Global Daily – US homebuilder chill

by: Aline Schuiling , Peter de Bruin

140219-Global-Daily-Insight.pdf ()
  • US homebuilders feel cold winter chill, but outlook for residential investment remains sound
  • Germany’s ZEW economic sentiment falls, probably reflecting global uncertainty…
  • …though index remains consistent with stronger growth of German economy

US homebuilders feel cold winter chill…

The NAHB Homebuilders’ index unexpectedly plunged to 46 in February, down from 56 the month before. This marked the biggest monthly drop in the history of the series, and, hence, was considerably worse than the consensus forecast of no change. That said, the steep drop in confidence seems to be mostly related to unseasonably bad winter weather. Indeed, according to NAHB’s Chairman Kevin Kelly, ‘significant weather conditions across most of the country had led to a decline in buyer traffic.’ This marks the third successive month in which economic data have been adversely impacted by weather, making it difficult to read underlying trends, though we think that overall fundamentals for the US economy remain positive.

…but outlook for residential investment sound

Indeed, although February’s housing market data will most likely be affected by the winter weather as well, the outlook for construction activity remains healthy and we continue to think that residential investment will remain an important source of growth this year. This is because housing starts stood at just 999 thousand units in December of last year, which is still well-below the long-term average of 1.3 – 1.5 million units that starts need to rise to in order to catch up with population growth. Against a background of such a favourable supply-demand situation, home builders’ mood should quickly warm up again, once the weather normalises.

Germany’s ZEW economic sentiment edges lower …

Meanwhile, Germany’s ZEW indicator of economic sentiment fell from 61.7 in January to 55.7 in February, which was somewhat lower than the consensus forecast. Participants to the ZEW survey (financial analysts and economists ) seem to have become a bit less optimistic about the outlook for the German economy during the next six months due to the publication of some disappointing data for the US economy in December-January. Indeed, their forecast for the economic conditions in the US (percentage ‘improve’ minus percentage ‘get worse’) fell by 8 points to 58. On top of that, the recent volatility in emerging markets, raised some extra doubts about the strength of the global economy. With regard to financial markets, the percentage of participants that expect short-term interest rates in the eurozone to fall during the next six months rose by 9 points and is now almost equal to the percentage that expects short-term rates to rise (balance: +3), suggesting that an increasing number of analysts expect the ECB to ease monetary policy further in the coming months. Long-term interest rates, in contrast, are expected to rise during the next six months, according to a vast majority of the participants (balance for German Bunds: +62), albeit that the balance was 8 points lower in February than in January.

…. though economy still set to step up a gear

At its current level the ZEW sentiment indicator is well above its long-term average value of around 25 and consistent with accelerating growth of the Germany economy. Indeed, we expect GDP growth to rise from 0.4% qoq in Q4 to around 0.5-0.6% in the next couple of quarters. Growth should be broad-based, with consumption being lifted by wage growth and employment growth. Indeed, a separate report published yesterday showed that the number of persons employed rose by 0.2% qoq in 2014Q4, while strong survey results suggest that job growth should gain momentum in the next couple of months. In addition, higher corporate profitability is likely to result in solid expansion of fixed investment, while a stronger global economy should continue to support exports. All in all, we see GDP expanding by around 2% this year and 2.2% next year, which is a bit higher than the consensus forecast and also significantly above our forecasts for the eurozone.