International Week In Review: U.S. Housing Market Starting To Cause Concern Edition

by: Hale Stewart

The current general economic consensus is the developed world will take the reins of growth and hopefully pull the developing world along for the ride. But while the U.S. and Australia have been growing for the last few years, the EU is still trying to emerge from its malaise and Japan is still hoping the long-term benefits of Abenomics pays off. Recently reversing course is the U.K., which is now printing very solid numbers. When looking at weekly numbers, we're looking for continued news of a U.S., U.K. and Australian expansion and further evidence of EU and Japanese improvement.

Let's begin this week's analysis by looking at the U.S. On the positive side, the index of leading indicators increased .8%. However, there were two pieces of negative news from the housing market: existing home sales decreased .2%, which can be attributed to statistical month to month noise. However, the overall trend of existing home sales is now down, as shown in this graph:

Sales started to decline in mid-2013 and have since continually moved lower. However, the really bad news came from the new home sales market, which decreased 14.5% M/M. Here is a chart from Calculated Risk placing that number in context:

New home sales have been fluctuating at low historical levels for the last few years.

The primary problem caused by this lackluster housing information is housing market growth is a precursor to most economic expansions largely because of the ancillary activity a rising home market creates; new homes have to be built, which increases employment. Existing homes are almost always remodeled in some way, which increases durable goods orders. And no one buys a home if they don't have enough confidence they can make the monthly payments. Some of this recent decline is due to rising interest rates. However, there are other issues at play here as well, such as the lack of strong wage growth caused by weak employment numbers. In short, the U.S. housing market rebound is moving more to "on pause."

Canada released two pieces of news. First, retail sales increased .5% M/M. However, this data series has been moving more or less sideways for the last 6 months:

Second, the government reported a budget surplus in the latest month and has stated it is on target to balance the budget by 2015.

Japan's program of stoking inflation still appears to be working. National CPI increased 1.6% Y/Y and the CSPI index rose .7% Y/Y. But the really big news this week was the trade balance number, which printed a deficit of 1.71 trillion yen. Here is a chart of Japan's current account to GDP over the last 14 years, which shows its deterioration:

Some of the recent decline is due to Japan shutting down its nuclear power plants, forcing the country to import more oil. And with a weaker yen, oil imports are more expensive. However, Japan is no longer the export powerhouse it once was, as most of their larger businesses have moved production offshore. This is muting the intended impact of the yen devaluation policy.

The EU received news from Market this week, which reported an overall EU composite PMI of 54 -- a 35 month high. As this chart of Markit's numbers shows, these numbers are rising:

Germany's manufacturing PMI was 54.2 while its service number was 55. France's numbers were 50.9 for manufacturing and 50.3 for services.

Earlier this week, I explained how the U.K. recovery was gaining momentum. Since that article, the U.K. also reported retail sales numbers, which increased .1% M/M but 4.2% Y/Y.

Finally, the Australian leading index increased .3%/ M/M. But the most important number released was the quarterly CPI number which increased 2.9% Y/Y. The weighted medium increased 2.7% while the trimmed mean was up 2.6%. This number came in lower than expectations, and eased concern that the RBA would have to raise rates to tamp down inflationary pressures.

Hope for an EU rebound continues largely on the back of the strong Markit numbers. And the U.K. is quickly becoming the success story of 1H14. But the housing news from the U.S. is beginning to raise concerns. While this rebound was previously strong, it is now moving more and more sideways as consumers appear to be having second thoughts about the purchasing. In my yearly forecast, I argued for a weak housing market in the first half caused by rising rates followed by a second half rebound caused by consumers realizing that 4.5% is still a really good rate for a home loan. We'll have to wait and see if that holds out to be true.

Hale Stewart,