Week of February 24
The Sound of Silence
It was a quiet week on the data front - new home sales underperformed, while the Fed’s inflation read on Friday was slightly better than anticipated and showed that inflation continues to moderate. Advance durable goods orders were solid, likely due to stockpiling, while north of the border the Canadian economy ended 2024 on very solid footing.
The quiet will undoubtedly change this week with construction spending and employment data coming out. Of course, what we’re all watching for is for an update on potential tariffs on Canada and Mexico. Will there be exceptions? A way out for the countries if they strike a deal elsewhere? Or will they retaliate in kind? It’s hard to get too far ahead on any analysis since they were already delayed once, but this could very well be a pivotal week for the economy, and especially the construction sector.
Important Data Points From The Past Week
U.S. Single Family Home Sales
New home sales fell in January, dropping 10% from December to a seasonally adjusted annual level of 657,000. Sales were down sharply in the Northeast, Midwest, and South regions (-20%, -17%, and -15% respectively), but they rose in the West (+8%). The months’ supply of homes for sale moved higher to 9 months, while the median sales price rose 8% to $446,300.
The decline isn’t terribly surprising. New home sales started last year on a high note but faded as the year progressed and mortgage rates trended higher. Mortgage rates, and affordability in general, will keep any strong sales growth in check. Coming into this reading I was expecting new home sales to be around 732,000 for the full year (+6% from 2024). January’s reading was at the lower end of what I was anticipating for the month, but not enough to make me rethink my forecast at this point - I still think we’ll see sales pick up as the year goes on. Regardless, they won’t grow by enough to stimulate single family construction; I’m still thinking low single digit growth there.
U.S. Advance Durable Goods Orders
New orders for nondefense capital goods, excluding aircraft, moved higher in January, rising 0.8% from December. New orders spent much of the last year moving sideways but have moved higher in recent months, in all likelihood as efforts to stockpile goods before tariffs kick in accelerate. The gains were pretty broad based, but the release of the detailed data this week will provide a better read on construction-related products.
The strength in new orders should remain in place for the next month or two as this stockpiling continues, but I think it’s unlikely that we’ll see a long period of sustained growth, with both consumer and business confidence in the doldrums.
U.S. Personal Consumption Expenditure Deflator
The Fed’s preferred measure of inflation posted a small increase from December to January, while on a year-over-year basis inflation ticked down – the total deflator slowed from 2.6% to 2.5%, while core (excluding food and energy) slowed from 2.9% to 2.6%.
To be honest, based on the hotter-than-expected CPI read last week I was thinking that inflation would have accelerated in January, so this deceleration is certainly good news. Indeed, the continued moderation in this data should reduce some (but not all) concern that inflation is
re-igniting.
The risks, though, remain tilted to the downside. Consumers are tired, businesses are concerned, and tariffs may bring higher prices. Long story short, the Fed will not be cutting rates until a) they have a clearer idea on the track of fiscal policy and/or b) the labor market starts to show serious cracks.
Canadian Gross Domestic Product
Real Canadian GDP rose by an annualized 2.6% in the fourth quarter of 2024, a pick up from the 2.2% growth in Q3. On the plus side, growth was led by consumer and business spending and rising exports, while inventory drawdown and imports were a drag.
With the seemingly endless torrent of breaking news, the fourth quarter seems like a year ago, but it’s at least reassuring to know that the Canadian economy was on solid footing as the year came to a close. I think we may even see a bit of a pickup in the first quarter due to stockpiling, but if tariffs really do take hold this week it will be short lived.
What I’ll Be Watching This Week
There’s a lot on the docket this week, but I’ll be paying close attention to the construction spending data on Monday and the U.S. and Canadian labor market data on Friday. Of course, front and center will be any action on tariffs on Canada and Mexico.
What I Listened To Last Week
The Concert In Central Park - Simon and Garfunkel - Spotify
I’m not sure what made me obsess over this album this week, but I did. It is certainly not them at their best. At this point in 1981 they had moved on with their lives apart and the sound has a Paul Simon solo gig feel to it (not that there is anything wrong with that!). Garfunkel’s harmonies seem strained and there are even a few spots where they flub the lyrics.
But at the same time, there is something special about it. In the late 70s and early 80s Central Park was in decay and the city couldn’t afford to fix it. The concert was a fundraising gig and launched the rebirth of this great space - and I would offer the city as well.
In the end though, good music is supposed to transport you to a different place and time. I challenge you to close your eyes and listen to Sound of Silence or Bridge Over Troubled Water and not feel like you are there in the park on that fall evening in 1981. It’s magical.
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