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While the big picture of the US economy lumbering along at a 2% growth rate remains intact, developments this week have been mostly negative. And each of these developments could have a negative impact on late B-2-B payments in the near term.
Housing data is showing some weakness. Several major measures of the housing market were down m/m over the past week including permits, starts (when the ground is broken), new home sales and existing home sales. It’s true that this data is quite volatile month-to-month, but it’s the second time in the past four months that all four measures have declined, and the last time it happened before that was November of 2014. In addition, all four measures are down from recent peaks. Starts are down -13% from the October ’16 peak, permits are down -5% from the January peak, new home sales are down -11% from the March peak, and existing home sales (10 times as big as the new home market) are down -5% from the March peak.
There are several imbalances in the housing market. Prices of new and existing homes are up +6.2% y/y and +6.3% y/y respectively, much faster than headline inflation of +1.6% y/y and headline wage growth of +2.5% y/y. The result is that monthly payments as a percent of median annual income are now at 17.3%, the highest since October 2008, and much higher than five years ago when it was only 13.8%. At the same time, the supply of existing homes for sale is tight at 4.2 months vs. the long term average of 6.9 months. Realtors say that the lack of supply is holding back sales. So activity is slipping, prices are rising, and there aren’t enough homes on the market – a bad combination.
President Trump has threatened to “shut down” the government if Congress doesn’t make funding available for his proposed border wall in the next budget bill. Government shutdowns have occurred 18 times since 1976, with the longest one being 21 days. The most recent shutdown was in 2013 and lasted 16 days. During that shutdown, 800,000 non-essential government personnel were laid off and went unpaid while 1,300,000 had their payment delayed. After the shutdown ended, most of the affected government workers were paid retroactively, so the effect on GDP was a reduction of only -0.1% to -0.2%. It’s entirely possible that this shutdown will occur, but if it ends in a reasonable amount of time, the damage to the economy will be temporary and reasonably small. Members of Congress of course continue to get paid during a shutdown.
Note that this is a separate issue from raising the debt ceiling. A shutdown may temporarily shave a bit off of GDP, but a failure to raise the debt ceiling, which would put the US in default, would be catastrophic.
Finally note that Hurricane Harvey is headed through the Gulf of Mexico towards the Texas coast. At the time of publication it was expected to arrive as a category 3 hurricane which is described on the Saffir-Simpson scale as having the potential for “Devastating damage.” Of course that’s a worrisome thought for people and property, but it’s also worrisome for the national economy. Unfortunately Harvey is headed for an area where between one-third and one-half of the nation’s refining capacity is located. As a result, gasoline futures jumped to a three week high today. Hurricanes typically cause the most damage through flooding. If refineries do get flooded it could conceivably take some time, perhaps weeks, to bring them back on-line, and gasoline prices could continue to rise sharply.
Sorry for the unhappy news. Send good thoughts to the people in Harvey’s path.
euler hermes roma Economic Update: Budget v. Trump's Wall; Hurricane Harvey v. Gasoline | |
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