Stocks are higher this morning after good numbers out of Intel. Bonds and MBS are down.
US economic growth rebounded in April after the war-related slowdown in March. Output rose to a 3-month high, although we are still at relatively depressed levels. The service sector remained under pressure, while manufacturing rose at the fastest pace in 4 years driven by new orders. That said, some of the new orders appears to be companies building a safety margin of inventory in anticipation of potential supply shocks or price increases. Prices increased at the fastest rate since July 2022, driven by higher fuel prices.
“A rebound in business output growth in April is good news after the near stagnation seen in March, but over the past three months we have seen the weakest expansion of output recorded since the start of 2024 with the war in the Middle East squarely to blame.
The April PMI is broadly consistent with the economy struggling to manage annualized growth in excess of 1%, with the vast service sector acting as the principal drag … There was better news from manufacturing, but here an expansion of output and orders could be partly traced to the building of safety stocks, with survey respondents reporting “panic” and “emergency” buying ahead of price hikes and supply shortages in echoes of the problems seen during the pandemic. Not surprisingly, prices are already spiking higher in this environment, and not just for energy but for a wide variety of goods and services. The overall inflation picture is now the most worrying for almost four years.”
PulteGroup reported decreased net income in the first quarter, which is par for the course for the whole sector. “Within a demand environment impacted by domestic and global dynamics, we see a consumer with concerns about affordability and the economy, but still desirous of homeownership as demonstrated by the 3% growth in our first quarter net new orders,” added Marshall. “Given these dynamics, we continue to intelligently manage sales, incentives and production to best position the Company for near- and long-term success.”
Like most builders, gross margins contracted substantially, falling 300 basis points. On the earnings conference call, CEO Ryan Marshall said:
Overall, I would say that the first quarter developed as a typical spring selling season with orders increasing sequentially as we move through the months. It is difficult to determine what impact global events may have had, but appreciate consumers were facing higher rates and costs in March. During the first few weeks of April, demand conditions have remained on track with typical seasonal trends. Still in the quarter, we experienced strong buyer traffic to our communities and sold more than 8,000 homes, which says consumers remain actively engaged in homebuying. And once again, our diversified business platform allowed us to capture the strongest segments of the business, namely the move-up and active-adult buyers.
Economic reports talk to the K-shaped economy and how lower and middle-income families are struggling much more than those in upper incomes. Housing demand over the past 2 years has been consistent with these dynamics. We saw this play out again in our first quarter results with both relative demand strength in our move-up and active-adult businesses, and option and lot premium spend that continues to average over $100,000 per home.
However, on the lower leg of the K, first-time buyers continue to struggle with the challenges of stretched affordability and fear of job loss. Our ability to offer low fixed rate mortgages and other incentives is certainly helping solve the affordability riddle for some. But this comes at a price as incentives in the quarter reached 10.9% of gross sales price. Even at this level, I think, we have done an excellent job of balancing the need to sell homes, particularly finished spec homes and turn our inventory, while maintaining higher margins in support of delivering strong returns on invested capital.
The Trump Administration is considering buying Spirit Airlines to rescue it out of bankruptcy. I am not sure what is so special about this particular bankruptcy – airline bankruptcies are common, and Spirit has a debtor-in-possession credit line that will allow it to operate as normal. I find it ironic that the government blocked the merger with Jetblue which pushed Spirit into bankruptcy and is now talking about bailing it out. Spirit clearly fit the “failing firm” antitrust exemption, so why did they block the merger?
The Chicago Fed National Activity Index decreased to -0.20 in March from 0.03 in February. The CFNAI is sort of a meta-index of some 85 economic indicators and is meant to be a 10,000 foot view of the economy. Production and income indicators drove the decline.
