To fully understand markets, you also need to understand the real estate cycle. We always study the US economy first and foremost because, if history repeats, the US will continue to lead Australia about a year ahead.
That’s handy knowledge to have if you’re wondering where Aussie property is headed.
So it behoves us to look what is happening in the US.
The manufacturing sector has been in a lull, struggling with low oil prices dampening US energy companies, and the strong dollar depressing demand for US exports. But those dynamics are slowly reversing, with oil hitting new highs in 2016, and the dollar weakening a little, giving a boost to the US economy.
US manufacturing expanded in April for the second straight month, indicating the sector is starting to stabilise as the falling dollar gives American factories some relief.
On Monday, the Institute for Supply Management said its index of manufacturing activity fell slightly in April. But, for a second straight month, the measure remained above 50, indicating the US economy is expanding.
Manufacturing doesn’t hold sway over the US economy as it once did. Less than 10% of US employment is in the manufacturing sector, down from about 25% in the 1970s, and well below the 40% of the economy it accounted for in the 1940s.
But a pickup in manufacturing activity would give a boost to US gross domestic product (GDP), which expanded by only 0.5% in the first quarter.
At the beginning of 2014, the US economy contracted. In early 2015, it barely expanded. But in both instances, GDP recovered and ultimately advanced by 2.4% each year.
For the industrial sector the tide may now be turning.
Despite all the calls that the US economy will enter recession in 2016, the world’s largest economy continues to coast along.
Jobs additions are averaging around 200,000 every month, while unemployment has halved from the 10% post-GFC highs.
Conference Board, a leading economic research organisation last month released a report predicting 15 years of labour shortages for the US economy — due mostly to falling participation rates as the workforce ages.
Construction spending continues to grow at a decent pace. According to data from the United States Department of Commerce US, construction spending advanced in March to an eight and half year high.
Back to back increases in February and March raised total construction spending to a seasonally adjusted annual rate of $1.14 trillion, the highest level since October 2007.
But the most telling indicator for the economy is the ‘land price’, which must rise and fall with the economic outlook.
The Standard & Poor’s/Case-Shiller 20-city home price index rose 5.7% from a year earlier, a slight increase from the 5.6% annual increase in December. On top of this, a government report revealed US house prices are climbing at more than double the rate of wages growth.
That is not suggesting a weakening economy; rather, it’s factoring in future growth.
Rising land price and rents make it more profitable to build. So let’s look at what is happening to residential housing construction.
While the monthly figure for housing starts in March was down 8.8% from the previous month (annualised), housing starts were over 14% above those in March 2015.
Housing starts are still far below 1.5 million per year, which has been the long term average over the last 40-plus years, and is even further below the 2.2 million peak of the most recent housing boom.
See for yourself…
That’s a bullish chart as it suggests there’s still plenty of ground to make up post-GFC to get back to historic levels. The US housing boom might still have some time to run.
The Federal Reserve passed on raising interest rates at its March meeting this year, citing the global economic and financial situation as a risk. Policymakers had previously signalled in December that four rate rises were likely in 2016.
Despite the August 2015 and January 2016 panics, the S&P 500 and the Dow Jones are near their May 2015 highs. Commodities are rallying, and stimulus in China is kicking in. US manufacturing is expanding, construction spending is at eight and a half year highs, and the economy has been adding jobs for 72 straight months.
The reasons for holding back on rate hikes may be slowly disappearing.
If you want to know what effects US rate hikes will have on stocks and property, then go here to find out more.
For Money Morning