Weighing The Week Ahead: Does Weakness In Housing Threaten The Economy And Stocks?

Housing data have clearly hit a soft patch. How much of the deceleration is important? How much can be attributed to weather?

Most importantly: Does weakness in housing threaten the economic recovery? What does it mean for stocks?

[note to readers. I always try for weekend publication, but sometimes I cannot work then. The links and ideas this week were so important and still timely that I decided to finish writing this evening.]

Last Week’s Theme Recap

I expected last week’s theme to be focused on the market rebound. That was basically correct. I failed to guess that the (delayed) Fed transcripts would finally be released, providing a pundit’s dream. It was open season, as everyone went wild using information that they know now to show how stupid the Fed was five years ago.

The weather story continues. We await a “clean” read on data. Until then we are guessing how much is temporary, what sales have been permanently lost, and what has been “pushed forward.”

Readers are invited to play along with the “theme forecast.” I spend a lot of time on it each week. It helps to prepare your game plan for the week ahead, and it is not as easy as you might think.

This Week’s Theme

The market rebound in the face of weak economic data continues to challenge the punditry. The recent improvement in earnings now seems like ancient history, with renewed focus on yet another “soft patch” in economic data. Some will attribute this to the weather, but that explanation (excuse?) can only persist for another month of reports.

Last week’s housing weakness is a continuing theme. There are two basic positions, illustrated by objective sources who are open to new information:

• The pessimist is New Deal Democrat. While remaining open-minded about long-term trends, he attributes the weakness to higher interest rates. Read the full piece, but here is a key chart:

The optimist is Calculated Risk. Bill began with an analysis of the housing start data (the sky is not falling) and then a comprehensive update. He does a nice review of the recent spate of weak housing data and the underlying factors. A basic theme is that there is “pent-up demand” in the form of new households. I cannot do justice to the entire article, so you need to read it for yourself. CR writes, “The bottom line is the housing weakness should be temporary. There should be more inventory this year, price increases should slow, and sales volumes increase.” 

As always, I have some thoughts that I will share in the conclusion. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
2. It is better than expectations.

The Good

There was a little good news.

• The “flash PMI” for the US was very strong. I have not been highlighting these releases, but the pre-market futures seemed to respond. This indicator is going to be like the ADP and the employment report. People will evaluate it based on whether it accurately predicts the official ISM report which comes out a couple of weeks later.
• Weather gains traction as an explanation for economic weakness. This is important because businesses, consumers, and markets will look past something that is viewed as temporary. Please note that I am not offering a conclusion here. I am reporting the facts. Markets, at least for now, are accepting the weather hypothesis. See a good discussion from Matthew Boesler, including this Goldman analysis of the data: