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Optimism Winning Over Activity

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The housing market is improving, although not as fast and steady as economists wish. Economists were hoping to see a rebound in new home construction in April after unusually harsh weather dampened activity in March. Unfortunately, housing starts in April were a disappointment, with construction activity declining 2.6 percent. The decline was the second drop in a row and the fourth drop in six months. The silver lining in the report was a 9.6 percent decline in multi-family housing versus a 0.4 percent gain in single-family structures. The mix of more single-family homes versus less multi-family structures is a move in the right direction. The first quarter of 2017 was the first time in a decade there were more new buyers than renters. And, the buyers are looking for affordable homes. To meet the demand, 31 percent of the homes built in the first quarter were smaller, starter homes, compared to 27 percent a year ago.

If optimism evolves into action, we should expect to see advancement in home sales in coming months. Homebuilder sentiment rose to 70 in the latest survey, the second highest reading since April 2005. The optimism is coming from what many consider the two factors stalling the housing market – a lack of inventory and higher prices. Demand for housing is strong, especially from the millennial generation tired of paying high rental prices. Builders believe potential homebuyers will turn to new homes to find the house they want. The measure of future conditions, the six-month sales outlook, climbed to 79, the highest level since June 2005. Overall confidence levels rose in all geographic regions except the Midwest.

Other Key Indicators this Week:

Industrial Production – Industrial production rose 1.0 percent in April, the largest increase in more than three years. There was a nice rebound at factories, with output increasing 1.0 percent after a decline of 0.4 percent in March. The broad-based increase included a jump of 5.0 percent in auto production. This was the largest increase in auto-related activity in almost two years. Utility output was minimal, up only 0.7 percent, since most of the U.S. experienced the warmest April since 2012. Mining output climbed 1.2 percent. Capacity utilization increased to 76.7 percent, the highest level since August 2015. The increase in production activity bodes well for business investment down the road.

Leading Indicators – The index for leading economic indicators rose 0.3 percent in April, matching the increase from March. The index provides a useful guide for gauging GDP growth. Improvement in unemployment claims, consumer confidence and workweek hours topped the list of factors for continued advancement in economic growth. Weakness in building permits was the largest source of disappointment in the index. The report suggests the weak growth in the first quarter may prove to be a temporary hiccup as the economy continues to strengthen.

Strategically for Credit Unions:

It was another volatile week for both bonds and stocks as the news out of Washington unnerved markets. The flight to safety trades brought the 10-year bond yield to 2.23 at one point, 14 basis points lower than a week ago. The yield curve is nine basis points narrower at 96 basis points. Despite the volatility, fed funds futures still predict over a 90 percent chance for a rate increase in June.

Sarina Freedland – Senior Investment Officer

Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.