March 5, 2019 / 3:10 PM / 7 months ago

U.S. new home sales at seven-month high; services sector picks up

WASHINGTON (Reuters) - Sales of new U.S. single-family homes rose to a seven-month high in December, but November’s outsized jump was revised lower, pointing to continued weakness in the housing market.

FILE PHOTO: A real estate sign advertising a new home for sale is pictured in Vienna, Virginia, U.S. October 20, 2014. REUTERS/Larry Downing

While other data on Tuesday showed a rebound in growth in the vast services sector in February amid a surge in new orders, concerns about import tariffs, capacity constraints and labor shortages lingered. The trade dispute between the United States and China is among the factors that analysts say will contribute to slower economic growth this year.

Growth is softening as the stimulus from a $1.5 trillion tax cut package and increased government spending ebbs. The economy’s outlook is also being clouded by slowing global growth and uncertainty over Britain’s exit from the European Union.

“GDP growth is currently on course to drop below 2 percent in the first quarter,” said Andrew Hunter, a senior U.S. economist at Capital Economics in London.

“With the fiscal boost having now faded and higher interest rates starting to take their toll, we expect a further slowdown over the course of this year.”

The Commerce Department said new home sales increased 3.7 percent to a seasonally adjusted annual rate of 621,000 units, the highest level since May 2018. November’s sales pace was revised down to 599,000 units from the previously reported 657,000 units. October’s sales pace was also revised lower.

Economists polled by Reuters had forecast new home sales, which account for about 11.2 percent of housing market sales, falling 8.7 percent to a pace of 600,000 units in December.

New home sales are drawn from permits and tend to be volatile on a month-to-month basis. They fell 2.4 percent from a year ago. Single-family home sales rose 1.5 percent in 2018.

The release of the December report was delayed by a five-week partial shutdown of the federal government that ended on Jan. 25.

The housing market hit a soft patch last year amid higher mortgage rates, expensive lumber as well as land and labor shortages, which led to tight inventories and less affordable homes. Reports last month showed homebuilding dropping to more than a two-year trough in December and home resales in January hitting their lowest level since November 2015.

Though house price inflation has slowed and mortgage rates are hovering at 12-month lows, economists expect the housing market to remain weak for a while because of persistent land and labor shortages. Investment in homebuilding contracted 0.2 percent in 2018, the weakest performance since 2010.

In December, new home sales rose in the South, West and Northeast, but tumbled in the Midwest to their lowest level since April 2016. The median new house price fell 7.2 percent to $318,600 in December from a year ago.

“This is consistent with other indicators that point to a gradual slowing in housing sector activity,” said Pooja Sriram, an economist at Barclays in New York.

ECONOMY SLOWING

The soft housing data added to weak December construction spending, retail sales, factory orders, exports and business spending plans on equipment in setting the economy on a slower growth path in the first quarter.

The Atlanta Federal Reserve is currently forecasting GDP rising at a 0.3 percent annualized rate in the first quarter. The economy grew at a 2.6 percent pace in the fourth quarter.

U.S. stocks were trading largely flat as investors waited for developments on U.S.-China trade talks. The dollar rose against a basket of currencies, while prices of U.S. Treasuries fell.

Despite the anticipated sharp first-quarter slowdown, the economy’s fundamentals remain favorable. In a separate report on Tuesday, the Institute for Supply Management (ISM) said its non-manufacturing activity index increased 3.0 points to a reading of 59.7 last month.

A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity. January’s drop in the services sector index was largely blamed on financial market volatility and the government shutdown.

The surge in services sector activity last month was in sharp contrast with an ISM survey last week showing its measure of national factory activity tumbled in February to its lowest reading since November 2016. That left some economists skeptical of February’s rebound in services industry growth.

“But one month does not make a trend and we need to see more to say that things are turning around, ideally from the consumer,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

The ISM’s new orders sub-index for the services sector surged 7.5 points to a reading of 65.2 last month, the highest level since August 2005. The ISM said industries “are concerned about the uncertainty of tariffs, capacity constraints and employment resources, however, they remain mostly optimistic about overall business conditions and the economy.”

FILE PHOTO: Chinese staffers adjust U.S. and Chinese flags before the opening session of trade negotiations between U.S. and Chinese trade representatives at the Diaoyutai State Guesthouse in Beijing, Thursday, Feb. 14, 2019. Mark Schiefelbein/Pool via REUTERS/File Photo

Worries about import duties were mostly prevalent in the retail, support services, accommodation and food industries.

The ISM’s services industry employment measure fell 2.6 points to 55.2 in February, the weakest reading since June 2018. The slowdown in hiring is likely related to worker shortages.

“While employment growth is cooling, it remains solid overall,” said Jake McRobie, a U.S. economist at Oxford Economics in New York. “We expect the maturing labor market to add fewer jobs this year.”

Reporting by Lucia Mutikani; Editing by Paul Simao

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