Economic Reports

Production

Production ended the year on a strong note but early readings from January are not as positive. The December industrial production report headline was strong at a 0.9% gain but a lot of that strength was in the mining (oil drilling) and utility sectors. Mining has actually led the way the last year as rig count has risen with drilling activity. I’d love to see our economy less dependent on the price of oil but that is what we’ve become over the decade or so. Utility output was obviously up due to some severe cold weather up north so that isn’t indicative of anything except the desire to stay warm. The manufacturing part of the IP report was much more subdued and, like a lot of reports recently, less than expected. 

The IP report was less than inspiring but durable goods orders were quite a bit more positive. The headline was skewed form Boeing’s orders at the Dubai Air Show but are up a very healthy 11.5% year over year which is the best of this cycle (excepting the outlier of 7/14) and solidly above the peak of the last cycle. Ex-transportation was also strong, up 8.2% year over year for the best reading of this cycle if still slightly less than the last peak in 2008. The laggard in the report was core capital goods orders, a big miss at -0.3% versus expectations of +0.5%. Year over year looks better at +8.4% but the reading is still less than the 2000 peak so there is still a long way to go for a healthy investment outlook.

The regional Fed surveys released over the last two weeks (Empire State, Philly, Richmond and KC) were less than expected with the exception of KC which is influenced more by shale activity. 

Overall, production ended the year on a fairly strong note, especially durables. But the regional Fed surveys are mostly pulling back from their best levels and frankly, the very positive sentiment of these reports over the last year never showed up in the actual economic reports. I think the most disturbing aspect of these reports is that they are being driven by oil drilling activity. If oil prices fall – and there are technical reasons to believe that may be in the offing – economic growth is going to take a hit. President Trump would be well advised to pay more attention to oil prices and less to stocks.

Housing

The reports on the housing sector were uniformly disappointing. Housing starts were less than expected and down 8.2% from November to December, some of which might be fairly blamed on cold weather. For a change it was single family starts leading the drop, down 11.8% versus a 1.4% gain for multi-family. Permits were stronger but as I’ve noted before, permits don’t mean a lot if sales start falling. They permitbuilding not mandate it. New home sales are still in an uptrend even with December’s disappointing numbers; November was revised lower while December dropped another 9.3% from that reduced level. But, as I said, sales are in an uptrend and at 625K are gaining on single family completions which are running at about an 800K rate. Inventory is now at 5.7 months. The increased activity is reflected in the Housing Market Index, a builder’s sentiment index which was less than expected at 72 but still quite strong.

Existing home sales don’t have as much impact on the economy as new building but are still important as economic indicators. What they seem to be saying recently is that people aren’t much interested in moving. Sales were down 3.6% month to month and are up only 1.1% year over year. That may be because prices are rising a lot faster than incomes but even prices rising at a 6% annual rate aren’t enough to lure in new sellers. Inventory is at just 3.2 months, a 19 year low.