3 Numbers: Europe 'paused' in recession, US Mfg PMI, US home sales
- Lack of evidence for sustained EU recovery
- US manufacturing PMI looking strong
- Slight increase expected in US home sales
An early look at the macro profile for June will dominate today’s economic news with the publication of flash estimates of manufacturing and services activity in the Eurozone and manufacturing for the US. Later, we’ll see the May numbers on existing home sales for the US, offering another read on the state of housing, which has been wobbly this year.
Eurozone: Manufacturing & Services PMIs (08:00 GMT) The Centre for Economic Policy Research (CEPR) warned that the Eurozone may be caught in a “recession pause” - a sort of in-between state where the last recession ended but a genuine recovery hasn’t really started. “The lack of evidence of sustained improvement of economic activity precludes calling an end to the recession that started after Q3:2011,” CEPR advised in a report issued last week.
Technically, one could argue that the recovery has arrived. Eurozone GDP has increased in each of past four quarters through the first quarter of 2014 (quarter-over-quarter change), according to Eurostat. But the rise has been weak - just 0.2 percent in this year's January to March period, for instance. Some of the debate about recession and recovery is semantics, but no one can deny that the “recovery” has been sluggish.
The more pressing question: Is Europe vulnerable to another leg down? In theory, yes, as the research note from the Centre for Economic Policy Research (CEPR) suggests. The main problem: limited confidence for expecting a robust expansion any time soon and so doubts will linger about what comes next. All the more reason to pay close attention to today’s flash estimate of business activity for June via Markit’s purchasing managers indexes (PMI) for the Eurozone. As one of the earliest indicators that’s published each month, the first round of PMI data sets the tone for macro expectations. On that note, the weak reading on the manufacturing front in the final data for May could be a sign of trouble if the slide continues. The services index is still trending higher, but the rise doesn’t look particularly convincing. If nothing else, today’s release will tell us if CEPR’s concerns are more than the academic grumblings of dismal scientists.
US: Manufacturing PMI (13:45 GMT) As usual, the flash release of this report will present a hint of things to come for the economic profile and so it’s highly prized as a bit of advance intelligence on the world’s largest economy. We’ll likely to see this indicator reconfirm that manufacturing continues to expand at a healthy rate. The consensus forecast sees this index climbing a bit higher after a solid report for last month.
“Purchasing managers reported a further surge in business activity in May,” noted Markit’s chief economist in the previous release. “With the exception of a brief spell in early 2010, output is growing at the fastest rate seen since prior to the financial crisis.”
One reason to expect that today’s release national benchmark will deliver something comparable: last week’s Philly Fed Index showed that manufacturing growth this month accelerated more than expected in the US mid-Atlantic region. We also learned last week that weekly jobless claims fell a touch more than expected, dropping to a seasonally adjusted 312,000 - close to a seven-year low. The news suggests we’re going to have "another decent gain in job creation this month”, said Ryan Sweet, senior economist at Moody’s Analytics. His forecast will be more compelling if today’s PMI report delivers another upbeat number.
US: Existing Home Sales (14:00 GMT) There are signs that the housing market is stabilising after the recent run of turbulence, although the jury’s still out. One reason for caution: the May updates on housing starts and newly issued building permits still reflect a downward bias in the year-over-year trends. As I discussed last week, especially worrisome is the decline in permits on an annual basis for the first time since January—and the steepest drop in three years.
Today’s release on existing home sales will provide some fresh intelligence for judging the risk outlook in this critical sector. The last several reports suggest that the worst has passed. Sales so far this year have found a floor around the 4.6 million mark (annualised seasonally adjusted data). With the national average for mortgage rates (based on the monthly average for the 30-year fixed rate) slipping in May, there’s one less headwind to worry about.
Sentiment at this point can survive a more or less flat report for existing home sales - by far the dominant piece of residential sales activity. Macro news otherwise is generally upbeat. But a decline below the recent low in March of 4.59 million would look troubling. I don’t think that’s likely. My econometric modeling suggests a slight increase is in the cards, and that's also the consensus forecast. But there’s a bit more uncertainty at the moment about housing’s capacity for growth. For example, the Mortgage Bankers Association last week lowered its 2014 sales outlook for existing homes by 4.1 percent, in part because prices have jumped sharply.
“The big housing rally wiped itself out because prices increased too quickly for buyers to keep up,” a strategist at Global Hunter Securities told Bloomberg. “The pool of eligible new buyers is collapsing” due to flat incomes and a low supply of available credit for home buyers.
Maybe, although cautious optimism remains a reasonable outlook for housing. With economic momentum firmly in the positive column in general (see my analysis here, for instance), the recovery in the residential property market will probably survive, albeit at a lesser pace and with bruises along the way.