Builders’ Confidence Erodes; Manufacturing Deteriorates

MBA (5/16/2008 ) Velz, Orawin
Home builders continue to be more pessimistic in May. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index declined to 19 from 20 in April after holding steady for the previous three months. (Readings below 50 indicates that more respondents view conditions as poor.) The index was one point above the record low of 18, reached in December 2007, and has hovered within two points of the historical low over the past nine months.

The survey asks builders for their sentiments on current sales, traffic of potential buyers and projected sales over the next six months. Fewer builders expected market conditions to improve in the near term: the index gauging sales expectations for the next six months fell three points to 27. The index gauging current sales conditions declined one point to 17, its lowest level since the series began in January 1985. The index gauging traffic of prospective buyers declined two points to 17.
Given eroding builders’ confidence and rising months’ supply of new homes to near the record high, total housing starts should continue to decline through the rest of the year. In the May mortgage finance forecast released on Wednesday, the Mortgage Bankers Association projects that housing starts will hit bottom in the fourth quarter of this year at around 850,000 units (seasonally adjusted annualized rate)—the slowest quarterly pace in the history of the series.

Another report showed a sharp decline in the nation’s output from factories, mines and utilities. Industrial production was down 0.7 percent in April, following a 0.2 percent increase in March.

Manufacturing output, which accounts for about four-fifths of industrial production, dropped 0.8 percent. Auto production was responsible for half of the decline. This was the biggest drop in manufacturing output since September 2005, during the aftermath of hurricane Katrina. Mining output also fell 0.8 percent, while utility output gained 0.3 percent.

A protracted strike at American Axle may have contributed to the decline in manufacturing output. However, automakers such as General Motors are also cutting production to respond to declining demand. Sales of cars and light trucks fell to an annualized rate of 14.4 million in April, the slowest pace since August 1998.

The industrial production report showed that capacity utilization, which measures a portion of plants in use and a gauge for inflationary pressures, fell to 79.7 percent, the first reading below 80 percent since October 2005. Industrial production is one of the five monthly indicators (including monthly gross domestic product) that the National Bureau of Economic Research tracks to date recessions and expansions. It has dropped 1.2 percent since peaking in January.

Manufacturing activity may decline further in May, according to two regional Federal Reserve Banks surveys released yesterday. The New York Fed’s Empire State manufacturing survey showed that the general business conditions index fell to negative 3.2 from 0.6 in April. This was the third negative reading, which indicates contracting activity, in the past four months. The Philadelphia Fed manufacturing survey continued to show reduced activity in May but the pace of contraction moderated. The general business conditions index improved to negative 15.6 from negative 24.9. Despite the improvement, the index has been negative for six consecutive months.

Another report showed that foreigners’ appetite for long-term U.S. assets held firm in March but the pattern of purchases indicated that demand for U.S. asset-backed securities had diminished. Net foreign purchases in long-term U.S. securities increased to $80.2 billion from $77.9 billion in February. Net private purchases of agency securities dropped drastically and net purchases of corporate bonds, which include private-label mortgage backed securities, were negative. By contrast, net private purchases of U.S. equities increased strongly as foreign investors appeared to find a bargain in equities, resulting from the weak dollar and the declining stock markets throughout the month. Net official purchases of U.S. corporate bonds and agency securities increased.

Long-term Treasury yields declined in response to weak economic reports. The yield on the 10-year Treasury note stayed around 3.83 percent by mid-Thursday afternoon, eight basis points lower than the rate on Wednesday.