The Business News Week In Review

A week filled with news was led by the Trump administration's efforts to raise tariffs on China and included buckling in web stocks on Facebook's enormous privacy beach. These events pushed out a steady-as-she-goes FOMC meeting and even a last minute extension of the debt limit. What we'll concentrate on this report is the week's economic data, headlined by a durable goods report that brings up the question of overheating and by a run of housing data topped by what could tentatively be described as a surge in home prices.

The economy

Significant strength is the verdict for the latest durable goods report and with it, significant growth is now the tangible outlook for this year's factory sector. The blue columns of the graph track monthly order totals for durable goods which came in at $247.7 billion in February for a jump of 3.1 percent compared with January. The green line tracks shipments of durables which totaled $249.7 billion for a 0.9 percent increase which is very sizable for this measure. The slopes in the graph are very convincing and show no suggestion of plateauing, confirming the enormous strength that has been posted over the last year by regional and private factory surveys. Unfilled orders, which have been showing less strength, improved with a 0.2 percent gain. Turning to inventories of durables, they rose a healthy 0.4 percent but, relative to shipments, they are not keeping pace as the inventory-to-shipments ratio fell one notch to 1.64. The dip in this reading points to the need for restocking which should be a special plus for factory payrolls.

Durables, which are discretionary in nature, get special attention since rising demand for these goods hints at rising demand for goods and services in general. And among durables, capital goods get the most attention as demand for these, from machinery to computers, points to increasing fixed investment as businesses put new equipment in place to meet what they expect will be rising demand ahead. And very convincing strength comes from core capital goods (nondefense ex-aircraft) where year-on-year growth, as tracked by the blue line of the graph, moved up nearly 2 percentage points to 8.0 percent. Monthly growth for this reading far surpassed top estimates with a 1.8 percent gain to $67.8 billion while related shipments, which are direct inputs into GDP business investment, rose an outsized 1.4 percent. Looking at product groups that contribute to the capital goods component, orders for primary metals surged a monthly 2.7 percent in a gain that may reflect, based on reports from regional and private surveys, rising prices for steel and aluminum. It's worth noting that these prices were already climbing ahead of possible steel and aluminum tarrifs announced earlier this month. Fabrication orders rose 0.8 percent in February with machinery, which is at the very heart of the capital-goods group, rising 1.6 percent.

Less strength, however, comes from the week's sales data out of the housing sector. Existing home sales did rise in February but followed lackluster sales in January and December. Home sales can be very volatile month-to-month -- especially during the weather effects of winter -- which puts the focus on 3-month averages as tracked in the graph. The blue line of existing sales, at an annualized rate of 4.890 million for February, has been flat for nearly 2 years in what has been a major disappointment for the nation's Realtors. New home sales, the green line, have been doing better but have run out of gas in recent months, slipping in February to a 3-month rate of 631,000 in what is not the best news for home builders. Lack of homes for sale has been perhaps the biggest reason for the lack of sales punch, especially in the resale market where supply is at a very thin 3.4 months relative to sales. And not helping matters is an ongoing rise in mortgage rates which are averaging about 4.70 percent for 30-year fixed loans which is up about 25 basis points from this time last year. Another factor holding down sales is an increase underway in prices, up a year-on-year 5.9 percent for existing homes to a median $241,000 and up 9.7 percent for new homes to a median $326,800.

Home prices, that is FHFA house price data, were perhaps the week's biggest surprise, shooting up to 259.28 in data for January for a far stronger-than-expected 0.8 percent monthly gain and a 7.3 percent year-on-year increase which is the best in 3-1/2 years. This index covers single-family transactions using data from Fannie Mae and Freddie Mac. Federal Reserve Chair Jerome Powell, in his first FOMC press conference at midweek, said there's currently no immediate risk of excess value in the housing market though FHFA's data do hint at acceleration. If there are questions of a possible price bubble they're centered in the western states with the Mountain region in this dataset at a year-on-year 10.0 percent and the Pacific region at 9.4 percent. And three other regions are 7 percent and over: South Atlantic up 7.8 percent, New England up 7.1 percent, and the East North Central at 7.0 percent. If it wasn't for the moderation underway in underlying sales, rising prices in the housing market would likely be considered a warning of unsustainable economic growth.

Also released in the week were early indications on March from Markit's manufacturing and services reports. Let's look first at manufacturing where the purchasing managers index came in at 55.7 which, as tracked in the blue line, extends a rising slope that parallels in direction the more closely watched ISM survey. Strength so far this month includes orders, production and also employment but price pressures, in an echo of the housing data, are perhaps the most telling result. A number of respondents are citing higher prices for metals and, according to the report, increased charges by suppliers amid strong demand for raw materials. At the same time, selling prices are rising at the strongest pace in just over 6-1/2 years.

Markit's service sample is reporting less strength, moderating to an index of 54.1 with this curve, though pointing higher, underperforming the ISM's non-manufacturing measure. Despite the slowing, orders and employment remain strong. And price pressures are also evident. Markit's results are likely to firm expectations for yet another very strong reading in the ISM manufacturing report though they may temper expectations for ISM's non-manufacturing data, both of which will be posted at the beginning of next month.

Whether we are talking about manufacturing or services or housing or even prices, all of these take a backseat to the nation's most important set of economic data: the monthly employment report. And the the report for March looks to be strong once again based on initial jobless claims which, in the sample week for the monthly report, remained low and very favorable. Initial claims in the March 17 week inched 3,000 higher to 229,000 with the 4-week average up slightly to 223,750. A comparison with the February 17 sample week of the prior employment report, as highlighted in the graph, shows no significant change. Continuing claims, in lagging data for the March 10 week, fell 57,000 to 1.828 million and a new multi-decade low. Employers are holding onto their employees like never before which is an indication that demand for labor is unusually strong.

Markets: Stocks move to the minus column

The stock market took a beating, opening the week with a 1.4 percent drop for the Dow on news that a third-party firm amassed Facebook data without user permission which was followed on Thursday by a 2.9 percent plunge after President Trump, who earlier this month announced tariffs on primary metals, moved to impose heavy tariffs specifically targeted at Chinese imports. Friday wasn't much better with the Dow dropping another 1.8 percent. The declines wipe away this year's year-to-date gains, at least for the Dow and S&P 500 which now show respective losses of 4.8 percent and 3.2 percent. But sellers didn't move their money into Treasuries, which were mostly steady in the week, though they may have been buying commodities based on the big 5.8 percent weekly gain for oil and 3.0 percent gain for gold. The dollar, however, wasn't in demand, falling 0.8 percent in the week for a year-to-date decline of 3.0 percent which points to increasing price acceleration for imports.

Markets at a Glance	Year-End	Week Ended	Week Ended	Year-To-Date	Weekly
	2017	16-Mar-18	23-Mar-18	Change	Change
DJIA	24,719.22	24,946.51	23,533.20	-4.8%	-5.7%
S&P 500	2,673.61	2,752.01	2,588.26	-3.2%	-6.0%
Nasdaq Composite	6,903.39	7,481.99	6,992.67	1.3%	-6.5%
Crude Oil, WTI ($/barrel)	$60.15	$62.27	$65.91	9.6%	5.8%
Gold (COMEX) ($/ounce)	$1,305.50	$1,313.50	$1,352.30	3.6%	3.0%
Fed Funds Target	1.25 to 1.50%	1.25 to 1.50%	1.50 to 1.75%	25 bp	25 bp
2-Year Treasury Yield	1.89%	2.30%	2.27%	38 bp	−3 bp
10-Year Treasury Yield	2.41%	2.85%	2.81%	40 bp	−4 bp
Dollar Index	92.29	90.22	89.48	-3.0%	-0.8%

The bottom line

The week's durables data point to continued increases in factory payrolls, which have already been very impressive, and also to an increasing capital-goods contribution to business investment, specifically equipment investment that already represented about 1/4 of the fourth quarter's 2.5 percent GDP growth rate. Though inflation wasn't directly in the week's spotlight, factory strength does highlight the risk of rising pressures as perhaps do home prices. Yet we'll give Jerome Powell, who chaired his first FOMC press conference in the week, the last say, that increases underway in inflation are right now no more than moderate.