Sales of Building Materials Are Strong
In a sign of good health for the construction and remodeling industries, sales of building materials rose to $329 billion In November. This is a 1.2% gain for the month, and it reverses the modest decline recorded in November.
For the last 12 months, sales have risen 10.7% — more than double the increase seen in the same period in 2016. Last year, retail sales in this category rose by 4.7%.
In fact, as reflected in the chart above, retail sales of building materials have been extremely robust for the last three months, following a lull between February and August.
Strong sales reflect partly the more robust remodeling market of the last few months, as illustrated in the chart below. Homeowners are currently spending at an annual rate of nearly $190 billion on remodeling their homes. This is significantly higher than the $163 billion spent in 2016.
The robust remodeling market also partly reflects the fact that many households are finding it difficult to find a new home in which to move, thus preferring to remodel their existing residence.
Mortgage Rates Remain Stable While Federal Funds Rate Edges Up
Mortgage rates remained virtually unchanged last week. The Fed has maintained an “easy money” stance for quite a few years now, and it will continue to do so for the foreseeable future.
Last week, the Federal Reserve Bank raised the federal funds rate to 1.5%. (The federal funds rate is the rate that banks charge one another for overnight loans. The prime lending rate, which is closely tied to the federal funds rate, is the interest rate that banks charge their best consumer customers for loans, such as credit cards and mortgages. The prime usually runs a few points above the federal funds rate.)
The Fed has recently maintained the federal funds rate at around 1.25%. The chart below displays that rate since the beginning of the century, and shows the long period of nearly-zero rates the Fed followed after the 2007-2009 recession.
It should be noted that the Fed does not dictate the level at which the Fed Funds rate will sit. Rather, it influences the rate through its activities in the purchase and sale of Treasury bills and other market securities. In the present situation, it will sell securities, increasing supply so that their price will drop. But the price of securities is the inverse of the interest rate they yield — thus, when their price drops, this simply means that the yield, or effective interest rate they pay, rises.
The full effect of this policy should be evident this week, when the federal funds rate rises to approximately 1.5%.
Making Progress on Tax Reform
The GOP’s sweeping tax reform bill is still moving through Congress, but changing the Federal tax system is being sought for two basic reasons. The first is that the system is so complex and unwieldy that it’s very difficult to comprehend. The second is that the current structure has consequences impacting national economic growth that the current administration wants to address. The most evident is the rate of taxes paid by corporations that resulted in many businesses preferring to “park” their foreign earnings abroad. Although a precise figure is hard to obtain, it is estimated to be more than $2.5 trillion. Proponents of the tax bill — which represents the largest one-time reduction in the corporate tax rate in U.S. history, from 35 percent to 21 percent — speculate that the proposed reforms will likely result in many companies bringing those funds home.
The big question is what corporations will do with those funds. Will they distribute them as dividends to shareholders? Will they use the funds to affect stock buy-backs? Will they directly invest in the business to attain higher productivity? It’s impossible to say at this point, since each company will act according to its own individual needs.
Manuel Gutierrez, Consulting Economist to NKBA
Explanation of NKBA’s Economic Indicators Dashboard
The dashboard displays the latest value of each economic indicator with a colored triangle that highlights visually the recent trend for each of the drivers. “Green” is a positive signal, indicating that the latest value is improving; “Yellow,” as it’s commonly understood, denotes caution because the variable may be changing direction; “Red” indicates that the variable in question is declining, both in its current value and in relation to the recent past.
Note that all the data, except for “mortgage rate” and “appliance-store sales” are seasonally adjusted and are represented at annual rates.
Remodeling Expenditures. This is the amount of money spent on home improvement projects during the month in question. It covers all work done for privately owned homes (excludes rentals, etc.). The data are in billions of dollars and are issued monthly by the U.S. Department of Commerce.
Single-Family Starts. This is the number of single-family houses for which construction was started in the given month. The data are in thousands of houses and are issued monthly by the U.S. Department of Commerce.
Existing-Home Sales. These data are issued monthly by the National Association of Realtors, and capture the number of existing homes that were sold in the previous month.
High-End Home Sales. This series are sales of new homes priced at $750,000 and higher. The data are released quarterly by the U.S. Department of Commerce, and are not seasonally adjusted. Thus, a valid comparison is made to the same quarter of prior year.
Mortgage Rate. We have chosen the rate on 30-year conventional loans that is issued by the Federal Home Loan Mortgage Corporation (known popularly as Freddie Mac.) Although there are a large number of mortgage instruments available to consumers, this one is still the most commonly used.
Employees in Residential Remodeling. This indicator denotes the number of individuals employed in construction firms that do mostly residential remodeling work.
Building-Materials Sales. These data, released monthly by the Department of Commerce, capture total sales of building materials, regardless of whether consumers or contractors purchased them. However, we should caution that the data also includes sales to projects other than residential houses.
Appliance-Store Sales. This driver captures the monthly sales of stores that sell mostly household appliances; the data are stated at an annual rate. We should not confuse this driver with total appliance sales, since they are sold by other types of stores such as home centers, for instance.
We hope that you find this dashboard useful as a general guide to the state of our industry. Please contact us if you would like to see further detail.
