A pair of economic reports on Monday serve as the latest reminder that the U.S. economy’s recovery from the coronavirus pandemic is uneven and will remain rocky.
The National Association of Homebuilders said its housing market index climbed to 78 in August, up from 72 in July and matching a December 1998 record. Economists surveyed by FactSet expected a smaller improvement to 74 in the gauge of builder sentiment.
Hopes for a broad V-shaped economic recovery have all but disappeared since renewed rises in Covid-19 infection rates interrupted reopening plans and slowed rehiring. But the housing market has remained the brightest spot in the U.S. economy as historically low interest rates encourage buyers and as the pandemic increases demand for homes outside of major city centers. Buyer traffic is at all-time highs, the NAHB says, driving builder confidence and construction forecasts higher.
“Single-family construction is benefiting from low interest rates and a noticeable suburban shift in housing demand to suburbs, exurbs and rural markets as renters and buyers seek out more affordable, lower-density markets,” says NAHB Chief Economist Robert Dietz.
Builder stocks, which have been on a tear in recent months, got another lift Monday. The
SPDR S&P Homebuilders
exchange-traded fund (ticker: XHB) rose 1%, bringing gains over the past three months to 16%.
Worth watching, though, is the price of lumber. “The V-shaped recovery for housing has produced a staggering increase for lumber prices, which have more than doubled since mid-April,” the NAHB said Monday. That sets up a potential threat to continued gains.
Meanwhile, the latest manufacturing reading sends a conflicting message. The New York Federal Reserve Bank’s Empire State Manufacturing index tumbled in August, to 3.7 from 17.2 in July and far short of the 17.3 economists predicted.
The decline in the Empire index came as the forward-looking new-orders gauge fell to minus 1.7 in August from 13.9 in July, and the index for expectations of business conditions six months out eased to 34.3 in August from 38.4 in July.
Josh Shapiro, chief U.S. economist at MFR, says it’s important to remember that manufacturing indexes like this one are constructed from diffusion indexes. Naturally, after an economy has been shut down and then reopened, huge numbers of respondents will answer that business conditions, orders and production are better than they were when the economy was fully or partly shut down. What the answers don’t reveal is how much better—nor does it reflect the condition of business activity relative to what it was before the crisis hit.
What the Empire report does signal, says Oren Klachkin of Oxford Economics, is that the manufacturing recovery will settle into a slower path after an immediate rebound—especially as Covid-19 cases rise and reopenings remain tenuous. Soft demand, supply-chain disruptions, and high levels of uncertainty are set to persistently constrain the manufacturing rebound until a health solution for the virus is found, Klachkin says, adding that his baseline forecast includes manufacturing not returning to pre-virus levels of activity until 2022.
Industrial stocks were mixed Monday morning, with the
Industrial Select Sector SPDR
ETF (XLI) flat as the broader S&P 500 rose 0.3%.
Taken together, Monday’s housing and manufacturing readings remind investors that the U.S. economy is still at the mercy of the pandemic, with the recovery ongoing but spotty.
Write to Lisa Beilfuss at [email protected]