 | New orders for durable goods increased 0.2% in April |
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| Posted Under: Data Watch • Durable Goods |
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Implications: New orders for durable goods rose modestly in April, up 0.2%, and the underlying trend remains favorable, up a healthy 6.9% in the past year. However, the gain in April was due to the transportation sector, which is very volatile from month to month. Excluding transportation, orders were down 0.6%. We don’t think this decline will persist. Unfilled orders (ex-transportation) are up 10% in the past year and nearing a record high. Also, we are in the early stages of a home building recovery. As housing continues to pick up steam, orders for durables should pick up as well. Some analysts might dwell on a 1.4% drop in shipments of “core” capital goods (which excludes defense and aircraft). That is a big drop. But these shipments have fallen in the first month in nine of the past ten quarters, only to rebound in the following two months. 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 reaching its long-term norm, meaning companies have an increasing incentive to update their equipment. We anticipate better numbers on durables next month. In other news today, new claims for unemployment insurance dipped 2,000 last week to 370,000, matching consensus expectations. Continuing claims for regular state benefits fell 29,000 to 3.26 million. The four-week average for continuing claims is now 3.27 million, the lowest since 2008. Moreover, these claims data are consistent with a private sector payroll gain of 145,000 for May, and that’s before upward revisions in later months.
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| | New single-family home sales increased 3.3% in April, to a 343,000 annual rate |
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| Posted Under: Bullish • Data Watch • Home Sales |
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Implications: New home sales should be the last piece of the housing puzzle to recover, and they now look to be on the mend. New home sales beat consensus expectations and are now up 9.9% from a year ago. This is great news considering banks can now move forward with foreclosures more quickly, which is bringing a large inventory of bargain-priced existing homes on the market. The road ahead looks better than it has 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 near rock bottom levels (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 4.9% from a year ago and average prices up 5.1%. In other news on home prices, the FHFA index, a measure for homes financed by conforming mortgages, jumped 1.8% in March, the largest monthly gain since the start of the series back to 1991. Prices are now up 2.7% from a year ago, the largest gain since November 2006.
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| | Existing home sales rose 3.4% in April to an annual rate of 4.62 million |
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| Posted Under: Bullish • Data Watch • Home Sales |
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Implications: The housing recovery is definitely underway. Existing home sales rose 3.4% in April, and are up 10% from a year ago. The median price of an existing home is up 10.1% from a year ago, the largest yearly gain since January 2006. A big reason for this gain was fewer distressed sales and more sales of larger homes, a good sign for the economy moving forward. 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 29 percent of purchases in April 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 definitely on the mend. In other news today, the Richmond Fed index, which measures manufacturing activity in mid-Atlantic states, fell to +4 in May from +14 in April. The decline came in well below consensus expectations of +11.
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| | The Plow Horse Rolls On |
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| Posted Under: Monday Morning Outlook |
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Turn on the television, pick up the newspaper, search the Internet and you will find story after story about Greece, JP Morgan, austerity, the labor force, student loans, California, the G-8, or the Facebook IPO. Just about every bit of the coverage is negative.
Replace that list with Tunisia, Egypt, China, oil prices, foreclosures, deleveraging, and Ireland; or Dubai, tsunami, earthquake, copper, Baltic Freight Index and Portugal…and you get the picture. For three years, the news has been relentlessly bearish.
And yet, amid all this, our “plow horse economy” keeps moving forward – through the stumps and rocks and mud. It’s certainly not I’ll Have Another, who, with one more win, can take the Triple Crown – a measure of strength, courage and greatness. But it ain’t headed for the glue factory either.
Consumer spending is at a record high (whether measured on a real or nominal basis). Retail sales were up in April for the 21st time in the past 22 months. In terms of consistency, this rivals the 1998-99 streak of 16 straight monthly gains, a period everyone looks back on as a boom. Real (inflation-adjusted) retail sales are up 4% from a year ago. If this is the new normal, let’s have more of it.
Private payrolls are up 26 consecutive months, hours of work are rising, and consumers’ financial obligations are the smallest share of income since 1984. No wonder sales of autos and light trucks are up almost 10% from a year ago.
Meanwhile, business investment is soaring. While overall industrial production is up a robust 5.2% from a year ago, the production of business equipment is up a stellar 12%. This is why we believe productivity growth, which has slowed down the past couple of years, is destined to get a second wind.
Capacity utilization hit 79.2% in April, equal to the average of the past twenty years. What this means is that firms have an increasing incentive to build out capacity by investing in plant and equipment. At the same time, profits and balance sheet cash are at record highs. In other words, prospects in the business sector look good.
And, despite all you hear about banks not lending, commercial and industrial loans are up 13.6% in the past year. The story about banks not lending to companies is getting very stale, the bottom for these loans dates back to late 2010.
And to top it all off, housing is clearly on the mend. Starts are up 30% from a year ago. Every major region of the country shows growth in the past twelve months, for both single-family and multi-family homes. Residential investment (home building) has been a positive factor for real GDP growth in each of the past four quarters and looks poised to do it again in Q2.
What we have on our hands is a sustainable, self-reinforcing economic recovery. It could be better. What’s holding it back is bad policy choices coming out of Washington, DC. Government spending is robbing the economy of potential and uncertainty about future taxes and regulation is a wet blanket.
Amazingly, the plow horse keeps moving forward. That’s the real news here - unending pessimism being defeated by the American entrepreneurial spirit.
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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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