 | Existing home sales fell 2.6% in March to an annual rate of 4.48 million units |
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| Posted Under: Data Watch • Home Sales • Housing |
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Implications: The housing market is slowly but surely mending. Although existing home sales fell 2.6% in March, they are still up 5.2% from a year ago. Even with the decline in March, sales averaged 4.57 million homes at an annual rate in the first quarter, the strongest level since the second quarter of 2010. It still remains tough to buy a home. 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 32 percent of purchases in March 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. In other news this morning, new claims for unemployment insurance slipped 2,000 last week to 386,000. Continuing claims for regular state benefits increased 26,000 to 3.30 million. The Philadelphia Fed index, which measures manufacturing activity in that region, declined to +8.5 in April from +12.5 in March. Notably, following the same pattern as the Empire State index, even though the overall index fell – suggesting a moderation of growth after an unusually warm winter – the sub-index for employment picked up substantially, rising to +17.9 in April from +6.8 in March.
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| | Industrial production was unchanged in March |
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| Posted Under: Data Watch • Industrial Production - Cap Utilization |
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Implications: Today’s report on the factory sector was deceptive. Industrial production was unchanged in March, which was less than the consensus expected, but prior months were revised up 0.4%. This seems to be the pattern over the last several months and we would not be surprised at all if the unchanged number in March is revised higher in the future. The manufacturing sector fell 0.2% in March, but was up 0.3% including upward revisions for prior months. The data we watch most closely is manufacturing production ex-autos. This figure fell 0.3% in March, but this is the first drop in nine months. That’s a good track record, given that manufacturing ex-autos usually falls three or four times a year even during normal economic expansions. The fact that it hasn’t over the past few years is a testament to the current strength in the manufacturing sector. Higher production is making factories use higher levels of capacity. Utilization in manufacturing is now at 77.8%, which is higher than the 20-year average of 77.7%. As capacity use moves higher, firms have an increasing incentive to invest in more plant and equipment. Meanwhile, corporate profits and cash on the balance sheet show they have the ability to make these investments.
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| | Housing starts declined 5.8% in March to 654,000 units at an annual rate |
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| Posted Under: Data Watch • Home Starts • Housing |
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Implications: Despite the headline drop in housing starts, the recovery in home building is still underway. Housing starts came in below consensus expectations in March, but you should take that headline with a huge grain of salt. First, almost all the drop was due to multi-family starts, which are very volatile from month to month; single-family starts were basically unchanged in March. Second, due to relatively warm weather, building conditions were unusually good between December and February. This pulled some starts from March/April into the winter. But starts were still up 10.3% in March versus a year ago. Third, the total number of homes under construction (started, but not yet finished) increased for the seventh straight month, the first time this has happened since 2004-05. Fourth, and the most impressively, permits to build homes easily beat consensus expectations, hitting the highest level since September 2008, and are up 30.1% from a year ago, signaling continued gains in home building in the coming year. It looks like the first quarter of 2012 will be the fourth straight quarter where home building boosts real GDP. 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 fell to 25 in April from 28 in March, but is still up from 16 a year ago and as low as 14 as recently as September.
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| | Still "On Your Own" |
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| Posted Under: Monday Morning Outlook |
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Last week’s Monday Morning Outlook generated a lot of responses. We wrote about the “on your own economy” and argued that, in this world, there is no economic system that eliminates all risk from life. Even though some think free markets are scary and government can eliminate risk, our point was that private relationships – family, friends, business, and charity – do a better job than government over time.
Those who disagreed with us – the negative responses – seemingly missed the point. They dwelled on the relative quality of health care in the US and UK. We were barraged with claims of lower infant mortality rates in the UK and lower overall health care costs compared to the US.
We used the example of a woman who entered a hospital in the UK at 8:30 pm, had a baby at 10:30 pm and was sent home – on her own – at 3 am. This is not unusual for the National Health Service and is clearly done to save money. But, this could never happen in the US.
In 1996, Bill Clinton campaigned against “drive-by deliveries” and a new mandate was put in place to force insurance companies to pay for a minimum of 48 hours of maternity care. The argument was that private insurers were acting dangerously and putting mothers and babies at risk.
So, in the UK, costs are reduced by limiting maternity stays, while in the US costs are increased because of mandates to expand maternity stays. On this side of the Atlantic, it is safer to have longer maternity stays while on the other side of the Atlantic it is safer to have shorter stays. It’s all very confusing and convoluted and we get why some of our detractors thought we were being overly political.
We have no doubt that some health statistics are better in the UK than in the US. However, these statistics are not as clear as many seem to think. For example, although it’s true that infant mortality is slightly lower in the UK than the US (5 children per 1,000, rather than 7), the UK had lower infant mortality than the US even before they adopted their government health system. In other words, the gap may be due to demographics, culture, or climate, not the quality of care. Moreover, the fertility rate is lower in the UK, which may skew toward lower-risk births.
It’s also true that the US spends a larger share of GDP on health care. But non-price rationing of health care hides costs. If a country makes people wait for hip replacements, for example, but those people, if allowed, would pay more for earlier treatment, then having to wait is part of the true cost of care. The US delivers care quickly and that cost is counted, while the cost of delay is non-monetary and not counted.
In addition, GDP per capita is about one-third higher in the US and we simply don’t know what share of that added income, if achieved, citizens of the UK would spend on health care.
We are not advocating for the status quo in health care. The tax deductibility of employer-paid health care costs, Medicare, and Medicaid have driven consumers’ out-of-pocket expenses down to about 10% of the total. Imagine if Americans bought food this way? Having 90% of costs paid for by someone else would cause consumers to spend much more than if it was their own money.
In the end, what we know is that life is inherently risky. No system (capitalism or socialism) can erase that risk. In the United Kingdom, resources for health care are limited. In bankruptcy, Greece has few resources to help anyone. Government is not a panacea. If we try to rely on government, we may still find ourselves on our own.
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| | Retail sales increased 0.8% in March |
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| Posted Under: Data Watch • Retail Sales |
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Implications: Another month, another set of nice numbers on retail sales. Consumer spending on goods beat consensus expectations for March and is now up 20 of the past 21 months. The last time retail sales were up this consistently was 1998-2000, during the first internet boom. Compared to a year ago, retail sales are up 6.5%, but the growth has accelerated lately, up at a 10.4% annual rate in the past three months. Sometimes a single category, like autos or gas, can boost sales temporarily. However, excluding autos, gas, and building materials, sales are up at a strong 8.1% annual rate in the past three months. In other words, retail sales gains are broad-based. Notice that all these gains are easily outstripping inflation. Adjusted for the consumer price index, retail sales are up a robust 3.7% in the past year and 5.4% higher in Q1 than Q4. Mixing this data with today’s report on inventories suggests real GDP grew at about a 3% annual rate in Q1. The sub-sector that jumps out the most is building materials, which are up 14.1% versus a year ago and up at a 24.2% annual rate in the past three months. Surely, some of this is due to unusually warm weather. But we also think it supports the case that we are in the early stages of a large rebound in home building. In other news this morning, the Empire State index, a measure of manufacturing in New York, fell to +6.6 in April versus +18.0 in March. So factories are still expanding production, just not as quickly. However, the sub-index for employment improved substantially, hitting +19.3 in April versus +13.6 in March.
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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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