Category Archives: Finance & Economics

The University of Michigan on Friday (7-12-24), released the preliminary results of its Consumer Sentiment Index (CSI) for June. …July’s reading was a statistically insignificant 2 index points below last month, well within the margin of error. Although sentiment is more than 30% above the trough from June 2022, it remains stubbornly subdued. Nearly half of consumers still object to the impact of high prices, even as they expect inflation to continue moderating in the years ahead. With the upcoming election, consumers perceived substantial uncertainty in the trajectory of the economy, though there is little evidence that the first presidential debate altered their economic views. Year-ahead inflation expectations fell for the second consecutive month, reaching 2.9%. …The Current Economic Conditions for July dropped to a reading of 64.1 down from June’s Reading of 65.9.

Both overall and core inflation continued to slow in June, as a decline in gasoline prices offset the increase in shelter costs. This is another dovish signal for future monetary policy, following a significant downward revision to the job report. Despite a slowdown in the year-over-year increase, shelter costs continue to put upward pressure on inflation, accounting for over 60% of the total increase in core inflation. While this report indicates signs of softening prices, the Federal Reserve will require further data to confirm a consistent disinflation trend toward their 2% target before considering rate cuts. …The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) fell by 0.1% in June on a seasonally adjusted basis. This was the first monthly decline since May 2020.

WASHINGTON — Associated Builders and Contractors reported that its Construction Backlog Indicator increased to 8.4 months in June, according to an ABC member survey conducted June 20 to July 3. The reading is down 0.5 months from June 2023. …ABC’s Construction Confidence Index readings for sales and staffing levels fell slightly in June, while the reading for profit margins improved. All three readings remain above the threshold of 50, indicating expectations for growth over the next six months. “Backlog continues to hold up remarkably well despite high interest rates, inflation and emerging weakness in the broader economy,” said ABC Chief Economist Anirban Basu. “While contractor confidence regarding the outlook for sales and staffing levels fell modestly in June, all three Construction Confidence Index components are higher than they were one year ago.

Russ Taylor

During a protracted slump this year prices have remained mired below $400 per thousand board feet for 12 weeks in a row. …Russ Taylor said the sharp spike in mortgage rates and borrowing costs since 2022 have weighed down on the lumber market’s performance, and look set to keep activity muted for the foreseeable future. The “bite” of rates hovering around the 7% mark is especially impacting the repair and remodeling sector, he noted, which marks the biggest lumber consumption segment in the US. …The prospect of borrowing costs remaining higher for longer could keep the market subdued by canceling out cheaper lumber costs and deterring builders from beginning projects. …Markets are currently expecting the Federal Reserve to cut its key rate at least once before the end of the year. Taylor noted that a single mild rate cut is unlikely to do much to change buyers’ or builders’ sentiments. 

The U.S. exported 926,024.1 metric tons of wood pellets in May, up from 819,341.5 metric tons exported the previous month and 820,057.5 metric tons exported in May 2023, according to data released by the USDA Foreign Agricultural Service on July 3. The U.S. exported wood pellets to more than a dozen countries in May. The U.K. was the top destination for U.S. wood pellet exports at 654,234.4 metric tons, followed by Japan at 154,311.4 metric tons and the Netherlands at 91,973.5 metric tons. The value of U.S. wood pellet exports reached $167.35 million in May, up from $157.26 million in April and $153.12 million in May of last year. Total U.S. wood pellet exports for the first five months of 2024 reached 4.12 million metric tons at a value of $774.64 million, compared to 3.75 million metric tons exported during the same period of 2023 at a value of $690.01 million.

High interest rates continued to batter the housing market in May as both single and multifamily starts continued their slide from April. Overall housing starts dropped 5.5% from the month prior as noted by the U.S Census Bureau. Single family numbers specifically dropped 5.2% to a seasonally adjusted annual rate of 982,000 units, below April’s adjusted rate of 1.036 million units. This is still up 18.8% compared to May of last year. Multifamily starts, meanwhile, have declined another 6.6% from April to 295,000. This, notes the NAHB in its press release, is the lowest rate for MDU construction since April 2020, nearing the height of the pandemic. At the time of writing, lumber prices currently sit below pre-pandemic prices, despite post-pandemic inflation. During this time, the average rate on the 30-year fixed mortgage has danced between over and under 7%.

Anyone who follows the lumber industry closely knows it’s not for the faint of heart. Market volatility, which is frequently inflamed by any number of economic, environmental, political or logistical fluctuations, can make lumber pricing seem like an unpredictable flume ride. Practically speaking, it makes buying and selling a tricky proposition. So, what’s the latest on this roller coaster of a market? We sought guidance from industry veterans Russ Kathrein, VP of lumber and building materials for Do it Best, as well as Tim Johnson, VP of forestry products at LBM Advantage. Below are their thoughts on which way the wood winds are blowing.

Investments from a position of strength will enable Home Depot and Lowe’s to capitalize on a rebound in-home improvement spending that we think will emerge in 2025, with sales rising mid-single digits. While both retailers stand to benefit, Home Depot’s outsized exposure to pros could fuel stronger growth amid expectations for the segment to outpace DIY customers. …The $1 trillion North America home-improvement industry may return to growth in 2025, climbing mid-single digits after two years of declines. Our intermediate-term view is underpinned by a rebound in existing home sales from trough levels, $32 trillion in homeowners’ equity and the oldest US housing stock on record. The $500 billion market for pro contractors is projected to fuel industry growth over the next five years, climbing 4.4% annually vs. 3% for the DIY segment.

Data released on Friday shows that housing starts and building permits have dropped to their lowest levels since mid-2020, and lumber prices are responding. …As of yesterday’s close, lumber is down 9.7% over the last month and down 15% since this time last year. Permit issuance dropped 3.8% last month to an annualized pace of 1.38 million, down from 1.44 million in April. Everyone is getting housing wrong now. The interest rate lags are beginning to hit, and housing construction is clearly telling you the impacts are just starting to manifest. …The data isn’t good, which matters for U.S. markets. Lumber is likely to continue its downtrend in response; it is one of the most expensive materials used in a new home, and homebuilder sentiment has a big impact on lumber’s prices. As homebuilding permits and housing starts slump, lumber demand slacks and prices fall — just as we are seeing today.

The Conference Board Leading Economic Index® (LEI) for the U.S. decreased by 0.5 percent in May 2024 to 101.2 (2016=100), following a 0.6 percent decline in April. Over the six-month period between November 2023 and May 2024, the LEI fell by 2.0 percent—a smaller decrease than its 3.4 percent contraction over the previous six months. “The U.S. LEI fell again in May, driven primarily by a decline in new orders, weak consumer sentiment about future business conditions, and lower building permits,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “While the Index’s six-month growth rate remained firmly negative, the LEI doesn’t currently signal a recession. We project real GDP growth will slow further to under 1 percent (annualized) over Q2 and Q3 2024, as elevated inflation and high interest rates continue to weigh on consumer spending.”

Single-family and multifamily housing starts fell in May as high interest rates for construction and development loans and elevated mortgage rates held back both housing supply and demand. Overall housing starts fell 5.5% in May to a seasonally adjusted annual rate of 1.28 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. …Within this overall number, single-family starts decreased 5.2% to a 982,000 seasonally adjusted annual rate. However, on a year-to-date basis, single-family starts are up 18.8%, albeit off weak early 2023 data. …The multifamily sector, which includes apartment buildings and condos, declined 6.6% to an annualized 295,000 pace. This is the lowest pace for apartment construction since April 2020. The three-month moving average for multifamily starts is the lowest since the fall of 2013 as the multifamily development deceleration continues.

Housing prices in America today are near an all-time high, and home ownership has yet to recover from the 2008 and 2020 recessions. …With construction materials making up roughly 60% of a home’s cost, we need to address the problem from another angle. The U.S. currently has tariffs on important construction materials such as Canadian lumber and Chinese nails and pipes. Eliminating such building material tariffs could deliver a powerful blow to the other side of this housing problem. Unfortunately, President Biden has other plans. This May, the president announced a new 25% duty rate on Chinese steel, up from 0-7.5%. For comparison, the 5-20% duty rates on Canadian softwood lumber added an extra $24,000 to construction costs in 2021. Construction costs have skyrocketed since 2020, increasing by an average of 20% and outpacing even the highest inflation rate of 8%. Imposing still more tariffs on important construction materials will only further inflate those costs.

Mortgage rates that continue to hover in the 7% range along with elevated construction financing costs continue to put a damper on builder sentiment. Builder confidence in the market for newly built single-family homes was 43 in June, down two points from May, according to the NAHB/Wells Fargo Housing Market Index (HMI). This is the lowest reading since December 2023. …The economy, and monetary policy more directly, is in an unusual situation because a lack of progress on reducing shelter inflation, which is currently running at a 5.4% year-over-year rate, is making it difficult for the Federal Reserve to achieve its target inflation rate of 2%. …All three HMI component indices posted declines in June. The HMI index charting current sales conditions in June fell three points to 48, the component measuring sales expectations in the next six months fell four points to 47 and the gauge charting traffic of prospective buyers declined two points to 28.

A report released by the Commerce Department on Thursday unexpectedly showed a steep drop in new residential construction in the U.S. in the month of May. The Commerce Department said housing starts plunged by 5.5% to an annual rate of 1.277 million in May after surging by 4.1% to a revised rate of 1.352 million in April. Economists had expected housing starts to climb by 0.7%. With the unexpected decrease, housing starts fell to their lowest level since hitting an annual rate of 1.254 million in June 2020. Single-family housing starts dove by 5.2% to an annual rate of 982,000, while multi-family housing starts plummeted by 6.7% to an annual rate of 295,000. …The report also said building permits slumped by 3.8% to an annual rate of 1.386 million in May after tumbling by 3.0% to a rate of 1.440 million in April.

To the extent areas of increased climate risk may be reflected in pockets of repriced real estate in the US, those pockets have the potential to infect other areas of our financial system. After all, it was foreclosures in Las Vegas, Phoenix, and a handful of other locations that led to a cascade of global effects in 2008. …If we wanted to steadily, prudently reduce risks to homeowners in America that are being caused by out-of-date building codes, inadequate land-use policies, and under-capitalized insurers, one possible area to examine would be the rules that Fannie Mae and Freddie Mac use to screen the mortgages they agree to guarantee. Using this power wisely has the potential to affect much of the housing market, because these Government Sponsored Enterprises support about 70 percent of the mortgage market, according to the National Association of Realtors.

Inputs to residential construction, goods less food and energy, fell 0.09% over the month according to the most recent producer price index (PPI) report published by the U.S. Bureau of Labor Statistics. …This was the first decrease in the index since October of last year. While the index fell over the month, it was 2.91% higher than May of last year. …The seasonally adjusted PPI for softwood lumber fell for the first time since February, down 5% over the month. Prices for softwood lumber remain lower than last year at 8.10% below May of 2023. …The non-seasonally adjusted PPI for gypsum building materials was unchanged over the month but was up 2.09% over the year. …The seasonally adjusted PPI for ready-mix concrete fell for the second consecutive month, down 0.13% in May after falling from 0.9% in April. …The non-seasonally adjusted PPI for steel mill products rose 0.54% in May after falling in the two previous months. 

Lumber prices rebounded toward $500 per thousand board feet, moving away from the eight-month low of $488 observed from June 4th as the latest US data lifted the demand outlook. Softer-than-expected US inflation data, which bolstered expectations for multiple Federal Reserve rate cuts this year, added further optimism for reduced mortgage rates amid a sharp decline in US Treasury yields. Still, housing starts continued to struggle amid high rates and home prices continue to weigh on home builders. Mortgage rates remained above 7% for over two months, while building permits in the US sank for a second straight month in April, limiting the outlook for wood and housing construction materials.

The Federal Reserve’s monetary policy committee held constant the federal funds rate at a top target of 5.5% at the conclusion of its June meeting. …Compared to the Fed’s May statement, the current statement upgraded “lack of progress” stated in May to “modest further progress” referred to this month with respect to achieving the central bank’s 2% inflation target. The FOMC’s statement also noted (consistent with its commentary in May): The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.  Overall, the central bank continues to look for sustained, lower inflation readings, with the data having shown insufficient progress during the first quarter. The May CPI data was a step in the right direction, but the central bank will remain data dependent with respect to an eventual easing of monetary policy.