to back away from additional spending, a trend that is likely to be further exacerbated in the increasingly uncertain environment of the second half of the year,” she said. “Furthermore, those orders that are being filled are likely to be done so out of existing stockpiles with a sizable inventory overhang still lingering from last year’s ramp up in production."

Going forward, she said, without certainty and further improvement in consumer spending, business investment is likely to remain weak.

However, an analyst report from RBC Economics is more bullish when it comes to business investment. It noted that orders of nondefense capital goods excluding aircraft for July and August, when annualized, are 11.3% above their second quarter level. The corresponding shipments measure is also up, though by a lesser 2.3% annualized level, relative to the second quarter.

“This suggests a solid add to third quarter gross domestic product growth from capital spending after reduced investment in oil and gas industries weighed on nonresidential investment growth earlier in the year,” said RBC Economist John Nye. “The solid trend that has recently emerged in durable goods orders following a soft patch earlier this year points to investment spending continuing to pick up and contribute to growth later in the year, which we expect will help support GDP gains of around 3% in the second half of 2015.”

New Home Sales Best Since February 2008

A separate report from the U.S. Commerce Department showed sales of newly built, single-family homes rose 5.7% in August to an adjusted annual rate of 552,000, following an upwardly revised 12% jump in July.

This pace, a post Great Recession high, is 21.6% better than the level from a year ago

"Today's report indicates the release of pent-up housing demand as the overall economy strengthens, consumer confidence grows and mortgage interest rates remain low," said National Association of Homebuilders Chief Economist David Crowe. "The housing market should continue to move forward at a modest but more persistent pace throughout the rest of 2015."

Regionally, the Northeast, South and West posted respective gains of 24.1%, 7.4% and 5.4%. The Midwest registered a 9.1% decline.

Due to the reported strength in new home sales (which make up just over 10% of the marke), total home sales (new and existing) in the U.S. in the third quarter are tracking 15.4% annually above the second quarter average. The stamina of employment gains set against the sustained backdrop of low borrowing rates is no doubt putting some wind in the sails of housing demand, according to Laura Cooper, economist with RBC Economics.

“A pronounced uptick in the latest residential mortgage purchase applications, following a modest pullback in earlier weeks, along with rising buyer traffic and continued easing in lending conditions, provides scope for the demand-side of the housing equation to remain firm,” she said. “Supply constraints are acting as an impediment to the pace of housing activity; however, it is encouraging that new home construction and homebuilder confidence are trending at multi-year highs, suggesting that this source of restraint could ease in the coming quarters, thereby helping to offset anticipated borrowing rate increases and make room for further advances in new home sales."

Expect Retail Holiday Sales to Increase

Finally, a third report is forecasting retailers should see a moderate increase in holiday sales in the stores and online this year, according to the annual retail holiday sales forecast from the financial advisors at Deloitte.

It expects holiday sales to climb to between $961 billion and $965 billion, representing a 3.5% to 4% increase in November through January holiday sales (excluding motor vehicles and gasoline), over last year's shopping season. This growth rate is below last year's 5.2% gain.

Additionally, Deloitte forecasts an 8.5% to 9% increase in non-store sales in the online and mail order channels during the 2015 holiday season.

"An improving labor market, increasing home values and relief at the pump gave more Americans reason to believe the economic recovery was gaining real traction this year," said Daniel Bachman, Deloitte's senior U.S. economist. "Those recurring improvements helped buoy sentiment and spending over the past several months. Housing and employment tend to create a more meaningful wealth effect than that of the financial markets, so the recent stock market fluctuations and instability overseas should not have a marked impact on shoppers' holiday spending intentions.

"However, while retail holiday sales are expected to rise, the increase may be smaller than last year due to the lingering effects of flat personal income growth in the first quarter."

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