U.S. Home Sales surges in March

According to the National Association of Realtors (NAR), sales of existing homes increased by 4.4% in March. This marks the fastest sales rate since February 2007. According to Thomson Reuters consensus estimates, economists were forecasting a lesser increase of 2.5%.

Lawrence Yun, a chief economist for the NAR, said, “The early returns so far this spring buying season look very promising as a rising number of households dipped their toes into the market and were successfully able to close on a home last month. Sales will go up as long as inventory does.”

Nela Richardson, chief economist at Redfin, said, “The pace of sales we saw in March is unsustainable. Sales may be soaring, but inventory isn’t.”

According to NAR, sales have now increased to a seasonally adjusted annual rate of 5.71 million units as of March.

It will only take 3.8 months to clear the inventory of houses at March’s sales pace. Yun said, “We had a housing shortage last year, and in the early parts of 2017 the housing shortage has intensified.”

In March, the median house price increased 6.8% compared from one year ago to $236,400 as a result of the tightening of house supply. Yun said, “Bolstered by strong consumer confidence and underlying demand, home sales are up convincingly from a year ago nationally and in all major regions despite the fact that buying a home has gotten more expensive over the past year.”

The inventory of available properties dropped by 6.6% from March of last year to 1.83 million.

The recovery in the housing market has been assisted by rising wages and falling unemployment which dropped to 4.5% last month.

According to Jennifer Lee, a senior economist at BMO Capital Markets, it’s possible that more Americans are directing their incomes towards housing because retail sales has been on the decline in recent months.

Commenting on the housing market, Yun said, “This is a very broad-based recovery. Both sales, as well as prices, are running very solidly, and buyers are not being deterred by these affordability challenges. Policy changes could quickly change the direction of housing in the second half.”

First-time house buyers comprised 32% of all sales last Month. Sales of single-family home grew by 4.3% while the acquisition of condominiums and co-op units grew by 5% to reach 630,00.

Yun said, “Last month’s swift price gains and the remarkably short time a home was on the market are directly the result of the homebuilding industry’s struggle to meet the dire need for more new homes. A growing pool of all types of buyers is competing for the lackluster amount of existing homes on the market. Until we see significant and sustained multi-month increases in housing starts, prices will continue to far outpace incomes and put pressure on those trying to buy.”

The average days it takes to sell homes also fell significantly last month to 34 days. It took 45 days in February and 47 days in March.

US Wages Increase but Do Not Contribute to Inflation

According to the Federal Reserve, inflation has not been an issue, but businesses are increasingly having a problem finding workers, particularly low-skill jobs. Sectors that are getting affected include manufacturing, transportation, and construction.

The Fed said that there was an expansion of economic activity across the 12 districts. The pace was rated between ‘modest and moderate.’

The Fed said, “Labor markets remained tight, and employers in most districts had more difficulty filling low-skilled positions, although labor demand was stronger for higher skilled workers.”

Many firms also forecast labor demand to grow over the next six months while wage growth will continue to be modest.

According to Fed’s beige book report, the manufacturing sector enjoys widespread optimism as output continues to grow. The pace of economic expansion was also “equally split between modest and moderate.” The report also noted the slowing down of home-sales growth which can be attributed to a lack of inventory. Residential construction growth, on the other hand, increased its pace.

The wage increases ranged from modest to moderate, and there is still the potential for wages to create cost-push inflation. As such, this will be something the Fed will review ahead of its May 2-3 policy meeting to determine the benchmark lending rate.

The Fed is expected to increase key interest rate at least two more times this year. Rates will be raised more quickly if inflation suddenly accelerates.

According to the Fed’s beige book report, travel and tourism activity were overall positive.

In February, the Personal Consumption Expenditures price index, which is the preferred measure of inflation of the Fed increased by 2.1%. It breached the Fed’s target of 2% for the first time since 2012.

According to the report, businesses in the Fed’s Atlanta district struggled to find, hire and hold onto quality workers in skilled technical jobs, sales, finance and information technology.

The Fed in Cleveland, Ohio highlighted that some large manufacturers were cautious about the new found optimism. They say the strong dollar and the lack of clarity in trade policy are important issues of concern.

For business in the Dallas area, they were particularly concerned with trade policies that relate to Mexico because Mexico has close ties to Dallas firms and society. The Boston Fed is also concerned with trade deals as the area is a manufacturer of test equipment which exports most of its production.

In Richmond, Virginia, the labor shortages had increased labor costs and reduced the margins to businesses. As such they have to reduce their planned capital spending.

In St. Louis, coal production so far is 10% more than last year.

Minneapolis, on the other hand, experienced many closures of retail stores, both large and small. The Minneapolis Fed said, “firms catering to tourists in the Black Hills region reported difficulty finding labor, mainly seasonal immigrant labor they have traditionally used.”

In San Francisco Fed’s district, hotel stays were weak because of the new immigration policy and increased scrutiny of foreign arrivals.

U.K. Manufacturing Slows to a Crawl

According to HIS Markit, the U.K. manufacturing sector has unexpectedly slowed down during March. UK’s factory Purchasing Managers Index (PMI) went down to 54.2. It was 54.5 last month.

However, it is still above the critical level of 50 which divides whether the manufacturing sector is expanding or contracting. The expectations of economists were for U.K manufacturing to increase to 55. The long-run average of the PMI is 51.6.

Joshua Mahony, market analyst at IG, said, “UK manufacturing took another step backwards in March, with today’s PMI reading showing growth in the sector slowed for a third consecutive month. The boost of a weaker pound appears to be on the wane.”

According to Markit senior economist Rob Dobson, manufacturing has indeed lost some momentum, and it will likely persist in the 2nd quarter. Dobson also noted that the slowdown in manufacturing was mostly caused by firms producing consumer goods. Manufacturers making investment goods such as machines were still enjoying significant growth.

Dobson, said, “High costs and weak wage growth are sapping the strength of consumers with rates of expansion in output and new orders for these (consumer) products slowing further.”

ING economist James Smith, said, “Whilst the near-term outlook for manufacturing looks encouraging, it’s possible that Brexit uncertainty will start to weigh more heavily on sentiment. Given the fairly contrasting negotiation strategies outlined by U.K. and European leaders last week, the risk of reduced or altered access to European markets may begin to feel more real. The fall in the value of the pound post-Brexit is helping new orders. But that currency effect comes at a price.”

The weak pound has increased inflationary pressure on the economy. The fast-rising inflation is creating a situation of households’ income not showing any real growth. Data also shows British households were saving a tiny percentage of their income and the percentage is the lowest ever since this statistic was collected half a century ago.

Factories are not hesitating to increase prices as input prices increases. March data shows that factory gate inflation grew by 3.7 %.

Last year, Britain’s gross domestic product was 1.8% which was the 2nd fastest rate among developed nations.

Duncan Brock, director at Chartered Institute of Procurement & Supply, said, “The reduced buying power of the pound has led to the 11th consecutive rise in input costs with consumers feeling the effects in the form of higher prices on the high street. Supplier delivery times have also begun to lag, clogging up the supply chains of British manufacturing. With the rate of new order growth showing early signs of easing in March, manufacturers must act to ensure they are not locked into costly contracts. Now is not the time for manufacturers to rest on their laurels.”

The pound fell 0.3% against the dollar and 0.6% against the euro in response to this dismal data.

On the bright side, business sentiment increased to a 10-month high. 52% of the companies surveyed predicted that their production would increase within 12 months. Only 6% of respondents expected their output to decrease.