Based on the latest reports, there’s a lot to like about the economy right now.
The Institute of Supply Management reported that October’s service sector reading came in at 60.3. That’s down from September’s reading of 61.6, which was the second-highest reading in history. But October’s reading is still stellar.
Readings above 50 are an indication of expansion in that sector. Nearly every division within the service sector reported growth.
In addition, the October unemployment rate dropped to 3.7% — a 48-year low.
Over a 12-month period, wages for the average employee grew 3.1%. It’s the first time wage growth has tagged 3% since mid-2009.
It certainly looks like everything is humming along nicely.
But we are starting to see some cracks in this amazing economic picture that could spell trouble for the market.
A Struggling Housing Sector
The housing sector caused horrible problems for the market in 2008, leading to the Great Recession. But today, I’m not writing about overleveraged banks and questionable loaning practices.
This time, I’m simply looking at an overall slowdown in this key market. A slowdown that Wall Street seems to be purposefully ignoring.
In September new home sales dropped 5.5% to a near two-year low. What’s more, the June and July sales rates were revised lower.
New home sales have declined for four consecutive months.
Existing home sales have fallen for six consecutive months. In September, sales dropped 3.4%, marking the largest drop in more than two years.
The overall drop in sales have caused home prices to slow in their steady climb. The S&P CoreLogic Case-Shiller 20-City Composite Home Price Index rose only 0.1% in the most recent period and has slowed to a 5.5% gain on a 12-month basis. We’re seeing a number of hot markets starting to cool.
The Housing Decline Could Infect Other Sectors
Consumers are reaching a critical breaking point. An abnormally tight supply of homes, rising labor costs and climbing materials costs have pushed home prices higher.
In addition, mortgage rates are on the rise.
The average 30-year fixed-rate mortgage is at its highest level since 2011.
And with the economy humming along at a strong clip, the Federal Reserve is likely to lift interest rates by another 25 basis points when it meets in December.
Higher rates and home prices mean that fewer people are going to be getting in new or existing homes. This slowdown will have a ripple effect across other sectors in the market and spell trouble for 2019.
Many headlines’ numbers look rosy right now, but the signs are already there for a drop in economic growth in the new year.
Editorial Director, Banyan Hill Publishing