Lennar#, the largest homebuilder in the U.S., announced Monday that second-quarter earnings grew 15% on a 9% revenue increase compared to a year ago. These results were ahead of expectations, although Lennar’s backlog and margin outlook were both a bit light. Lennar noted that consumers are still pressured by higher mortgage rates, but seem to be responsive to increased sales incentives. New orders increased 19% to 21,293 homes, and the quarter ended with a backlog of 17,873 homes. However, the average sales price of homes delivered was down 5% compared to a year ago due to the increased use of incentives and product mix.
KB Home reported earnings on Tuesday and said that home orders rose in its fiscal second quarter. In the quarter, revenue fell 3%, home orders rose 2% while order value grew 7%. KB Home raised the lower end of its housing revenue guidance for the year amid higher prices. A few weeks ago, Toll Brothers# reported a better-than-expected quarter and noted that demand has been very strong in the first three weeks of the third quarter. Also, the company raised net pricing in ~60% of its communities, resulting in an approximate $10K increase in net price across the company.
According to the National Association of Home Builders (NAHB) Housing Market Index released this week, builder confidence in the market for newly built single-family homes fell two points to 43 in June from the prior month. A number below 50 indicates that more builders view conditions as poor than good. The NAHB survey noted that high mortgage rates are keeping many prospective buyers on the sidelines. Home builders are also dealing with higher rates for construction and development loans, labor shortages and a lack of buildable lots. This feeds into shelter inflation in the CPI numbers, which is currently running at a 5.4% year-over-year rate. That makes it difficult for the Federal Reserve to achieve its target inflation rate of 2% and to eventually reduce interest rates. The latest data shows a 4.5MM unit housing deficit in the U.S. that will take time to fill. To put this in perspective, about 1.45 million new housing units were completed last year including about one million single family homes.
On the broader consumer side, May retail sales rose 0.1% from April, less than expectations for a rise of 0.3%, but up 2.3% from the prior year. Retail sales excluding autos were down 0.1% from the prior month versus expectations for a 0.2% rise. Of 13 tracked categories, five saw declines including gas stations (-2.2%), home furniture (-1.1%), building materials/ garden (-0.8%), food services/drinking places (-0.4%) and food/beverage stores (-0.2%). Meanwhile, sporting goods retailers (+2.8%), online stores (+0.8%), and car dealers (+0.8%) saw some strength.
On the plus side, Walmart#, which sells about $650 billion a year to consumers, reported good results and market share gains recently. Costco# also reported decent results, but is keeping its $1.50 hot dog and soda combo fixed for now along with membership prices that are overdue for an increase. Starbucks# and Target# have not been faring as well. Consumers continue to be cautious with their spending, supporting a soft-landing scenario. Soft economic readings for May continue to raise hopes for a Fed rate cut later this year.
New light-vehicle sales in May totaled 15.9 million units at an annualized rate. That is up 2.4% from May 2023 and up 0.8% from April 2024. Fully electric vehicles accounted for a little over 7% of units in the first quarter in the U.S. Not much change is expected here for the full year in overall auto sales, except for perhaps more incentives to move inventory. It does not help that average auto loan payments are over $760/month, with 17% of owners paying over $1,000/month.
On the industrial side, demand has been mixed. Industrial production overall rose 0.9 percent in May from the prior month and was 0.4 percent higher than the year-earlier level. Manufacturing output posted a similar gain of 0.9 percent after declining in the previous two months. The Manufacturing PMI registered 48.7 percent in May, down 0.5 percentage point from the 49.2 percent recorded in April. A reading over 42.5 percent generally indicates an expansion of the overall economy. Capacity utilization moved up to 78.7 percent, but is still below the 79.5% in May of last year on a slow but steady path so far.
The Congressional Budget Office (CBO) updated its Budget and Economic Outlook this week and raised its FY24 deficit forecast by 27% to $1.9 trillion from its February projection. Election years often are accompanied by increased fiscal spending, so no great surprise here. The latest increase was driven by recent legislation, including $95B in additional international aid such as for Ukraine, plus loan forgiveness and higher Medicaid spending. Markets have been particularly sensitive to higher deficits and the growing debt. The budget office predicts that annual interest costs alone will now rise to $1.7 trillion in 2034 from $892 billion this year. At that point, the U.S. would be spending about as much on interest payments as it does on Medicare.
“The only thing that is constant is change.” –Heraclitus (Greek philosopher, around 500 BCE). Heraclitus is best known for his views that things are constantly in flux and changing and that opposite forces often coincide. The S&P500 is up over 15% so far this year, led by a few technology stocks. However, the Dow is up only 3% and the equal weighted S&P is up less than 5%. About 40% of stocks in the S&P 500 are actually down this year. This trend of concentrated performance has been evident in prior periods, such as during the dot-com bubble in 2000. The top ten stocks back then included Microsoft#, Cisco#, Exxon#, GE#, and Intel. Going back further to 1980, the top ten stocks included IBM#, AT&T# and GM. The top ten stocks in the S&P 500 are different than 20 years ago and will most likely be different 20 years hence. While change is inevitable and ongoing, sometimes the more things change the more they stay the same.
Christopher Crooks, CFA®, CFP® 610-260-2219
Birthdays: Actress Nicole Kidman turns 57 and singer Lionel Richie turns 75.