As February wears on, the real economy gets shaky, as the housing market gets Bubblier

On Friday, I saw a surprising report that indicated the overall US economy actually declined in the first part of February.

Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 49.6 in February, down from 53.3 in the opening month of 2020. Although only fractional, the decrease in business activity brought to an end a near-four year sequence of expansion following a contraction in service sector output and a slower rise in manufacturing production amid supplier delays following the outbreak of coronavirus….

New orders received by private sector firms fell for the first time since data collection began in October 2009. The fractional decline in new business stemmed from weak client demand across the service sector and the slowest rise in manufacturing new order volumes for nine months. Private sector companies continued to struggle to attract foreign client demand as new export orders fell for the second month running.

That’s not promising whatsoever, and except for a one-month blip due to the government shutdown in October 2013, it’s the first decline in the PMI composite index in a decade.

The bigger alarm is that February’s decline was driven by services.

The seasonally adjusted IHS Markit Flash U.S. Services PMI™ Business Activity Index registered 49.4 in February, down from 53.4 in January. The latest data signalled the first decline in business activity for four years and a notable turnaround from the solid output expansion seen in the opening month of the year.

The contraction in output was in part driven by a renewed decrease in new business across the service sector. Although only fractional overall, the rate of decline was the strongest in the series history (since October 2009). New export orders also fell as firms reported greater hesitancy among clients to place orders amid speculation regarding coronavirus.

Maybe the coronavirus is causing a one-month blip, but it adds to a list of iffy economic reports in recent days. This includes a mediocre retail sales report for January, a decline in job openings to a 2-year low, as well as new data that shows job growth for 2019 will be revised down by another 300,000.

Put those uncertainties together along with the Federal Reserve continuing to throw money into the market, and interest rates have plummeted in recent weeks, with the 30-year bond at its lowest levels ever, and the 10-year note losing 45 basis points in the first 7 weeks of 2020.

One of the few things keeping the economy afloat? A Bubbly housing market, which continues to ride the low interest rates which have allowed prices to rocket higher in recent years. Friday’s report from the National Association of Realtors reiterated that trend continued in January.

Total existing-home sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, decreased 1.3% from December to a seasonally-adjusted annual rate of 5.46 million in January. However, for the second straight month, overall sales substantially increased year-over-year, up 9.6% from a year ago (4.98 million in January 2019).

Lawrence Yun, NAR’s chief economist, finds the outlook for 2020 home sales promising despite the drop in January. “Existing-home sales are off to a strong start at 5.46 million.” Yun said. “The trend line for housing starts is increasing and showing steady improvement, which should ultimately lead to more home sales.”…

Single-family home sales sat at a seasonally-adjusted annual rate of 4.85 million in January, down from 4.91 million in December, but up 9.7% from a year ago. The median existing single-family home price was $268,600 in January 2020, up 6.9% from January 2019.

Existing condominium and co-op sales were recorded at a seasonally adjusted annual rate of 610,000 units in January, down 1.6% from December but 8.9% higher than a year ago. The median existing condo price was $248,100 in January, an increase of 5.7% from a year ago.

It's worth noting that the home price increases are jumping at a rate that's more than twice the US's 3.1% increase in wages over the last 12 months, and property taxes are likely rising with those higher prices. Which sure doesn't seem very sustainable for the long term, even with the lower interest rates making it slightly less costly.

We're not at the massive debt loads that we saw in the mid-late 2000s. But any growth in the 2020 economy seems to be increasingly based more on speculation and asset values than on growth in wages, jobs or demand. And when we get in this Bubbly stage without legitimate growth underneath it, the ultimate POP of that Bubble never ends well, and hurts the real economy below it.