Jay Powell is on the warpath, he thinks. Some aren’t so sure, though. At his last press conference, the one held on September 26 after the last “rate hike”, someone in the media actually asked him about the impact of rising interest rates. And not in a good way.
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His answer would apply to a broad cross section of the economy. He keeps saying it is strong and in need of less “accommodation” if not the end to a decade’s worth. Yet, when confronted with public perceptions, as opposed to eurodollar reality, Powell would have to demure on several related topics.
One of those was housing. For a booming economy, something’s up in the real estate market. Rather than come right out and state the obvious, Powell merely said that housing was more affordable today than it was before the crisis. That’s only true if you have a job, which fewer people as a percentage of the population do.
It was also a total dodge. Why? Just ask the FOMC in August (meeting minutes from the one before September):
Residential investment declined again in the second quarter. Starts for new single-family homes were little changed, on average, in May and June, but starts of multifamily units declined on net. The issuance of building permits for both types of housing was lower in the second quarter than in the first quarter, which suggested that starts might move lower in coming months. Sales of existing homes edged down in May and June, while sales of new homes moved up on balance.
The economy is booming but housing is not, even though it arrived at this boom already at historically low levels. Those FOMC minutes would mention housing one more time, in reference to where the Fed might get it wrong. “Other downside risks cited included the possibility of a significant weakening in the housing sector.”
The Census Bureau reports this week that residential construction spending has tailed off. This despite weak growth in the sector dating back more than a year; already weak getting weaker still. The labor market is booming, at least according to the unemployment rate, and yet there isn’t much appetite for new structures.
These figures are noisy and tend to be revised over subsequent months, but current revisions have been sharply lower. The setback in terms of residential construction spending is at present the largest and longest since the housing recovery began more than six years ago.
The thing is Powell is right, in the one sense. Homes are more affordable so, as he was trying to imply, it’s not the Fed’s fault for what’s going on here. They will be blamed anyway because ten years onward everyone still thinks the crash was about subprime mortgages.
This is not the only alarming trend in the construction figures. More concerning still is the other side of private activity – non-residential construction. In their bland, short statement accompanying that September “rate hike” the FOMC claimed, “…and business fixed investment have grown strongly.” There has been business investment in some equipment, mostly transportation, in the GDP sense, but true fixed investment has really lagged.
In fact, in terms of construction spending, business investment is at a two-year long standstill. The economy is booming but neither housing nor capex is, too? It just doesn’t add up.
There was an obvious temporary bump associated with last year’s big tropical storms, Harvey and Irma, but after their aftermaths construction in this space is flat and weak all over again. Non-residential spending is essentially the same as it was in July of 2016, even though the economy was supposed to have roared forward out of the last downturn – or at least when tax reform was passed.
Obviously, something is amiss. The most plausible explanation is the one put forward by the flat yield curve and the inverted eurodollar curve. Jay Powell is “hawkish” because he is hawkish, not because the economy warrants such a position. The FOMC is going to go ahead with scheduled rate hikes regardless. They know full well what happens when they display doubt – such as Yellen’s FOMC in 2015 and 2016.
It’s an inversion of the old Twain cliché; better to just hike rates anyway and be thought baseless than to pause and confirm all doubts. They are now fully committed, which is why the BOND ROUT!!!! The only question is how far they might get before it all falls apart. Again.
These are not the characteristics of a healthy economy. They aren’t even consistent with one breaking loose for the better. Together, the lack of commitment in both residential housing and non-residential capex point to more fundamental negatives that in the balance of probability will re-emerge at some not-too-distant point.
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