ABS Special Report: Gov’t Shut Down & Data

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The markets have been slightly bearish today over Covid D and a rise in Jobless Claims 51K to 419k.  However, the biggest immediate threat I see in the markets is a potential government shutdown over increased spending.

The current $28.5 trillion debt is the starting point as the two-year suspension of the debt ceiling occurred in 2019 but will expire at the end of July. Treasury Secretary Janet Yellen believes the federal government will hit its spending limit very quickly and said a default is “unthinkable”.

Senate Minority Leader Mitch McConnel (R-KY) said Republicans will not support an increase to the U.S. debt limit. The Senator said, “I can’t imagine a single Republican in this environment that we’re in now — this free-for-all for taxes and spending — to vote to raise the debt limit.”

This makes me think there is a 50/50 chance of shutdown because Republicans appear to be unified against raising the debt limit.

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Inflation will be the reason why Republicans won’t immediately support increasing the limit….. but will most likely increase it on their terms.

The limit could be increased through reconciliation, but the government will likely run out of money before it gets done.

Hence why I think there is a good chance of a government shutdown.

Today’s Market Data – 

  • Initial claims rose 51k to a 419k, from a 368k (was 355k) cycle-low also seen in late June.
  • Claims on an NSA basis rose 14k to 406k, after rising 9k to 392k (was 383k).
  • Continuing claims fell -29k to a 3,236k cycle-low, after falling -102k to a 3,265k (was 3,241k) prior cycle-low.
  • The insured jobless rate sat at a 2.4% cycle-low for a third week, after a 2.5% prior cycle low over the previous four weeks.
  • Existing home sales rose 1.4% to a 5.86 mln clip, after a 5.78 (was 5.80) mln pace in May.
  • Home inventories rose to 1.25 mln from 1.21 (was 1.23) mln in May, leaving a -18.8% y/y drop.
  • The months’ supply of homes rose to 2.6 from 2.5 in May, versus a 1.9 all-time low in January and December.
  • The median sales price rose 3.7% to a fourth consecutive new all-time high of $363,300.
  • The median price posted a 23.4% y/y gain that was the second largest in history, after two record-large gains of 23.6% in May and 18.8% in April.
  • Leading indicators rose 0.7%, after a 1.2% (was 1.3%) May gain.
  • Eight of the ten LEI components contributed positively, led by a 0.25% boost from initial claims.
  • The weekly Langer consumer comfort index fell to 51.5 from 52.2, versus a 55.7 cycle-high average in June.

Contents

Weekly Claims

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The 51k initial claims pop to an 11-week high  of 419k in the BLS survey week reversed last week’s -18k drop to the 368k (was 360k) cycle-low in the week of the July 4th holiday that was also seen in late-June, versus a 368k previous cycle-low at the end of June. Continuing claims fell -29k to a higher than expected 3,236k new cycle-low, after last week’s -102k drop to an upward-revised 3,265k (was 3,241k).

The insured jobless rate sat at a 2.4% cycle-low for a third week, after a 2.5% prior cycle low over the previous four weeks. Today’s disappointing figures reversed recent positive claims surprises, but the data remain consistent with our July nonfarm payroll estimate of 600k.

  • Initial claims rose 51k to a 419k, from a 368k (was 355k) cycle-low also seen in late June.

  • Claims on an NSA basis rose 14k to 406k, after rising 9k to 392k (was 383k).

  • Continuing claims fell -29k to a 3,236k cycle-low, after falling -102k to a 3,265k (was 3,241k) prior cycle-low.

  • The insured jobless rate sat at a 2.4% cycle-low for a third week, after a 2.5% prior cycle low over the previous four weeks.

Initial claims are averaging 392k in July, following prior averages of 394k in June, 428k in May, and 582k in April.

Today’s 419k BLS survey week reading exceeded the 418k June figure, but it undershot prior survey week readings of 444k in May, and 566k in April.

Continuing claims likely fell about -220k between the June and July BLS survey weeks, after drops of -199k in June, -42k in May, -188k in April, and -628k in March.

Our July nonfarm payroll forecast sits at 600k, following a 543k average gain thus far in 2021. The rise is consistent with GDP growth of 7.3% in Q2 and 7.0% in Q3. Our forecast tracks solid 2021 production and retail sales gains, a firm ADP path, a continuing claims downtrend, a housing boom, and robust sentiment. Vehicle sales fell -9.8% in June alongside an assembly rate drop of -8.6%, as vehicle makers struggle with ongoing semiconductor shortages.

Existing-Home Sales

Existing home sales beat estimates with a 1.4% June bounce to a 5.86 mln clip after a -20k downward May revision. We have a four-month stretch of declines to an 11-month low of 5.78 (was 5.80) mln in May, versus a 10-month low of 5.85 mln in April.

The June rise breaks a string of declines since February. Despite the net pullback since the 15-year high of 6.73 mln last October, sales over the last 12 months were at rates not seen since 2006, given a peak in the last cycle of just 5.70 mln in February of 2020.

The median price rose 3.7% in June to a fourth consecutive all-time high that left a 23.4% y/y gain and a three-month stretch with the largest y/y gains in history. The supply of homes on the market is slowly rising from record-lows in 2020, but sales remain highly supply-constrained, and prices are posting huge gains.

Regionally, sales rose 3.1% in the midwest, 2.8% in the northeast, and 1.7% in the west but were flat in the south. We saw declines in three of four regions in both April and May, March declines in all four regions, and February declines in three of four regions.

Single-family sales bounced 1.4% as well to a 5.140 mln pace, following a -1.2% decline to 5.070 mln (was 5.080 mln) previously. Condo/coop sales also increased 1.4% to 0.720 mln, versus a prior -1.4% slide to 0.710 mln (was 0.720 mln).

Home inventories rose to 1.25 mln from 1.21 (was 1.23) mln in May, versus an all-time low of 1.03 mln in January and February, leaving a -18.8% y/y drop.

The months’ supply of homes rose to 2.6 from 2.5 in May, versus a 1.9 all-time low in January and December. The December bottom followed a string of prior all-time lows of 2.3 in November, 2.5 in October, 2.7 in September, and 3.0 in August. We saw a 4-year high of 4.6 with the pandemic in May of 2020. The series extends back to 1982.

The median sales price rose 3.7% to a new all-time high of $363,300 from three prior all-time highs of $350,400 (was $350,300) in May, $340,600 in April and $326,300 in March. The median price posted an all-time high before the last four readings of a much lower $313,000 in October of 2020 that capped a string of four consecutive new highs.

The median price posted a 23.4% y/y gain that was the second largest in history, after two record-large gains of 23.6% in May and 18.8% in April that left the three largest gains in history overall.

The winter NSA median price climb bucked the usual pullback from a June high to a January trough, as the school calendar and the holidays were less seasonally important with the pandemic.  Prices have continued to climb since then from the unusually high winter base.

Existing home sales posted a -26.8% contraction rate in Q2 after a -19.6% rate in Q1. We expect a 5% rise for existing home sales in 2021, after a 6% rise in 2020.

We expect GDP growth of 7.3% in Q2 and 7.0% in Q3, following the 6.4% Q1 gain. We expect real residential construction contraction rates of -6% in Q2 and -1% in Q3, after the 13.1% Q1 pace. We expect real nonresidential construction contraction rates of -7% in Q2 and -3% in Q3, after the -2.0% Q1 pace. We expect -1% real contraction rates for government purchases in both Q2 and Q3, after the 5.7% Q1 pace.

For other reports, housing starts rose 6.3% in June to a 1.643 mln clip, versus a 15-year high pace in March of 1.725 mln, while building permits fell -5.1% to a 1.598 mln pace that sits below the 15-year high rate of 1.883 mln in January. We saw 14-year highs for starts under construction in June and for home completions in March.

The NAHB housing index slipped to 80 in July from 81 in June versus an all-time high of 90 in November of 2020. Despite the pullback since November, we have a 12-month stretch of the highest readings ever.

Before this boom, the all-time high was a 76 figure in December of 2019.
The MBA purchase index has followed a disappointing path in 2021, with recent declines of -2.0% in June, -5.1% in May, and -4.5% in April, though we’ve seen a 2.2% bounce thus far in July. The purchase index marked a 14-month low at the start of July versus a 12-month low at the end of May, a 9-month low in mid-February, and a 12-year high in mid-January.

Housing faces ongoing headwinds from mortgage rate gains, labor shortages, and elevated construction costs that have capped affordability. The 2021 climb for starts and other residential construction measures has been disappointing, despite a historic shortage of existing homes for sale and soaring prices.

Leading Indicators

The leading economic index (LEI) underperformed, with a 0.7% June gain to 115.1 after downward revisions, leaving what are still outsized increases in 13 of the last 14 months.

We saw recent gains of 1.2% (was 1.3%) in May, 1.3% in April, and 1.4% in March, but a flat February figure due to weather disruptions. Since April, the index levels have beat the 112.0 prior all-time high at the end of the last expansion. The climb in the LEI since 2020’s March-April plunge has received a powerful 2021 lift from two rounds of stimulus and vaccine distributions.

The six-month annualized LEI rose to 10.3% from 9.6% (was 9.9%) in May. The y/y LEI fell to 12.0% from 14.5% (was 14.7%) in May, as we unwind easy comparisons.

Eight of the 10 components made positive contributions, again led by jobless claims (0.25%) and ISM new orders (0.21). The two components making negative contributions were building permits (-0.15%) and the average workweek (-0.14%).

The LEI sat at 115.1 in June, following a 114.3 (was 114.5) reading in May, leaving three new all-time highs that exceeded prior peaks of 112.0 in both January of 2020 and July of 2019. We had a seven-month plateau for the index in advance of the global pandemic. The 96.9 troughs in April of 2020 marked the weakest reading since September of 2014.

We saw industrial production growth of 5.5% in Q2 that looks poised to be repeated in Q3, alongside estimated GDP growth of an estimated 7.3% in Q2 and 7.0% Q3. We saw respective rates of 3.6% and 6.4% in Q1, and 8.2% and 4.3% in Q4 of last year. We saw respective 2020 record gains of 44.5% and 33.4% in Q3, and record declines of -42.% and -31.4% in Q2.

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