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Brian Wesbury
Chief Economist
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Bob Stein
Deputy Chief Economist
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 | The first estimate for Q1 real GDP growth is 2.2% at an annual rate |
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| Posted Under: Data Watch • GDP |
Implications: Real GDP grew at a 2.2% annual rate in the first quarter. The headline is a disappointment, considering that it's slower than the 3% rate in Q4 and at the low end of estimates (including ours). We believe this initial report will be revised upward over the next couple of months. For example, the government estimates that commercial construction was a drag of about a third of a point on the GDP growth rate, which simply doesn't fit with the unusually good winter weather in most of the country. It's also important to note that even without future revisions, real "private" GDP (real GDP excluding government purchases) grew at a 3.4% annual rate in Q1 and is up 3% from a year ago. The brightest spot in the report was that home building increased at a 19% annual rate in Q1, the fourth consecutive quarterly increase. Obviously, some of the strength in Q1 was due to the mild winter, but hard data and anecdotal reports all suggest home building is on the mend (see WSJ story today). We find no justification for a third round of quantitative easing in today's report. Nominal GDP grew at a 3.8% annual rate in Q1 and is up 4% from a year ago. These are not that far from the Federal Reserve's long-run outlook of a 4.5% growth rate for nominal GDP and much too fast for a short-term interest rate target near zero percent. In other recent news, new claims for unemployment insurance declined 1,000 last week to 388,000. Continuing claims for regular state benefits rose 3,000 to 3.32 million. These figures are consistent with a respectable rise of 175,000 in private sector payrolls in April. Claims came down more rapidly than anticipated this winter, due to good weather, and are up slightly reflecting a return to the norm, which is still below the psychologically important 400K level. On the housing front, pending home sales, which are contracts on existing homes, increased 4.1% in March and are up 10.8% from a year ago. Another sign of improvement for housing.
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| | Nothing New From the Fed |
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| Posted Under: Government • Inflation • Research Reports • Fed Reserve • Interest Rates |
Today's statement from the Federal Reserve was almost a carbon copy of the last statement in March. The Fed made no changes to monetary policy: not interest rates, not the size of its balance sheet, not its forward guidance on when it thinks it will start raising rates (still late 2014).
The Fed did make some small changes to the language of the statement. Most of the changes supported a more hawkish stance for policymakers. The Fed acknowledged "some signs of improvement" in the housing sector and that inflation "has picked up somewhat." It also said economic growth should "pick up gradually" after growing moderately in the near future. The one more dovish change to the statement was that last month it said financial strains in Europe had "eased," but today the reference to strains having eased was gone.
In terms of its economic forecast, also released today, the Fed made a small increase to the pace of economic growth this year, but reduced the forecast slightly for 2013-14. It also slightly raised its inflation forecast for the next few years.
One minor but interesting change in the Fed's forecast of the path of the federal funds rate was that the median forecast among members of the Federal Open Market Committee is that the funds rate will end 2014 at 1%, not the 0.75% previously forecast. Given that the Fed's statement still says conditions are likely to warrant no change in the funds rate through at least late-2014, this probably reflects a growing gap in sentiment between Federal Reserve bank presidents (who tend to be more hawkish), and Fed Chairman Ben Bernanke.
Consistent with that gap, once again the lone dissent from the Fed's statement was from Richmond Fed President Jeffrey Lacker, who doesn't think conditions will warrant keeping the funds rate at zero through late 2014.
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| | New orders for durable goods fell 4.2% in March |
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| Posted Under: Data Watch • Durable Goods |
Implications: New orders for durable goods fell an ugly 4.2% in March, the most in three years, showing broad losses across many categories. A 48% drop in civilian aircraft orders led the way, which was expected. However, despite the decline in March, the underlying trend remains favorable, with overall orders up 2.7% in the past year and 5% excluding transportation. Don't forget that orders are extremely volatile from month-to-month and the data we are seeing now reflect the very early stages of a home building recovery. As housing picks up steam, orders for durables should pick up as well. As a result, we expect gains in the year ahead. The details of the report were not as bad as the headline. Shipments of "core" capital goods were up 2.6% in March, hitting a new record high, and are up 7.2% from a year ago. Meanwhile, orders for core capital goods continue to outpace shipments, as they have for the past two years, meaning business investment will keep moving upward. Unfilled orders for core capital goods are at a new all-time record high and up 9.7% from a year ago. Monetary policy is loose, interest rates are extremely low, and businesses are reaping record profits while they already have record amounts of cash on their balance sheets. Moreover, capacity utilization at US factories is approaching its long-term norm, meaning companies have an increasing incentive to update their equipment. In other words, the large decline in new orders for March does not change our forecast for a continued recovery.
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| | New single-family home sales declined 7.1% in March |
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| Posted Under: Data Watch • Home Sales • Housing |
Implications: Please ignore the headline of a 7.1% drop in new home sales in March. It's very misleading. The reason for the drop is that February sales were revised up substantially, to a 353,000 annual rate from a prior estimate of only 313,000. In this situation, it's more important to look at the level of sales in March (328,000 annualized), which narrowly beat consensus expectations (325,000) and is up 7.5% from a year ago. The bad news for builders of single-family homes is not completely over. Now that banks can move forward with foreclosures more quickly, a large inventory of bargain-priced existing homes could temporarily attract some buyers away from the new home market. But, the road ahead looks better than it's looked in years. The upward trend in home sales is only one piece of good news for builders. Another is that the total inventory of new homes is at a new record low (see lower chart to right). Notably, however, the inventory of new homes where the builder has yet to break ground continues to climb, showing builders are getting ready for what they believe will be more buyers. We think they're right. In fact, a lack of inventories is probably holding back sales. The other piece of good news for builders is that new home prices are climbing, with the median price of a new home up 6.3% from a year ago and average prices up 11.7%. In other news on home prices, the FHFA index, a measure for homes financed by conforming mortgages, was up 0.3% in February and is up 0.4% from a year ago, the largest gain since 2006-07. The Case-Shiller index, which measures homes in the 20 largest metro areas around the country, increased 0.2% in February, the first gain in ten months, but is still down 3.5% from a year ago. Twelve of 20 metro areas had price increases, led by Phoenix. Atlanta had the largest decline. We expect the Case-Shiller index to be up slightly for 2012. In manufacturing news this morning, the Richmond Fed index, a measure of factory activity in the mid-Atlantic, increased to +14 in April from +7 in March.
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| | The Plow Horse Economy |
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| Posted Under: Monday Morning Outlook |
Like a plow horse, the US economy just puts one hoof after the other. It ain't gonna win any races, but it ain't gonna keel over and die either.
After slogging through the mud last year, and slowing down to just 1.2% annualized growth in the first three quarters of 2011, things have improved. In the fourth quarter last year, real GDP grew a solid, work-horse-like, 3%. We expect that continued in the first quarter of 2012.
If anything, other indicators suggest real GDP growth might be even stronger. Nonfarm payrolls rose 635,000 in Q1, the largest gain since 2006. Total hours worked in the private sector climbed at a 3.7% annual rate. In other words, to get 3% real GDP growth assumes some weakness in productivity.
This is clearly not the recovery heaven of 1983-84, when real GDP grew at a 6.6% annual rate for two years and the jobless rate fell 3.5 percentage points in only 21 months. It's not a double-dip, either, and after six consecutive months of 3% growth, it's not all about nice weather.
Consumption: Auto sales were up at a 35% annual rate in Q1 while "real" (inflation-adjusted) retail sales ex-autos were up at a 5.8% 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 2.2% annual rate in Q1, contributing 1.6 points to the real GDP growth rate. (2.2 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 6% rate in Q1. This should add 0.6 points to the real GDP growth rate. (6 times the business investment share of GDP, which is 10%, equals 0.6.)
Home Building: Led by apartment buildings – and assisted by unusually mild winter weather – residential construction appears to have grown at about a 17% annual rate in Q1. This translates into 0.4 points for the real GDP growth rate. (17 times the home building share of GDP, which is 2.3%, equals 0.4.)
Government: Military spending continued to decline in Q1, but state and local government construction looks like it rose. On net, real government purchases shrank at about a 1% rate in Q1, which should subtract about 0.2 percentage points from real GDP growth. (-1 times the government purchase share of GDP, which is 20%, equals -0.2).
Trade: At this point, the government has only reported trade data through February. But, on average, the "real" trade deficit in goods has declined compared to the Q4 average. This shrinkage resembles what happened in the first quarter of 2006, when the trade sector added 0.4 points to the real GDP growth rate. We're forecasting the same for this year's first quarter.
Inventories: As always, inventories are the wild card. We only have "real" inventory figures through January, when they rose sharply. Nominal inventories were up at a moderate pace in February and we're assuming another moderate gain in March. This should generate a very small addition of 0.2 points to the real GDP growth rate in Q1.
Add-em-up and you get another 3% real GDP growth for Q1 – another "plow horse" report.
The pessimists will likely subtract inventories and trade, and bash the economy, but this game of trashing every piece of data for political purposes is getting really old.
After piling massive government spending, new regulation, the threat of major tax hikes, European uncertainty, higher energy prices, and a host of other things on its back, the US economy keeps plodding along. It's a testament to the resilience of the entrepreneurial spirit, determination and new technology. It's worth celebrating, not tearing down.
Don't get us wrong. We think the economy could grow faster if government were smaller and tax hikes were off the table, but we are a long way from recession and that's good news for investors.
Click here for a PDF 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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