There were two important reports on the U.S. economy released this morning. First, the Federal Housing Finance Agency’s (FHFA’s) national home price index (HPI) rose by 0.4 percent in December (lagged), in line with expectations and the 59th monthly increase in a row. On a year-over-year basis, home prices grew by 6.2 percent in December, well above current measures of wage growth and consumer inflation. Over the course of 2016, home prices rose in 46 states and the District of Columbia, with the largest gains found in Oregon (11.0 percent), Colorado (10.6 percent), Florida (10.4 percent), Washington (10.2 percent), and Nevada (8.9 percent). Among the 100 biggest metropolitan areas in America, annual price increases were greatest in the Tampa-St. Petersburg-Clearwater region, where home values jumped by 13.2 percent. Some economists like to compare the HPI to the owners' equivalent rent section of the monthly consumer price index (CPI) report from the U.S. Bureau of Labor Statistics to help spot price bubbles. As the second chart below shows, home values have increased significantly in recent years but remain below the extremes seen prior to the last recession. Going forward, the housing market faces several headwinds but inventories remain low, which means that home prices are likely not going to start falling sharply any time soon. This environment is bad for first-time buyers but apparently appealing to housing market investors (flippers).
Elsewhere, the Federal Reserve Bank of Kansas City’s composite manufacturing index showed that activity in the Midwestern region of the country continued to expand at an elevated rate this month. Specifically, the headline index jumped to +14.0 in February, the highest headline reading since 2011. Under the hood, gauges of new orders, order backlog, and employment all improved this month, including the first positive reading on new export orders in over a year. Current measures of production and shipments eased in February but outlooks on future factory activity continued to strengthen. Comments from surveyed managers in the 10th Fed district were generally positive this month:
- “Overall, our business has significantly rebounded after the election in November. It was simply like a switch was flipped. Many customers are hopeful of less regulation under this Administration. Our backlog in most shops is now out to June and includes a growth in foreign business.”
- “Since December our industry has had significant increases in activity and January invoicing was the highest in over three years with more backlog of work than in recent memory.”
- “During this strong economic cycle, our pricing power may enable us to pass the increased costs onto consumers. As the business cycle weakens, we may lose the pricing power and see an accelerated erosion of profits due to the increased cost of imports.”
Sources: Econoday, U.S. FHFA, FRBKC, FRBSLPost author: Charles Couch