Housing and manufacturing conditions suggest a sustainable economic recovery remains in place, despite the surging virus and the impact it is having on consumer’s ability to spend.
We anticipate consumer optimism and spending will rebound as the vaccines are fully implemented—to the benefit of hard-hit industries and ultimately overall economic performance.
Unlike previous recessions, the consumer has remained healthy throughout the pandemic, supported by the massive $2.2 trillion CARES Act fiscal stimulus which provided stimulus checks and enhanced unemployment benefits. A $900 billion follow-on stimulus package was just put in place in late December, and President Biden is already working on an additional $1.9 trillion stimulus proposal.
All of this is supporting consumer savings with estimates showing excess savings at about $2 trillion. This savings should provide strong support for the building pent-up demand for travel, leisure, and other consumer activities that we believe will be unleashed as the vaccines are fully implemented.
While housing, manufacturing, technology, and health care are currently proving support to the economy, the pickup in consumer activity with the vaccines should ultimately lead to a broader, sustainable economic recovery as we move through 2021. We remain encouraged by the strong performance of cyclical stocks and industries that stand to benefit the most from a fully reopened economy.
Business Surveys Show Strong Start To 2021
Private business activity picked up at the start of 2021, despite the surging virus and a relatively slow vaccine
rollout. The preliminary Markit Manufacturing PMI (a timely business survey) climbed to a record high in January with factory output growing at the fastest pace since August 2014. New orders, including export orders, rose at the quickest rate since
September 2014. Greater demand drove up order backlogs, which led to manufacturing firms expanding their workforce at the fastest rate in two years.
The preliminary January Markit services sector business survey reached its second-highest level since March 2015, reflecting a notable pickup in business activity. However, new order growth softened, as COVID restrictions weighed on demand. Importantly, overall business confidence rose, led entirely by the services sector, on expectations that the vaccine rollout will boost economic conditions by the second half of 2021.
Housing Remains Strong
Housing starts increased 5.8% in December to a 1.67 million unit annual rate, the highest level since September
2006 and the seventh increase in the past eight months. Building permits, a harbinger of starts in the near-term, rose 4.5% to a 1.71 million unit annual rate, the highest level since August 2006 with all four regions of the country posting gains.
On a year/year basis, housing starts were up 5.2% in December, while permits increased a much stronger 17.3%. On a total annual basis, both starts and permits posted their highest levels since 2006.
In addition, December existing home sales increased 0.7% to a 6.76 million unit annual rate, close to the highest level since March 2006, and well above expectations. On a year/year basis, the sales rate was up 22.2%, with all four regions posting double-digit gains. The surge in housing demand last year exacerbated the housing shortage. Existing home inventory sank 16.4% in December to a record low 1.07 million units. It represented just 1.9 months of available supply, also a record low, and a sign that inventories are extremely tight. As a result, home price growth remained elevated, particularly for single-family homes, where the median price was up 13.5% y/y, near its fastest pace since October 2005. This tight inventory situation suggests the need for more housing and further housing strength ahead.
Manufacturing and housing are important economic drivers and we are encouraged by their strength as we start 2021. This supports our optimism on stocks and other risk assets as we begin the year.
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