March Macro Update: Housing Sales and Starts Rebound

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Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

One concern in recent months has been housing, but revised data shows housing starts breaking above the flattening level that has existed over the past two years. A resumption in growth may be beginning.

That leaves employment growth has the main watch out: employment growth is decelerating, from over 2% last year to 1.6% now. It's not alarming but it is noteworthy that expansions weaken before they end, and slowing employment growth is a sign of some weakening that bears monitoring.

Overall, the main positives from the recent data are in employment, consumption growth and housing:

  • Monthly employment gains have averaged 196,000 during the past year, with annual growth of 1.6% yoy.  Full-time employment is leading.
  • Recent compensation growth is the highest in nearly 8 years: 2.8% yoy in February. 
  • Most measures of demand show 3-4% nominal growth. Real personal consumption growth in January was 2.8%.  Real retail sales grew 2.9% yoy in January.
  • Housing sales grew 6% yoy in January. Starts grew 10% over the past year.
  • The core inflation rate is ticking higher but remains near the Fed's 2% target.

The main negatives are concentrated in the manufacturing sector (which accounts for less than 10% of employment):

  • Core durable goods growth rose 2.2% yoy in January. It was weak during the winter of 2015 and is slowly rebounding in recent months.
  • Industrial production has also been weak; it's flat yoy due to weakness in mining (oil and coal). The manufacturing component grew 0.5% yoy in January.

Prior macro posts are here.

Our key message over the past 4 years has been that (a) growth is positive but slow, in the range of ~3-4% (nominal), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely.

Read The Similarities (and Key Differences) Between 2017 and 2013 So Far

Modest growth should not be a surprise. This is the typical pattern in the years following a financial crisis like the one experienced in 2008-09.

This is germane to equity markets in that macro growth drives corporate revenue, profit expansion and valuation levels. The saying that "the stock market is not the economy" is true on a day to day or even month to month basis, but over time these two move together. When they diverge, it is normally a function of emotion, whether measured in valuation premiums/discounts or sentiment extremes.

spx vs. retail

A valuable post on using macro data to improve trend following investment strategies can be found here.

Let's review each of these points in turn. We'll focus on four macro categories: labor market, inflation, end-demand and housing.

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