Markit - Weak Construction Spending

December construction spending report was weak. But probably not the reason stocks fell. 

Stocks entered the week very overbought. No matter if economic reports beat or missed estimates, stocks would be on a path lower. Construction spending report showed monthly growth was -0.6% which missed estimates for 0.3% growth and November’s 0.8% growth. 

This report was below the lowest estimate which was for -0.3% growth. Year over year growth was a putrid 1.6% as it fell from 3.4% in November. 

As you can see in the chart below, that was the weakest yearly growth in at least 3 years.

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Private residential construction was the culprit of this weak report as housing was terrible in December. Private residential construction was down 1.4%. There was a 3.2% decline in spending on new homes and a 3.1% increase in spending on multi-family homes. 

Spending per unit on multi-family homes is much less than single family homes. Spending on remodeling fell by 0.4%. The good news is private non-residential construction spending was up 0.4%. It was helped by a 3.3% increase in healthcare construction spending, a 1.7% increase in manufacturing spending, and a 1% increase in lodging.

Public construction spending was also weak as it was down 0.6%. Healthcare spending was down 7.8%, residential spending was down 5.1%, power was down 2.9%, and highway & street construction was down 0.9%. Those were partially offset by increases in office construction and commercial construction of 6.4% and 6.1%.

Markit - PMI Services Index

Many expected ISM and Markit services indexes would be stronger than their manufacturing counterparts because of the flash Markit reading. 

Those correct expectations didn’t lead to a financial gain because stocks fell on Tuesday. The only thing the great services PMIs did was give the bulls ammo in their debate with the bears. 

Few people believe Q1 GDP growth will be above 3%. That level of growth would be a huge boon for stocks. 

Markit - Unfortunately, one month of great PMIs won’t convince many investors that the economy is turning around.

The Markit services index was up from 54.2 to 56. That’s 0.2 below the flash reading, but the output index was still the best in 7 months. 

New business expansion was the quickest since October. New export growth was positive for the first time in 2 months; it increased at the quickest pace in 9 months. Backlogs of new work were up the most since May 2018. Unlike the ISM report, the Markit reading showed faster increases in input and output prices as raw materials and fuel prices were up. 

Plus, tariffs and higher interest rates increased costs.

The Markit composite is anticipating way quicker GDP growth than most economists. It expects a 2.6% growth. The model forecasted 2.5% growth in Q4 which was just 0.1% below the actual result, so it has merit. It expects 250,000 jobs created in February. 

The consensus is for 178,000 jobs created with the unemployment rate falling to 3.9%. If that many jobs are created, either the labor participation rate will increase, or the unemployment rate will fall. Either scenario is very positive.

Markit - Atlanta Fed Estimate Increases Slightly

As I mentioned, the Markit reading is way above most models for Q1 GDP growth. 

According to the Atlanta Fed, the blue-chip consensus expects just 1.9% growth. The range of the bottom 10 and top 10 forecasts is between 1.3% and 2.5% growth. Not even the optimistic forecasts match Markit. Atlanta Fed Nowcast update on March 6th moved the estimate from 0.3% to 0.5% growth. 

Monthly treasury statement pushed up the estimate for real government expenditures growth from 1.3% to 1.9%. That’s the worst reason for the Nowcast to increase. Fiscal stimulus will be helping growth all year.

Markit - Great New Home Sales

New home sales report in November was a disaster as the reading was revised from 657,000 to 599,000. 

As you can see from the chart below, median prices were $303,500 which was a 21 month low. November had the weakest yearly price growth since February 2009 as prices fell 11.6%. 

The December report showed a great deal of improvement as prices increased 5% monthly to $318,600. That’s still down 7.2% year over year. There were 621,000 new home sales which beat estimates for 590,000. That’s a 3.7% monthly increase, but a 2.4% yearly decline. 

It’s nice to see this improvement since the housing market was very weak in December. Hopefully, this reading isn’t revised sharply lower like the November one.

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Monthly supply was up 3% to 344,000. Inventory fell slightly from 6.7 months to 6.6 months. Inventory has increased for 9 months in a row. The 10,000 increase in December was the quickest increase in 65 months. 

Even though this sounds terrible, it isn’t because new homes for sale that haven’t been started are up 44% year over year. This means there are many homes in the pipeline to be started when the housing market recovers.

New homes under construction and new homes completed were up 10.2% and 13.4% year over year. New home sales in the West were up 1.4% monthly, but they fell 24% year over year. December sales were strong in the Northeast and the South, but they were weak in the Midwest. 

Midwestern weakness may have been catalyzed by the extremely cold and snowy weather.

Markit - Conclusion

If Markit and ISM are correct about Q1 GDP growth, the economy is on solid footing. 

Personally, I need to see better hard economic data in the next few weeks to make that conclusion. It would be interesting to see stocks fall on good economic and earnings news. 

They rose on terrible earnings estimate revisions and economic data that made economists project weak Q1 GDP growth. I’d also like to see the ECRI leading index push to positive year over year growth before I become bullish on stocks. 

The housing market was mostly weak in Q4 as evidenced by the construction report and the year over year decline in new home sales. I’m looking for a rebound this spring.