LOS ANGELES-A report by Wells Fargo Securities Economics Group indicates the national economy is gaining momentum, but will continue growing only at a moderate pace. While that may not be great news, Wells indicates that modest growth will likely forestall any Federal Reserve plans to end its economic stimulus efforts for the foreseeable future.
The firm's forecast is more bullish on prospects for the Western US, particularly California. Wells says Western states should outperform national economic growth over the next few years.
Although existing home sales fell 1.2% in June, disappointing news when some moderate growth was expected, Wells notes new home sales rose to its highest level in five years. That increase in new home sales belies any impact of the mortgage rate rise of recent months, it says. Inventories of unsold new homes remain “incredibly lean,” and at current selling rates it would take only 3.9 months to sell all unsold new homes, which is the lowest inventory-to-sales ratio since October 2004.
“One should not make general inferences based on one month's data release, because home sales data are volatile on a monthly basis and revisions to past months' data are common,” the Wells report states. “In general, the upward trend in home sales that has been in place for two years appears to remain intact, and we expect the housing market to continue to firm. Lean inventories should support new housing starts, and despite their rise over the past two months mortgage rates remain incredibly low when viewed in a historical context.”
Orders for capital good have now risen for four consecutive months and the labor market “appears to be holding up.”
News from the nation's factory sector was generally positive, Wells claims. Orders for durable goods shot up 4.2% in June. Not only was the outturn significantly stronger than the consensus forecast had anticipated, but it also came on top of the upwardly revised 5.2% rise registered during May. There also appears to be good momentum in the underlying pace of orders.
Orders for non-defense capital goods (excluding aircraft), which tends to be a good measure of the underlying pace of capital spending, have now risen for four consecutive months, leaving them 6.0% higher than they were last year at this time, Wells claims.
"Also, it appears that the factory sector may have strengthened a bit further thus far in July. The Markit US manufacturing PMI, a diffusion index similar to the ISM manufacturing index, rose to 53.2 in July from 51.9 last month."
Globally, the Chinese economy definitely appears to be slowing. The HSBC manufacturing PMI slipped to 47.7, indicating deterioration in that sector. In Europe, an expanded PMI indicated the continent may be lifting itself out of the doldrums. And in South Korea, the economy there beat growth expecations despite strong regional headwinds.
Many Western US states have fared better than the overall national growth rates, Wells says, owing to their heavy emphasis on technology firms, energy resources and international ties. An improving housing market and a resurgence in tourism have also added to the region';s recovery. But the West also faces some problems. With global economic growth slowing, that has cut into the region's exports. And interest rate rises could cause some stagnation in housing.
“We expect the Western states to slightly outperform the nation during the next few years,” Wells says. “Growth in California and Washington is likely even stronger than current numbers suggest, while Arizona, Nevada and Idaho are gaining momentum. Although export growth has slowed, there are increasing signs that global growth may now be bottoming.”
As previously reported by GlobeSt.com, three real estate veterans indicate the sky won't fall when interest rates inevitably rise.
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