INDICATOR: May Pending Home Sales and June Dallas Fed Manufacturing Index

KEY DATA: Sales: +44.3%; Over-Year: -5.1%/ Dallas Fed: +43.1 points

IN A NUTSHELL: “The housing market data rebounded sharply in May, as people could actually get out and visit homes for sale.”

WHAT IT MEANS: Once again, there was an outsized increase in an economic number. This time it was pending home sales. The National Association of Realtors reported that contract signing soared in May, with the surge in demand being fairly evenly distributed across the nation. The gains ranged from a low of 37.2% in the Midwest to a high 56.2% in the West. As usual, though, we need to look at these numbers with a lot of caution. Conditions started to weaken in March and collapsed in April, as the economy shut down and people stayed in their homes. As the economy started opening in May, people began to get back into the market. Thus, what we likely saw in the latest data were contract signings that include many that would have occurred from Mid-March through May. That catch-up may spill into June. What we need to see is the where the level settles down to when the backlogs disappear. The report was really great, but there could be some major bumps in the road over the summer.

The Dallas Fed’s manufacturing index soared in June. That matches the other regional measures, especially those that are diffusion indices. Thus, don’t take the enormous rise in the activity index on face value. Instead, if you look at the details, they are more sobering. Orders and backlogs continue to decline, though clearly at a much slower pace. But what is most troubling in this and other regional indices is that employment is still being cut. That is occurring despite the reopening of firms. As long as that is happening, and it appears to be the case across the nation, new claims for unemployment insurance and the unemployment rate will remain high, while job gains are likely to disappoint.

IMPLICATIONS: The housing market continues to be the strength in the economy. To some extent, the virus may be helping as people who were on the fence about where to live may be turning to less dense locations. It will be a while before we can determine if that is just a temporary move or a trend. Also, this is a sector that was ripe for “make-up” sales. That is, demand that was not so much lost as deflected from its normal pattern. It is likely to take a few more months before we know the true state of the housing market. Low mortgage rates are great, but income uncertainty is a major negative. So, don’t be surprised in August or September numbers are not as great as expected. As for the markets, I read a really strange headline this morning that indicated the markets were rallying because of hopes the virus numbers would fall. Huh? Three of the biggest states in the nation, California, Texas and Florida, have either paused or reversed some of their policies. Suddenly, even the administration has discovered that masks may actually work and is suggesting people should wear them. But once New York, New Jersey and some of the other states that have done such a great job of reducing the number of cases get close to fully reopening, isn’t it reasonable to expect they too will see a jump in the numbers? Indeed, the Secretary of Health and Human Services said the window is closing on the ability to get the virus under control. Yes, common sense and science seem to be slowly slipping into the thinking and actions of those who have rejected that approach in the past, but that doesn’t mean conditions are going to get better soon. So, what is going on in the minds of investors? I have no idea.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.