May 24, 2017 Reading Time: 2 minutes

The Chicago Fed’s National Activity Index, a weighted average of 85 economic indicators, rose to 0.49 in April following a 0.07 reading in March. For this index, zero represents trend growth in the economy with positive numbers suggesting above-trend growth and negative numbers implying below-trend growth. Using a six-month moving average to smooth out the monthly volatility, the index registered 0.14 in April, the highest since December 2014 and well above the −0.24 result in May and August 2016.

The index groups the 85 indicators into four component series: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories. Three of the four data series made a positive contribution to the April result, including 0.46 from the first series. Personal consumption and housing reduced the overall index by 0.08.

Despite the broad strength suggested by the CFNAI, the latest data for housing are disappointing. New single-family home sales fell in all four regions, by 11.4 percent in April to a 569,000 annual rate from 642,000 in March. The South, the largest region by sales volume, fell 4.0 percent to 333,000 from 347,000. The West, the second-largest, fell 26.3 percent to 126,000 from 171,000, followed by the Midwest, which fell 13.1 percent to 73,000 from 84,000, and the Northeast, whose sales saw a 7.5 percent decline to 37,000 from 40,000 in March.

The weak sales result helped boost the inventory of new homes for sale by 1.5 percent to 268,000 nationwide. Combined with the slower pace of sales, the months’ supply (inventory divided by selling rate) rose 16.3 percent to 5.7. While still low by long-term historical measures, it approaches the upper end of the four to six months’ supply in most of the past six years.

Existing-home sales also fell in April, dropping 2.3 percent to a 5.57-million annual rate from 5.70 in March. Single-family homes make up just under 90 percent of sales, with condo and coop sales accounting for the remainder. Sales of existing single-family homes fell 2.4 percent to 4.95 million from 5.07 in the prior month. Existing single-family home sales fell in three of the four regions of the United States, led by a 5.1 percent decline in the South. The Midwest posted a 4.1 percent gain for the month.

The inventory of existing single-family homes for sale increased by 8.2 percent for the month, pushing the months’ supply up by 10.8 percent to 4.1 — the highest since October 2016 but still below the figure for new single-family homes.

The housing market has made admirable progress recovering from the boom-and-bust cycle of the 2000s. Strong consumer fundamentals led by gains in jobs and income have boosted the housing outlook but have been partially offset by slowly rising interest rates. Despite the drop in the latest month, existing-home sales are relatively high compared to historical levels, and supply is generally tight, helping support home-price gains. The market for new single-family homes isn’t quite as tight, and new construction activity is close to long-term averages as builders take care to not overbuild. Builder confidence remains high, and housing looks likely to contribute to economic growth, but rapidly increasing activity seems unlikely.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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