Ignore The Crash In The Chicago PMI

Homeownership Rate Strengthens

Homeownership rate has been on a tear in the past couple quarters as the housing market seems to be nearly fully recovered from the bubble in the 2000s. Even though the recession ended in 2009, as you can see in the chart below, the rate continued to decline until bottoming in Q2 2016 at 62.9%. That was tied for the lowest rate ever, going back to 1965. It was that same rate in the first 2 quarters the data started being calculated in 1965. 

It’s tough to say what a normal rate is because the rate has been impacted by the bubble from the mid-1990s to the mid-2010s. That being said, with the 0.3% increase to 65.1% in Q4 2019, it is just 0.7% off the peak in 1979 and 1980. It seems like normal is somewhere in the mid-60s.

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Many investors are confident the rate won’t get back to the 2004 peak anytime soon. However, never say never because it’s possible housing becomes more affordable with the advance of modular construction. More millennials are moving to cities. But if more jobs allow people to work from home, they can afford to buy a house outside the city. If people can get good-paying jobs while living in the suburbs, they are more likely to be able to afford a house. Equity sharing agreements could also increase the homeownership rate.

Higher home price growth is good for most people. Mostly because the homeownership rate is much higher than the percentage of people looking to buy a house. This increase strengthens that case. Other great data points from this report were that the increase in the homeownership rate came from households making below the median income and the rate for those under the age of 35 increased from 36.5% to 37.6%. Finally, the vacancy rate stayed at 1.4% which is near a 25 year low.  

Big Crash In The Chicago Fed PMI

Chicago PMI crashed so hard that it caused Cornerstone Macro to lower its estimate for the ISM manufacturing PMI from 56 to 52.6. Even ignoring the Chicago PMI because it was pushed lower by the delay of Boeing’s 737 Max, most think that’s a more realistic assessment. 

With the Markit flash PMI falling and the ISM PMI being below most other soft data surveys recently, I’d be shocked to see it rise to the mid-50s. Personally, I don’t mix the regional Fed reports with the Chicago PMI as it is the product of ISM which means it is calculated differently. There are only 5 regional Fed reports.

Nonetheless, it’s worth reviewing what the data shows as we wait for the ISM and Markit reports. PMI crashed in January. It was down from 48.9 to 42.9 which missed estimates for 48.5 and the low end of the estimate range which was 47.8. The chart below shows the Chicago Business Barometer in comparison with the yearly change in Boeing’s stock. 

It’s not as if this recent decline is the only correlation. Boeing has an impact on this report. This is similar to how the GM strike hurt this report except now the manufacturing sector is recovering, while last fall the sector was weakening.

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Specifically, this was the lowest PMI since December 2015. PMI may not recover as quickly as it did last year because Boeing’s 737 Max might not be allowed to be sold again until mid-2020. Within the report, the new orders index fell 6.1 points to 41.5. Production index fell 3.8 points to 42.7 which was the lowest reading since July 2019. 

Backlog index fell 10.1 points to 34.6 which was the lowest reading in 4 years. Boeing definitely doesn’t have much of a backlog with the 737 Max stalled. This reading is similar to the big decline in inventory investment in Q4 which hurt the GDP report by 1.1 points. Inventory index in this report fell 5.8 points to 40.2 which is the lowest reading since May 2016.

Employment reading fell 0.2 to 47. Supplier deliveries fell slightly as the index was 53.3 making it the only major category above 50. Prices received fell 2.1 points to 56.1. Within this report, firms were asked if the trade deal with Mexico and Canada (USMCA) will help their supplier lines. 60% said it will have no impact and 40% said it will have little impact. Firms were asked about their 2020 activity forecast. 50% said there will be less than 5% growth, 43.2% see growth between 5% & 10%, and 6.8% see growth above 10%.

Inflation Stays Below 2%

We already got PCE data in the Q4 GDP report, but the latest monthly report gave us data from just December. Personal income growth was 0.2% monthly which beat estimates by a tick despite November’s reading be revised down by a tick to 0.4%. Yearly personal income growth fell from 4.7% to 3.9% which was the lowest growth since January 2017. The comp got tougher by 0.3%, but the 2-year growth stack still fell 0.5%. 

Monthly consumer spending growth was 0.3% which met estimates and fell from 0.4%. Yearly PCE growth was 5% which increased from 3.8%. Since the comp was 1.5% easier, the 2-year growth stack fell 0.3%. Since spending grew quicker than income, the savings rate fell from 7.8% to 7.6% which was the lowest rate since July.

As you can see from the chart below, both headline and core PCE inflation were 1.6%. Yearly PCE inflation rose from 1.4% to 1.6% which missed estimates for 1.7%. Energy was a positive factor on inflation. With the decline in oil prices in January, it be less of one in the next report despite the easy comp. 

Core PCE inflation rose from 1.5% to 1.6% which met estimates. There was almost no change in the comp which meats there was a slight rise in core inflation’s 2-year stack. With core inflation still below 2%, the Fed will be fine with cutting rates this year.

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