Where Is the Economy Headed?
The economic news last week took a distressing turn. Aside from the gyrations in the stock market, which naturally have many people on edge, mortgage rates made their largest jump in nearly five years. And they’re expected to rise even further before the end of the year.
NKBA’s Economic Indicators Dashboard also reflects this situation, with only four of the eight indicators in solid green.
Similarly, consumers have become less confident in the U.S. economy. The University of Michigan’s index of consumer sentiment, displayed in the chart below, fell in early October after having recovered most of the losses of the previous five months.
Trade Deficit Worsens — Again
The U.S. trade deficit with other nations widened in August by 6.4% to post a near all-time record of $53.2 billion for the month. Despite the administration’s efforts to improve the American trade position, the deficit has worsened for the last three months. Even though a tentative agreement has been reached among Canada, the U.S. and Mexico, in a replacement of the NAFTA deal, the trade situation with China is still unresolved and continues to deteriorate further.
Year-to-date for the first eight months of the year, the trade deficit is 8.6% above the same period last year. Curiously, year-to-date exports as well as imports have increased by the same percentage: each is up 8.4% compared to 2017. But the deficit has worsened simply because total imports are 23% higher than exports. That is, even with the same percentage increase, the higher level of imports results in a greater gap.
The negative U.S. trade position is the result of an unfavorable $76.7 billion balance in goods trade comparted to a favorable balance of $23.5 billion in services.
In fact, even though imports and exports of goods continue to grow, they are not growing at similar rates. This is shown in the chart below, where imports grew more than 11 percent over the last year, while exports have risen at a more modest pace of 8 percent.
The picture for services illustrates a dramatic contrast. Exports of U.S. services have risen faster than imports, by over two percentage points over the last 12 months. However, the growth pace is lower — in fact, it’s less than half that of goods.
Mortgage Rates Up Sharply
Last week, the 30-year mortgage rate spiked by 19 basis points — nearly a fifth of one percentage point — to 4.90%. There hasn’t been an increase of such magnitude in five years, since November 2013, when rates were at 4.35%.
Naturally, such an increase and the higher rate will hamper the construction markets. In particular, this higher rate will make it more difficult, if not impossible, for many households to become homeowners. New housing construction as well as home sales will be impacted by the higher rates.
Two weeks ago, the Economic Indicators revealed that new housing construction has declined over the last four months, and home sales have been experiencing declines since virtually the beginning of the year. Mortgage rates’ recent rise, which is not expected to abate, will only exacerbate this trend.
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 $500,000 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.
We hope 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.
