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Brian Wesbury
Chief Economist
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Bob Stein
Deputy Chief Economist
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 | Wesbury 101 Video Commentary - "Things Are Getting Better All the Time" |
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| Posted Under: Video • Wesbury 101 |
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| | Existing home sales increased 5.0% in December to an annual rate of 4.61 million units |
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| Posted Under: Data Watch • Home Sales • Housing |
Implications: The healing in the housing market is further along than previously thought. Existing home sales increased 5% in December, the third consecutive gain, to the highest level since January 2011. More importantly, the inventory of existing homes is down 21% versus last year and at the lowest level since 2005. As a result, the months' supply of unsold homes is down to 6.2, the lowest since April 2006. Even with this great news the National Association of Realtors said cancelled contracts to buy existing homes remained at 33% in December, which is three times the normal level. These figures suggest that, despite record low mortgage rates, home buyers still face very tight credit conditions. Tight credit conditions would also explain why all-cash transactions accounted for 31 percent of purchases in December versus a traditional share of about 10 percent. Those with cash are able to take advantage of home prices that are extremely low relative to fundamentals (such as rents and replacement costs); for them, it's a great time to buy. With credit conditions likely to remain tight for some time, we don't expect a huge increase in home sales any time soon, but, given declining inventories, the housing market is definitely on the mend.
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| | Housing starts declined 4.1% in December to 657,000 units at an annual rate |
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| Posted Under: Data Watch • Home Starts • Housing |
Implications: Housing starts fell short of consensus expectations, but that was all due to multi-family units, which are extremely volatile from month to month. As the charts to the right clearly show, the general trend in the multi-family sector has been up since mid-2009. Given the shift away from home ownership and toward rental occupancy, we expect that trend to re-assert itself over next few months. Meanwhile, single-family housing starts were up 4.4% in December and are up 11.6% from a year ago. With the exception of the temporary period in 2009-10 covered by the homebuyer credit, this is the largest twelve-month gain since the housing boom was still intact, back in 2005. In other words, the long-awaited turning point in home building has clearly arrived. Based on population growth and "scrappage," home building must increase substantially over the next several years to avoid eventually running into shortages. For more on the housing market, please see our recent research report (link). In other good news this morning, new claims for unemployment insurance fell 50,000 last week to 352,000, the lowest since April 2008. Continuing claims for regular state benefits fell 205,000 to 3.43 million, the lowest since just before the collapse of Lehman Brothers in September 2008. Seasonal volatility probably accounts for some of these declines, but not all of them. In other news, the Philadelphia Fed index, a measure of manufacturing activity, increased to +7.3 in January from +6.8 in December. Adding an expansion in home building to an already growing factory sector means faster economic growth and job creation in 2012.
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| | The Consumer Price Index (CPI) was unchanged in December |
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| Posted Under: CPI • Data Watch |
Implications: Energy prices have dropped substantially over the past three months. As a result, overall consumer prices remained unchanged for the second consecutive month in December, after a slight decline in October. Overall, consumer prices are down at a 0.4% annual rate in the past three months. However, the respite from inflation has been brief and we do not expect it to last. Monetary policy is very loose and the upward trend for inflation, on a monthly basis, will re-start soon. Despite this, the rapid increases in prices in the first three months of 2011 will now mean that the year-ago comparison for inflation – which now stands at 3% -- will look tamer over the next few months, even as prices move upward. Subdued prices over the past three months are not a justification for the Federal Reserve to pursue another round of quantitative easing. "Core" CPI, which excludes food and energy, was up 0.1% in December and is up 2.2% in the past year. This is higher than the Fed's target range, which is supposed to max out at 2%. Moreover, in the past year, while core prices have grown 2.2%, owners' equivalent rent, which makes up one-third of the core, is up 1.8%. Given the shift from home ownership toward rental occupancy, owners' equivalent rent should accelerate over the next year, putting more upward pressure on the core. On the earnings front, "real" (inflation-adjusted) earnings per hour were up 0.2% in December. Although these earnings are down 0.9% from a year ago, the number of hours worked is up 2.4%, giving consumers more purchasing power.
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| | Industrial Production increased 0.4% in December |
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| Posted Under: Data Watch • Industrial Production - Cap Utilization |
Implications: Excellent news on the factory sector in December. Although industrial production grew slightly less than the consensus expected, revisions to prior months put growth on par with expectations. More importantly, overall industrial production was held down by a 2.7% drop in utility output, a result of unusually warm December weather. Talking out utilities and mining (which was up in December), manufacturing surged 0.9%, the largest gain in 2011. Sometimes large increases in manufacturing are due by a temporary spike in auto production, but not this time. Manufacturing ex-autos was up 0.9%, also the largest gain this year. We have been following these numbers all year, to try to focus on the underlying trend, and that trend is still accelerating, up 3.3% versus a year ago, but up at a 4% annual rate in the past three months. High-tech is another good sign. After falling for three straight months due to major flooding in Thailand (one of the world's leading production centers for hard disk drives and semiconductors), high tech output increased 0.6% in December. More timely news on the manufacturing sector is also good. The Empire State index, a measure of activity in New York, increased to +13.5 in January from +8.2 in December. As recently as October, the index was -7.2. On the housing front, the market index from the National Association of Home Builders, which measures their confidence, increased to 25 in January, easily beating consensus expectations and the highest reading since 2007. As recently as September, the index was at 14.
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| | The Producer Price Index (PPI) declined 0.1% in December |
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| Posted Under: Data Watch • PPI |
Implications: Due to falling commodities, producer prices took a breather in December, dipping 0.1% overall. However, the Federal Reserve can hardly use this data to justify another round of quantitative easing. "Core" prices, which exclude food and energy and which the Fed says it follows more closely than the overall figures, increased 0.3% and are now up 3.1% versus a year ago. With the exception of a temporary surge in 2008-09, this is the largest 12-month increase for core producer prices since the early 1990s. The increase in core prices in December was largely due to light trucks and construction machinery, which suggests some firms are preparing for an increase in activity. There has been a recent lull in producer price inflation. Prices for overall finished goods increased 4.5% in the past twelve months, but are down at a 0.6% annual rate in the past three months. There has been a similar slowdown in producer price inflation at the intermediate and crude levels of production, for both overall prices and for prices excluding food and energy. Although monetary policy is loose, the reaction of inflation to that policy is variable, not a straight line. We do not expect the lull in producer price inflation to be long-lived. In other recent news, chain-store sales continue to grow, up 3% versus a year ago according to the International Council of Shopping Centers and up 2.8% according to Rebook Research. And remember, these data are only for stores open for more than a year.
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| | Q4 GDP - No Recession In Sight |
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| Posted Under: Data Watch • GDP |
Three months ago, we added up the major components of real GDP for the third quarter and predicted a solid annualized growth rate of 3.5%. Instead, the advance report came in at 2.5% and was later revised down to a tepid 1.8%.
We were too high on inventories as well as government purchases, and that made our overall forecast too high. However, our estimates of consumer spending, business investment, home building, and the trade balance were all pretty darn close to the mark. Final sales (GDP excluding inventories) grew at a 3.2% annualized rate.
So, while we missed on overall GDP, the underlying pace of final sales to the private sector made it clear that the economy did not need more government spending, temporary Keynesian-style tax cuts or more quantitative easing.
Now, once again we have added up the major parts of GDP and are forecasting...a 3.5% annual pace of growth in Q4. Be aware up front, however, that our predictions for consumer spending, business investment and home building are quite modest. Much of the growth we see in Q4 is due to our forecast that a surprising drop in business inventories during Q3 will be offset by a rebound in Q4. Another check on the forecast is that hours worked in the private sector were up at a 3% annual rate in Q4, so even modest productivity growth (growth in output per hour) suggests more than 3% increases in output.
Consumption: Auto sales were up at a 36% annual rate in Q4 while retail sales ex-autos were up at a 5.1% rate. Services, a major part of consumption, are not up as much, but it looks like real personal consumption – goods and services combined – probably climbed at a 2.3% annual rate in Q4, contributing 1.6 points to the real GDP growth rate. (2.3 times the consumption share of GDP, which is 71%, equals 1.6.)
Business Investment: Business investment in equipment and software as well as commercial construction appear to have grown at an annualized 5% rate in Q4. This should add about 0.5 points to the real GDP growth rate. (5 times the business investment share of GDP, which is 10%, equals 0.5.)
Home Building: Residential construction appears to have grown at about a 5% annual rate in Q4. This translates into 0.1 point for the real GDP growth rate. (5 times the home building share of GDP, which is 2%, equals 0.1.)
Government: Due to the wind-down of operations in Iraq, defense outlays were unusually soft in Q4. So, despite signs of a bottom in government construction – think schools and bridges – real government purchases shrank at about a 3.5% rate in Q4, which should subtract about 0.7 percentage points from the real GDP growth rate. (-3.5 times the government purchase share of GDP, which is 20%, equals -0.7).
Trade: In the last five years, the trade sector has added an average of 1.2 points to the real GDP growth rate in Q4. We probably won't get the same size boost this time, but do expect a modest add of about 0.3 points on the growth of real GDP.
Inventories: As always, inventories are a wild card. Inventories actually fell in Q3, which is rare for an economic expansion. We think businesses were way too cautious. They didn't want to get caught holding too much merchandise just in case the pessimists were right about a "double-dip" recession. Now that it's clear they were wrong, we look for a solid build to inventories in Q4 of about $55 billion at an annual rate. This translates into an additional 1.7 points for real GDP growth.
Add-em-up and you get 3.5% real GDP growth for Q4, although with final sales (GDP excluding inventories) growing at a more modest 1.8% pace.
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These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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