Implications:  After annual revisions in today's report pushed up sales of new homes to their fastest post-recovery pace in March, the headline number disappointed in April, falling 11.4%, the largest one-month drop in over two years.  Sales came in at a 569,000 annual rate in April, coming in below the estimate of even the most pessimistic economics group. However, it is important to remember home sales are very volatile and one month doesn't make a trend.  Going forward, we expect the trend to remain upward and housing to remain a positive factor for the economy.  First, employment gains continue, which should put upward pressure on wage growth, which is already accelerating.  Second, credit standards in the mortgage market are starting to thaw.  Third, the homeownership rate remains depressed as a larger share of the population is renting, leaving plenty of potential buyers as economic conditions continue to improve.  Unlike single-family homes which are counted in the new home sales data, multi-family homes (think condos in cities) are not counted.  So, a shift back toward single family units will also serve to push reported new home sales higher. Meanwhile, despite a 4,000 increase in unsold new homes, inventories remain low by historical standards (see chart to right) and are not a headwind to future construction.  In fact, all of the gain in inventories in April was due to homes where construction had either yet to start or was still under way, with the inventory of completed homes remaining unchanged. Look for overall gains in home sales in the year ahead as these factors combine to drive expansion, and any headwind created by an increase in mortgage rates is offset by expectations of faster future economic growth.  On the manufacturing front, the Richmond Fed index, which measures mid-Atlantic factory sentiment, fell unexpectedly to +1 in May from +20 in April, signaling further expansion in the factory sector, but at a slower pace.

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