 | Single-Family Starts Rose 6% in March, Up 9.1% Over the Past Two Months |
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| Posted Under: Data Watch • Home Starts • Housing |
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Implications: Don’t judge a book by its cover. Weaker than expected housing starts can be blamed solely on a 3.1% decline in multi-family starts. Single-family starts rose 6% and are up 9.1% over the past two months. The areas hit hard by weather in February rebounded strongly in March. Starts in the Midwest and Northeast were up 65.5% and 30.7% respectively. Although starts are down versus a year ago, we think that still reflects harsher winter weather than last year and that year-ago comparisons will turn positive again over the next few months. To smooth out some of the weather-related volatility we look at moving averages, and the 5-month moving average is the highest since July 2008. Meanwhile, the total number of homes under construction, (started, but not yet finished) increased 0.4% in March and are up 21% versus a year ago. Some analysts claim the weather is a minor factor and point the finger at mortgage rates for recent weakness. But the US had a bubble in housing in 2003-05 when 30-year mortgage rates averaged 5.8%; today, they’re 4.3%. The underlying trend for home building is still upward and should remain in that mode for at least the next couple of years. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year (probably by the end of 2015). This is the level of construction that keeps the number of homes stable relative to the US population. In other housing news, yesterday, the NAHB index, which measures confidence among home builders, came in at 47 in April, up one point from March. Look for increases in the next couple of months as the spring selling season coincides with the end of an unusually harsh winter.
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| | Industrial Production Increased 0.7% in March |
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| Posted Under: Data Watch • Industrial Production - Cap Utilization |
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Implications: Another very solid report from the industrial sector as the Plow Horse continues to thaw. Overall industrial output rose 0.7%, and was up a robust 1.2% with revisions to prior months. Earlier this winter, harsher than normal weather wreaked havoc on the economy slowing production, but that looks to now be over, and a positive payback has ensued. Over the past two months, industrial production has increased at an 11.8% annual rate. Manufacturing which excludes mining and utilities, rose 0.6% in March and was up 1.1% with revisions to prior months, up 12.4% at an annual rate over the past two months. Expect more healthy gains in the next couple of months as weather patterns continue to normalize. Overall production is up a respectable 3.7% from a year ago. We expect continued gains in production as the housing recovery is still young and both businesses and consumers are in a financial position to ramp up investment and the consumption of big-ticket items, like appliances. In particular, note that the output of high-tech equipment is up 8.3% from a year ago, signaling companies’ willingness to upgrade aging equipment from prior years. More big news from today’s report was that capacity utilization was 79.2% in March, above the average of 78.9% over the past twenty years, and the highest level since June 2008. Further gains in production in the year ahead will continue to push capacity use higher, which means companies will have an increasing incentive to build out plants and equipment. Meanwhile, corporate profits and cash on the balance sheet are at record highs, showing that companies have the ability to make these investments.
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| | The Consumer Price Index (CPI) Increased 0.2% in March |
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| Posted Under: CPI • Data Watch |
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Implications: Consumer price inflation came in higher than the consensus expected for March, for both all items and the “core,” which excludes food and energy. The headline measures of prices increased 0.2%. More importantly, there appears to be some gradual acceleration in these broad measures of inflation. For example, consumer prices are up 1.5% in the past year but up at a 1.8% annual rate in the past three months. The price gains in March were led by food and housing costs and we expect this trend to continue. Droughts and unusually cold winter weather will help push prices up for farm products. Meanwhile, owners’ equivalent rent (the government’s estimate of what homeowners would charge themselves for rent), which makes up about ¼ of the overall CPI, is up 2.6% from a year ago versus a 2.1% gain in the previous twelve months. This measure will be a key source of the acceleration in inflation in the year ahead, in large part fueled by a shift toward renting rather than owning. Lurking in the background, of course, is that monetary policy has been loose and is putting upward pressure on what is still low measured inflation. For the time being, neither overall inflation nor core inflation is setting off alarm bells. Instead, they suggest the Fed’s preferred measure of inflation, the PCE deflator (which usually runs a ¼ point below the overall CPI) will remain below the Fed’s target of 2%. But given loose monetary policy, we don’t expect this to last; inflation should reach the 2% target by late 2014. In other news this morning, the Empire State index, a measure of factory sentiment in New York, fell to +1.3 in April from +5.6 in March. We expect other regional measures of factory output to move higher, reflecting better weather.
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| | Lobbyist Rules |
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| Posted Under: Government • Monday Morning Outlook • Taxes |
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Just about every year, Congress votes to pass a set of so-called “extenders,” – temporary tax provisions – that provide an incentive or benefit for certain types of behavior. There are dozens (50 or more) of these temporary provisions in the tax code and, typically, they are extended for one or two years.
Last year, in the debt ceiling deal, the Congress put off a vote on these extenders, partly because they “cost” a great deal. According to the Congressional Budget Office (CBO), extending all the current temporary provisions over the period 2014-2024 would cost roughly $1 trillion. In other words, tax receipts would be reduced by an average of about $100 billion per year if these provisions were reinstated.
Normally, we would argue tax cuts are good for the economy and tax increases are bad. However, as a whole, these extenders represent what is wrong with fiscal policy in America these days. First, these lobbyist-driven deals distort resource allocation. Temporary tax credits and incentives for the environmentally-friendly industries of fuel-cell motor vehicles, three-wheeled vehicles, alternative fuels, and energy-efficient homes, siphon resources from productive and profitable sectors of the economy to support non-profitable sectors. Subsidizing one industry at the expense of another can lead to fewer jobs overall, if the resulting allocation is less efficient.
Second, many extenders are just spending in disguise. A tax credit is another way of saying Congress wants resources directed in a politically chosen direction. A more honest approach would be for Congress to directly spend its tax receipts in areas, sectors and industries that it deems suitable. In that way, an honest accounting of what it is choosing to do would be much more transparent.
And, third, by convention, CBO budget projections treat these provisions as if they expire (even though they are almost always extended), which artificially overstates future tax revenues. As a result, when Congress and the White House come up with spending cuts to offset the loss in tax receipts it results in even more patch-work, temporary actions.
Fourth, each of the extenders has a lobbyist or group of lobbyists attached to it. The best lobbyists win…and politicians who support certain extenders and credits get support in return.
Fifth, any group that benefits from a specified extender or credit, almost by definition, is a group that will not support, or find it hard to support, any tax reform that reduces its benefits. As a result, movement toward a lower, flatter tax system (with fewer deductions and credits) is a harder sell, politically, than it would be otherwise.
Given all of this, the Congress is now working toward a retroactive passage of these temporary tax provisions. Instead, we think this is an opportunity to change course and work toward true tax reform. Let these temporary provisions die!
Some would say this is a tax hike, but it would not change our forecast for the economy. Yes, the loss of some provisions, like bonus depreciation, small-business expensing and a research and experimentation credit, might cause short-term issues for some companies, but, the positive impact of a more efficient allocation of resources in the short, medium, and longer-term will offset any negatives.
If the US ever wants to see 4% growth again – it should end the extenders. Not only will it make government more honest, it will reduce the influence of lobbyists and fuel a more efficient economy.
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| | Retail Sales Increased 1.1% in March |
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| Posted Under: Data Watch • Retail Sales |
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Implications: Today’s retail sales report shows consumers are not only venturing out again after a very harsh winter, but making up for lost time. After falling in December and January, overall retail sales have increased at an 11.8% annual rate in the past two months. Sales of autos led the way growing 3.1% in March, the largest monthly gain since September 2012. But the spike in sales in March is not just due to volatile auto sales. “Core” sales, which exclude autos, building materials and gas, rose 0.9% in March and were revised higher for previous months. These “core” sales are a key input into the GDP data and it looks like “real” (inflation-adjusted) consumer spending, goods and services combined, grew at a about a 2% annual rate in Q1, in spite of the brutal winter weather throughout much of the country. To put this in perspective, over the past three years, real consumer spending is up at a 2.1% annual rate. For consumer spending to grow over this winter at basically the same trend as the past three years, the underlying fundamentals must be improving. And when we look at debt levels, wage growth and employment gains, we think these gains are sustainable. The one caveat is that real GDP growth likely slowed in Q1 to about a 0.5% rate. But this is largely due to a temporary issue with inventories and we expect real GDP to sharply re-accelerate in Q2. The Plow Horse, recently de-iced, is picking up his pace.
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| | The Producer Price Index (PPI) Rose 0.5% in March |
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| Posted Under: Data Watch • Inflation • PPI |
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Implications: After dropping slightly in February, producer prices surged 0.5% in March. Both the decline in February and the spike in March were led by prices in the service sector, which, until recently, weren’t even counted in producer prices. Cutting through the month-to-month volatility, it appears inflation is starting to wake up from its slumber. Producer prices are up 1.5% in the past year but up at a 2.2% annual rate in the past three months. The acceleration is in prices for both goods and services. Goods prices are up 1.2% in the past year but have climbed at a 3.2% annual rate in the past three months; services are up 1.5% from a year ago but have climbed at a 1.9% rate in the past three months. Prices further back in the production pipeline (intermediate demand) are showing similar acceleration. For example, although prices for processed goods are up only 0.8% in the past year, they’re up at a 4.3% annual rate in the past three months. Unprocessed goods are up 5.9% in the past year but up at a 28.8% annual rate in the past three months. Figures like these suggest the Federal Reserve should be tapering quantitative easing faster. In other recent inflation news, import and export prices surged in March, increasing 0.6% and 0.8%, respectively. However, overall import prices are still down 0.6% from a year ago, all due to a decline in petroleum. Excluding petroleum, import prices have increased 0.1% from a year ago. Export prices are up 0.2% from a year ago, 0.4% excluding farm products. In broader news on the economy, initial unemployment claims declined 32,000 last week to 300,000, the lowest level in almost seven years. Continuing claims dropped 62,000 to 2.78 million. As a result, our early payroll models suggest job growth of about 200,000 in April. After a winter hibernation, the Plow Horse economy has woken up and is ready to go.
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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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