Manufacturing Making A Comeback
Slight Decline In Markit PMI
Flash Markit PMI fell slightly in September, but this was still a pretty good report. Diffusion indexes measure how business is doing versus the last period. With the economy recovering, the comparisons get tougher. This explains why many diffusion indexes were very high right after the recession ended.
Composite PMI hit a 2 month low as the chart below shows. Services PMI fell from 55 to 54.6 which also was a 2 month low. The service sector still hasn’t fully rebounded from the COVID-19 crisis. We need to see rapid testing before the leisure and hospitality industry comes back.
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On the positive side, the manufacturing PMI rose from 53.1 to 53.5 which is a 20 month high. It’s doing better than it was in 2019 which makes sense because that actually was a weak year for manufacturing. The economy was just coming out of a slowdown before the COVID-19 crisis hit. We can expect manufacturing to have a strong September based on this reading and the Empire Fed reading.
In addition to those good reports, the Richmond Fed index was up from 18 to 21 which beat estimates for 12. Finally, the Philly Fed index was more of a mixed bag as the headline diffusion index was down from 17.2 to 15, but the future expectations index was up from 38.8 to 56.6.
That’s a pretty big improvement as the capex index was up 8 points to 31. Interestingly, the index was mostly driven higher by inflation. Prices paid index rose 20 points to 57.7 and the prices received index was up from 30.2 to 42.4.
In the comment section of the Markit report, the chief business economist stated, “US businesses reported a solid end to the third quarter, with demand growing at a steepening rate to fuel a further recovery of output and employment.” That's impressive because Markit has been more negative in recent months.
It’s clear manufacturing is turning higher and services has the potential to break out to the upside if the economy can get back to normal. Obviously, there are more fears of COVID-19 now than 2 weeks ago, but many sticking with optimism because of the potential for better treatments and more testing.
Changes To Housing Market
Recently we’ve seen lumber prices crash, but the housing market is still doing well. MBA mortgage applications index was up 6.8% weekly after falling 2.5%. This is in the week of September 18th. The refinance index was up 9% weekly after falling 4%. I think the 30-year fixed rate is about near its bottom. Banks won’t lower the rate they charge much further if rates fall; rates won't fall anyway.
At worst, they are range-bound. we're expecting a new uptrend in rates shortly. Current 10-year yield is 67.7 basis points. It hasn’t been falling despite the correction in stocks. Flight to safety trade where yields fall isn’t working.
TMBA purchase index was up 3% after falling 1%. It’s now up 25% yearly. FHFA home price index showed prices were up 1% in July which was the same as last month and beat estimates for 0.6%. Yearly growth rose from 5.8% to 6.5%. This should surprise no one.
The housing market is on fire. Investors are very confident yearly growth will expand in next month’s report. The longer this goes on, the worse it will be in the intermediate term because there could end up being expensive houses and rising rates sometime late this year or early next year.
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Preference for living in the suburbs has increased due to the pandemic. It doesn’t hurt that many millennials are in their mid-30s which is the time people leave the city and have children. If these 30 somethings were considering moving, this pushed them over the edge. As you can see from the chart above, there was an 18 point increase in preferences for living in a small town, a rural area, or the suburbs from before the pandemic to late July.
A few months ago, there was a lot of chatter about people leaving the city, but we didn’t know if it was real. Now we know it’s real. We just don’t know if it’s sustainable. It's unlikely that the people who moved away will come back, but new people will take their spots. Urbanization has been a long term trend lasting decades. As long as COVID-19 goes away within the next 12 months, the urbanization trend will likely continue.
COVID-19 Looks Better
Despite the increased fear of COVID-19 because of the recent outbreak in Europe, there is nothing doing in America. It’s terrible when anyone dies of this virus, but on a rate of change basis, deaths and hospitalizations continue to improve.
On Wednesday, Indiana announced that it will reopen in a stage 5 return to normalcy. That means it will allow restaurants, bars, and nightclubs to operate. Furthermore, conventions, sporting events, fairs, festivals, and other events may resume. That’s a pretty big change. Let’s see how long it lasts.
As you can see from the chart below, while the number of people hospitalized with COVID-19 is slightly above where it was in late June, when you account for the fact that not all states were giving data on COVID-19 hospitalizations in June, the current total is actually lower than that trough.
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Tuesday was a solid day for COVID-19 data. Wednesday wasn’t as good, but that doesn’t mean the trend is reversing. Specifically, there were 41,435 new cases and 1,104 new deaths. That’s more than Tuesday on both fronts.
Conclusion
Manufacturing is doing well in September. I’m predicting a return to positive manufacturing and industrial production growth by the end of the year. The housing market is still doing well even as lumber prices have crashed. Lumber was acting like software stocks which makes no sense because it’s a commodity.
People want to move out of cities for now. COVID-19 data is doing better. Adjusted for the states not reporting in the spring, we have the lowest hospitalizations since the April peak.
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