Weak Housing, Factory Data Hint at Modest 4Q Growth

Existing U.S. Home Sales Rise to Second-Highest Since 2007
Daniel Acker/Bloomberg via Getty Images
By Lucia Mutikani

Factory activity in the Midwest shrunk in November and contracts to buy previously owned U.S. homes rose marginally, the latest suggestions that economic growth will probably remain modest in the fourth quarter.

The raft of weak economic reports isn't likely to stop the Federal Reserve from hiking interest rates next month provided job growth doesn't slow significantly in November, economists say.

"It suggests that there is no obvious uplift for growth in the near-term," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Institute for Supply Management-Chicago said its business barometer fell 7.5 points to 48.7 in November as new orders tumbled, pushing the index back into contraction territory for the sixth time this year. A reading below 50 indicates contraction in the Midwest manufacturing sector.

New orders plunged 15.3 points to 44.1, the lowest reading since March. Production also fell sharply, but remained just above the 50 level. The survey, however, likely exaggerates the weakness in the factory sector.

Data on business capital spending plans and factory output have suggested that manufacturing's decline has bottomed.

That was also supported by a separate report on Monday showing the Dallas Federal Reserve's manufacturing index rose 7.8 points to -4.9 in November.

A report Tuesday from the Institute for Supply Management could shed more light on the health of the nation's factories.

Housing Softening

Manufacturing, which accounts for 12 percent of the U.S. economy, has been slammed by a strong dollar and spending cuts by energy firms.

In a third report on Monday, the National Association of Realtors said its pending home sales index rose 0.2 percent in October. While the increase ended two straight months of declines, it was far below economists' expectations for a 1 percent rebound.

U.S. financial markets were little moved by the data.

%VIRTUAL-pullquote-We saw resilience in existing home sales in the third quarter, but pending home sales ... suggest a slowing in existing home sales ahead.%The pending home sales and factory reports added to tepid consumer spending data in suggesting that the economy remained in moderate growth mode early in the fourth quarter. The economy grew at a 2.1 percent annual pace in the third quarter.

Pending home contracts become sales after a month or two, and last month's small gain implied home resales will probably remain weak after falling 3.4 percent in October.

Also coming on the heels of weak housing starts in October and a drop in homebuilder confidence in November, the report suggested a moderation in overall housing activity.

Home sales are being constrained by tight inventories, which are pushing up prices. Sales activity has also weakened in areas heavily dependent on oil-related jobs.

"We saw resilience in existing home sales in the third quarter, but pending home sales ... suggest a slowing in existing home sales ahead," said Derek Lindsey, an analyst at BNP Paribas in New York. "Additionally, the flat trend in mortgage applications suggests little pickup ahead in home sales activity more generally."

Pending home sales are up 3.9 percent from a year ago. In October, contracts rose 4.5 percent in the Northeast, which the Realtors group said hasn't experienced much of the drastic price appreciation and supply constraints afflicting other parts of the country.

Contracts fell in both the South and the Midwest, where low inventory continues to drive up prices.

9 Numbers That'll Tell You How the Economy's Really Doing
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Weak Housing, Factory Data Hint at Modest 4Q Growth
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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