The Federal Reserve Held Monetary Policy Unchanged but Noted Faster Economic Growth… The central bankers increased their GDP forecast for this year and next and moved back their estimate of when rates will move higher from 2024 to sometime in 2023.
What it means— News outlets from CNBC to The Wall Street Journal claimed that the Fed “surprised the markets” with its GDP growth estimates and closer time frame for raising rates. That’s a bit disingenuous, if not a flat-out lie. No one was surprised.
“An expectation that something might happen two years from now hardly constitutes a meaningful prediction. One would need to be extremely credulous to read the FOMC’s assessment as a “hawkish” move.” Yes, the equity markets dipped a bit, and yes, bond yields walked up a bit. The real surprise would have been the Fed completely ignoring the reality of red-hot GDP growth and rising prices, which would have caused a jump in equity prices and bond yields.
The latest moves show the central bankers begrudgingly acknowledging economy recovery even as employment lags. The Fed has made labor market gains its priority. Expect it to play catch-up in reducing bond purchases and raising rates in the face of solid GDP growth and higher prices.
Housing Starts Rose 3.6% in May, Less Than Expected… After falling in April, housing starts rebounded by a modest 3.6% last month to an annualized rate of 1.572 million units. The April numbers were revised lower.
What it means— It looks like home builders are getting nervous. With lumber prices soaring last month before rolling over in June and with not enough workers to get the job done, home builders have been cautious about putting up new homes. Demand remains strong for the moment. Will buyers balk at higher prices later this year if builders commit to the higher input prices today? They might not have a choice. According to the National Association of Realtors, we’re short 5.5 million homes.
Lumber for a thousand board feet is down from $1,733.50 to $967.90. While providing some relief, not all builders believe it is permanent. Plus, the other essentials for construction such as copper, steel and aluminum have not adjusted to the same degree. Price is only one of numerous reasons for a recent decline in home purchase contracts. The tight housing market loosened a bit last month. New listings in major metros rose 6.7%.
National Association of Realtors Estimates We Need 5.5 Million More Homes… Home builders constructed an average of 1.225 million new units from 2001 to 2020, roughly 275,000 units per year less than the average from 1968 through 2000, even as our population continued to grow.
What it means— According to the report commissioned by the NAR, we’re missing two million single-family homes, 1.1 million homes with two to four units, and 2.4 million buildings with at least five units. The structural imbalance should keep buying pressure in the market for years to come.
Other sources, including Freddie Mac and industry consultant John Burns, think that the deficit is much lower, at 3.8 million units and less than one million units, respectively. We’re familiar with and respect John Burns’ work. Even if his low estimate is correct, we should see strong demand in housing for at least another year or two.
Retail Sales Fell 1.3% in May… Consumers reduced their purchases of goods and turned their focus to services.
What it means— After being stuck at home shopping online for a year, consumers are turning their attention from online sales, furnishings, and building materials to food and beverages. Who can blame them? With the summer season underway and the economic restrictions fading, people want to get together with friends and go places, not shop for another piece of furniture.
There’s also a problem with inventory. Car sales make up 20% of retail sales. New car production and inventory much lower than normal due to the computer chip shortage. Car companies can’t keep up with demand. This reduces car sales dragging down overall retail sales. But don’t worry about falling sales hurting the economy. Annualized retail sales reached a record $628 billion in April, more than 19% higher than the previous record before the pandemic in February 2020. Even if retail sales ease over the summer, the federally funded spending spree definitely expanded the economy.
California Bans the 2022 Porsche 911 GT3 With Manual Transmission… To paraphrase Jimmy “The Rent Is Too Damn High” McMillan, the new Porsche is too damn loud, at least according to California officials. Citing outdated external-noise criteria from the Society of Automotive Engineers, the state banned sales of the supercar. Porsche had expected the state to update its criteria to the latest version before the car went on sale. For now, Californians wanting the 502-horsepower beast that revs to 9,000 rpm either will have to wait or simply will have to cross the border to another state to make their purchases.
Data supplied by HS Dent Research
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