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Brian Wesbury
Chief Economist
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Bob Stein
Deputy Chief Economist
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 | Consumer Financial Burdens – Lowest Since 1984 |
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| Posted Under: Data Watch • Double Dip • PIC |
Last week the Federal Reserve issued its quarterly report on households' financial obligations. It showed financial obligations in the fourth quarter were 15.93% of after-tax income, the lowest since 1984.
Financial obligations are all the recurring payments consumers must make each month for items they have already purchased. For example, it includes, mortgage payments (principal, interest, homeowners insurance, and property taxes), car loan payments, as well as debt service on credit cards and other loans, such as student loans. It also factors-in payments that are the economic equivalent of debt service, such as rent and car leases. In addition, if someone hasn't made their mortgage payment in a year or two and is waiting for the sheriff to show up and kick them out, the Fed still counts that amount as a financial obligation. Now that more states are letting banks and other lenders move forward with the foreclosure process, some occupants are going to have to move elsewhere and start paying rent. Because the rent they will pay will usually be less than the mortgage they were supposed to be paying – otherwise they would have had an incentive to pay the mortgage all along – foreclosures will put further downward pressure on this measure of obligations.
With financial obligations making up a smaller share of after-tax income, consumers are in a better position to increase their spending. This may help explain why nominal consumer spending is up 3.8% in the past year while personal income is up a smaller 3.6%. If financial obligations aren't impinging on family budgets as much as they were a few years ago, consumers should be comfortable, at least temporarily, raising their spending faster than their income.
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| | New single-family home sales declined 1.6% in February to a 313,000 annual |
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| Posted Under: Data Watch • Home Sales • Housing |
Implications: The housing market is on the mend, but new home sales will be the last thing to fully recover. Home building hit an upward inflection point in the middle of last year, home prices have leveled off in much of the country, and existing home sales have been in an upward trend for the past several months. As the chart above shows, new home sales have also been trending up. Even though they slipped 1.6% in February, they're up 11.4% versus a year ago. But, with banks now able to move forward with the foreclosure process, a large inventory of bargain-priced existing homes should temporarily attract more buyers away from the new home market. We still expect a full recovery for new home sales; sometime over the next several years, sales will rise to an annual pace of about 950,000. But the recovery in new home sales will take longer than the recovery in the rest of housing. The other problem affecting new home sales is a lack of inventory. The number of unsold but completed new homes is the lowest since 1971; the number of unsold new homes that are still under construction is the lowest since the early 1960s. Notably, the inventory of new homes where the builder has yet to break ground continues to climb, showing that builders are getting ready for what they believe will be more buyers. We think they're right. In other recent housing news, the FHFA index, a measure of prices for homes financed by conforming mortgages, was unchanged in January (seasonally-adjusted) and is down 0.7% from a year ago. The index has been roughly unchanged since mid-2011. We expect a slight price increase in the year ahead, the first since 2006-07. In other news on the broader economy, new claims for unemployment insurance declined 5,000 last week to 348,000, the lowest level since March 2008. Continuing claims for regular state benefits dropped 9,000 to 3.35 million, the lowest since August 2008. At present, it looks like private payrolls expanded by another 200,000 in March.
Click here for a printable version.
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| | Existing home sales fell 0.9% in February to an annual rate of 4.59 million units |
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| Posted Under: Data Watch • Home Sales • Housing |
Implications: The housing sales market is slowly but surely mending. Although existing home sales fell 0.9% in February they are still up 8.8 percent from a year ago and near the highest level since November 2009. The inventory of existing homes rose in February as more people put homes on the market, probably in large part due to the unusually warm weather, starting the spring selling season earlier than normal. But, even with this increase, inventories are still down 19.3% versus last year. It still remains tough to buy a home. The National Association of Realtors said cancelled contracts to buy existing homes were at 31% in February, 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 33 percent of purchases in February 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 remaining tight, we don't expect a huge increase in home sales any time soon, but the housing market is on the mend.
Click here for a printable version.
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| | Housing starts declined 1.1% in February to 698,000 units at an annual rate |
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| Posted Under: Data Watch • Home Starts • Housing |
Implications: The recovery in home building is well underway. Housing starts essentially matched consensus expectations in February, but are up almost 34.7% from a year ago. The number of homes under construction increased for the sixth straight month, the first time this has happened since 2004-05. The most impressive part of today's report was that permits to build homes easily beat consensus expectations and are up 34.3% from a year ago. That's the largest percentage increase in any twelve-month period in the last 20 years and signals large gains in home building in the coming year. Some of the recent gains in building have been weather-related. This winter has been unusually mild in much of the country. As a result, we would not be surprised if the report next month shows builders, on a seasonally-adjusted basis, pulling back a little in March. Regardless, it looks like the first quarter of 2012 will be the fourth straight quarter where home building boosts real GDP. As the charts to the right show, multi-family activity – both starts and permits – has been leading the way and we expect that to continue, particularly now that a legal settlement means more foreclosures can move forward. Some people occupying homes they have not been paying for will now have to go elsewhere and rent. Based on population growth and "scrappage," housing starts should eventually rise to about 1.5 million units per year (probably by 2016), which means the recovery in home building is still very young. For more on the housing market, please see our research report (link). In other recent housing news, the National Association of Home Builders housing market index remained steady at 28 in March, up from 17 a year ago and as low as 14 as recently.
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| | The Fed's March Madness |
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| Posted Under: Monday Morning Outlook |
With two #2 seeds going down on the same day (Mizzou and Duke), and four Ohio teams in the Sweet Sixteen, March Madness is in full swing. Nonetheless, the Federal Reserve added to the madness last Tuesday when it released its latest assessment of the economy.
After months of living in denial, the Fed finally admitted the economy has improved, while, for all intents and purposes, it also took additional quantitative easing – QE3 – off the table. The best news was that the Fed ignored the ridiculous idea of "sterilized" bond buying, which it floated in the Wall Street Journal a week ago. We can assume that idea is now dead.
The impact on the markets was dramatic – stocks rallied, bonds got crushed, and gold fell again.
For several months, many analysts argued that the only reason to buy stocks was the potential of another round of quantitative easing. If the economy wilted, they thought, the Fed would ride to the rescue, so there was no reason to get too bearish. The "Bernanke put" had replaced the "Greenspan put."
We've been bullish for completely different reasons. We believe the recovery is real and sustainable and that profit growth will continue. We have also believed that stocks are undervalued. Yes, monetary policy has been accommodative, but monetary policy alone is not the driving force behind the bull market, profits are. We have never believed that Quantitative Easing (or the anticipation of QE) has driven stock prices up – if it had, price-earnings ratios would have risen, but they haven't.
The proof is in the pudding. As the odds that the Fed will embark on a new round of quantitative easing decline, the stock market has moved higher. Equity investors now realize they don't have to pray for more Fed ease to keep the bull running.
Bonds certainly got the message. The 10-year Treasury was 1.93% a month ago, 2.03% on Monday, and then closed at 2.30% on Friday. We see this as a sign investors anticipate the Fed will start to raise short term rates before the late 2014 date it wanted markets to believe.
The expectation of less Fed accommodation is why gold got hit, dropping $56 per ounce in two days. Gold is now 12.5% below its record close on Labor Day 2011. With gold still at $1659 as we write, gold investors are still speculating on a major wave of 1970s-style inflation, but the message from the Fed is that the monetary spigot will not gush forever.
Once the Fed finally realizes that economic growth and inflation are not following the Keynesian script, rates will move higher. This won't happen as soon as we would like, but soon enough to prevent the kind of inflation some gold investors have been hedging against. Gold bugs beware: gold prices are headed even lower.
What this means is that the best currency to be in over the next year or so is the US dollar. Yes, the Fed is loose, but everyone already knows that. It's priced in. The issue today is whether the Fed tightens policy faster than investors previously thought. And that looks increasingly likely.
Meanwhile, Europe's troubles are not over and neither are Japan's. Socialist European economies are making some improvements, but debts are still high and not every country can be saved with an aid package from abroad. The European Central Bank will face great pressure over the coming year to stay easy to help Italy, for example, and that means a lower Euro. In Japan, a political consensus is forming in support of higher taxes, which means more pressure on the Bank of Japan to stay loose.
Momentum is now shifting toward the US, with some global investors looking at equity returns sweetened by currency gains. Add higher US bond yields and emerging markets should be even more willing to buy US assets.
A self-sustaining, virtuous cycle is emerging, the kind that often forms in long-term bull markets. It's time to get on for the ride.
Click here for a printable version.
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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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The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
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