ANALYSIS/OPINION:
As I predicted last week, this week was frenetic in terms of companies reporting their quarterly earnings, economic data for both the United States and abroad and, of course, the second presidential debate. While there were some positives, the overall picture continues to be mixed, with the manufacturing economy slowing and concerns rising over the technology economy following weak results from Intel Corp., Advanced Micro Devices and Google Inc., to name a few. The domestic housing market continued to improve in September, but will the stronger-than-expected housing market continue?
On the manufacturing front, data from this week’s Empire State Manufacturing Survey show that a greater portion of respondents viewed general business conditions to be lower in October than in September. Digging deeper into the survey’s findings, we see that new orders, the number of employees and average employee workweek were all lower in October than September. In fact, all three of those tracked metrics were negative in October.
Viewing the forward-looking aspect of the Empire Sate Manufacturing Survey, which gauges expectations over the next six months, capital spending levels and the average employee workweek were sharply lower in October than September. By comparison, the prices-paid component jumped meaningfully month over month. Translating, this means respondents expect slower growth and inflation ahead.
A falling six-month outlook also was evident in the Philadelphia Fed’s Business Outlook for October. More specifically, the six-month outlook reading in October was half what it was in September. Other aspects of the Philly Fed report — a contraction in new orders and continued weakness in unfilled orders — all point to continued slowing. Alongside data that point toward slower growth ahead, it’s not surprising to see the employment components in the Philly Fed report weaken further in October, and that is exactly what happened. Getting more granular, we learned the number-of-employees index fell from -7.3 in September to -10.7 in October, while the average workweek slipped from -7.3 to -7.6.
Also this week, we received the September Capacity Utilization readings from the Federal Reserve. I like following this figure because it gives us a feel for how much slack is in the overall economy as well as in the manufacturing economy. Since June, capacity utilization in the manufacturing economy has been on the wane, and that confirms the view that manufacturing activity is slowing. Total industry capacity utilization, while slightly higher than the August reading, remains well below levels from just several months ago and well below levels associated with a tight labor force and rising wages.
On a positive note, the September bounce in total industry capacity utilization was likely because of the continued rebound in the domestic housing market. As we learned on Wednesday, September housing starts were far stronger than expected, particularly in what the National Association of Home Builders defines as the South. The headline showed 872,000 housing starts, up 15 percent compared with August and 35 percent compared with September 2011. Pretty robust numbers, but digging deeper, we find two things. First, as I alluded to above, the strength is regional, with the South and West up more than the overall report. By comparison, September housing starts in the Northeast fell month over month.
The second realization was that the real strength in the September housing-starts data came from multifamily housing or apartments. With apartment vacancies below 5 percent and, according to some reports, near 4.7 percent, that market is tight, and that helps explain why apartment rents have soared over the past several quarters. Yet it is incorrect to say the single-family housing market was not improving, particularly because the September figure was the strongest reading in at least the past 12 months.
The big question is: How sustainable is the rebound in the housing market? With mortgage rates at historically low levels, consumer credit shored up and the Federal Reserve buying $40 billion in mortgage-backed securities per month, the housing market is out of the woods. Overall, continued strength in the housing market will hinge on the additional job growth in the weeks and months ahead. Until after the presidential election and the fiscal cliff is dealt with, it’s hard to see robust job creation compared to what has been reported in recent months. Here’s a hint: Robust job creation means people coming into the labor force, not leaving.
• Chris Versace is the editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com or follow him on twitter @chrisjversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.
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