While consumer spending continues to propel the US economy, GDP growth slowed in the September quarter, with a conspicuous downturn in fixed investment. Recent signs of weakness in the housing sector have raised fears that this downturn could continue through the December quarter, but more importantly markets are concerned that Fed tightening could exacerbate the situation, triggering a further fall in housing activity and putting pressure on consumer spending.
Although housing starts have fallen only modestly from an annual pace of 1.3 to 1.2 million, sales of new homes have fallen 13% over the course of 2018, while the NAHB builder sentiment index has reached its lowest level in two years. Housing activity remained weak in October, with single-family housing starts falling by 1.8% and permits falling by 0.6%. As the chart below shows, both existing and new home sales appear to be coming off, coinciding with the most recent cycle of monetary policy tightening.
The US housing market is sounding concerns for the economy
Source: St Louis Fed, Lonsec
At a recent speech at the Dallas Fed, Jerome Powell listed three possible challenges to growth in 2019, including a weaker global economy, fading fiscal stimulus, and the lagged economic impact of the Fed’s past rate increases. More broadly, financial conditions have tightened, with credit spreads widening, equity prices declining, and the currency strengthening. There is now a distinct possibility that the Fed may pause during the course of 2019.
In the meantime, trade tensions continue to impact confidence. President Trump has threatened to impose tariffs on almost all Chinese exports to the US and to ramp up the rate to 25%. Whether reduced options for stimulus force the Trump administration into a deal on trade with China remains to be seen. The recent impasse between the US and China on trade at the APEC conference does not instill confidence, although talks between Donald Trump and Xi Jinping at the G20 summit in Argentina in late November could bear fruit.
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