 | New Orders for Durable Goods Increased 2.6% in March |
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| Posted Under: Data Watch • Durable Goods |
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Implications: A very solid, well-rounded report on durable goods today. New orders for durable goods rose 2.6%, beating consensus expectations and the largest gain since November. Once again the transportation sector led the way, particularly orders for civilian aircraft. But, unlike last month, there was broad strength outside the transportation sector. Orders excluding transportation increased 2% in March, the largest gain since January 2013. The best news in today’s report was that shipments of “core” capital goods, which exclude defense and aircraft, increased 1% in March. Plugging these data into our GDP models suggests businesses increased “real” (inflation-adjusted) equipment investment at about a 5% annual rate in Q1. Business investment should accelerate over the next couple of years. Consumer purchasing power is growing and debt ratios are low, leaving room for an upswing in appliances. Meanwhile, businesses have record profits and balance sheet cash at the same time that capacity utilization is above long-term norms, leaving more room (and need) for business investment. Signaling future gains, unfilled orders for “core” capital goods rose 0.6% in March, hitting a new record high, and are up 10% from a year ago. In other news this morning, initial claims for unemployment insurance increased 24,000 last week to 329,000. Continuing claims declined 61,000 to 2.68 million. Plugging these figures into our payroll models suggests an April gain of roughly 210,000, both nonfarm and private. This forecast may change over the next week as we get more data, but it looks like another solid month for job growth.
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| | New Single-Family Home Sales Declined 14.5% in March to a 384,000 Annual Rate |
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| Posted Under: Data Watch • Home Sales • Housing |
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Implications: A very ugly report out today for housing. New home sales fell 14.5% in March to a 384,000 annual rate, the lowest level since July 2013 and much lower than the consensus expected. Unlike existing home sales, which are counted at closing, new home sales are counted when contracts are signed. Previous months had seen extreme weather which we believed was holding down sales as consumers had a harder time getting out to see places. Well, in March, weather was not a major issue. Instead, a few factors probably held down new home sales in March. First, the median sales price of a new home increased 11.2% in March, the largest monthly percent gain ever recorded. Median prices are now up 12.6% from a year ago, while average prices are up 11.3%. As a result, some potential buyers may be balking at higher prices. The demand may be there, but builders need to adjust their prices. Second, although higher mortgage rates should not be a long-term issue – the US had a bubble in housing in 2003-05 when 30-year rates averaged 5.8% versus 4.3% today – higher interest rates may be a short-term issue until potential buyers get acclimated to the higher level. This process should not take long as rates remain low by historical standards. Third, buyers may be shifting from single-family, which are counted in new home sales, to multi-family homes (think condos in cities), which are not counted in the report. The months’ supply of new homes – how long it would take to sell all the new homes in inventory – rose to 6.0 in March, above the average of 5.7 over the past twenty years. We wouldn't worry about the increase, which is mostly for homes that haven't been built yet. The inventory of completed new homes remains very low. As a result, as the pace of sales continues to recover in the years ahead, homebuilders still have plenty of room to increase both construction and inventories. Another way to think about it is that the construction of new homes can outpace a rising pace of sales. With total cash earnings for workers up 4% versus a year ago, consumers’ ability to pay for new housing is there and sales of new homes should trend higher over the coming years.
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| | Existing Home Sales Declined 0.2% in March to a 4.59 Million Annual Rate |
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| Posted Under: Data Watch • Home Sales • Housing |
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Implications: Existing home sales declined 0.2% in March to the slowest pace since July 2012. However, this was a little above what the consensus expected and should not change anyone’s impression about the economy. Existing home sales are counted at closing, and given harsh winter weather in January and February, when prospective buyers would have been placing contracts on homes, it makes sense that sales were still weak in March. Besides the weather, another reason for slower sales is a lack of inventory, which could lead some buyers to purchase a new home instead. The good news was that inventories increased by 90,000 units in March and this suggests that the pace of sales will pick up this spring, as contracts signed in March will show up in April and May sales. Expect more inventory to come onto the market in 2014 as home prices continue to move higher (median prices for existing homes are up 7.9% from a year ago). However, credit remains tight, making it hard to get a loan to buy a home. This explains why 33% of all sales in March were all-cash transactions. However, we do not believe higher mortgage rates are noticeably holding back sales. The US had a bubble in housing during 2003-05, when 30-year mortgage rates averaged 5.8%. Today they are 4.3%. We remain convinced that the underlying trend for housing remains strong. In other housing news this morning, the FHFA price index, which measures homes financed with conforming mortgages, increased 0.6% in February and is up 6.9% from a year ago. Home prices will continue to climb in the next couple of years, but not as quickly as in the past two years. On the manufacturing front, the Richmond Fed index, a measure of factory sentiment in the mid-Atlantic region, surged to +7 in April from -7 in March, a clear sign of a spring economic thaw.
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| | Q1 GDP Frozen, Q2 Thawed |
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| Posted Under: GDP • Government • Housing • Monday Morning Outlook • Retail Sales • Spending |
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When it comes to forecasting near-term real GDP growth, there are parts of the economy that are easy to follow and then there parts of it that are tough.
The easy parts (with lots of timely information) are consumer spending, business investment, and home building. And despite one of the worst winters in multiple decades, this portion of the economy looks like it grew at a solid 2.5% to 3% annual rate in the first quarter, right in-line with the trend since the recession ended in mid-2009.
To get that kind of growth during this past brutal winter means the underlying fundamentals of the economy are gathering strength. Now that banks are more confident the Fed’s balance sheet isn’t going to shrink anytime soon, the M2 money supply and commercial and industrial loans are both accelerating. Meanwhile, the recovery in home building is still far from complete and low business and consumer debt obligations mean plenty of room for growth in purchases of big-ticket items.
The problem, at least as far as Q1 is concerned, is that the parts of GDP where we have less information look downright ugly. Government purchases, international trade, and inventories are set to be major drags on the economy in Q1. For some reason, these are the areas hit by the weather. As a result, our “add-em up” calculations suggest real GDP grew at only a 0.5% annual rate.
This doesn’t mean the Plow Horse is headed for the glue factory. Far from it. Overall real GDP growth in Q1 may be weak, but it will rebound sharply in Q2.
Here’s the first quarter, component by component:
Consumption: Auto sales were unchanged in Q1and “real” (inflation-adjusted) retail sales outside the auto sector declined at a 1.1% annual rate. But services make up about 2/3 of personal consumption and, with strength there, it looks like real personal consumption of goods and services combined, grew at a 2.1% annual rate in Q1, contributing 1.4 points to the real GDP growth rate (2.1 times the consumption share of GDP, which is 68%, equals 1.4).
Business Investment: Business equipment investment looks like it grew at a 5% annual rate in Q1, about average for the past couple of years. Commercial construction looks like it grew at a 7% rate. Factoring in R&D suggests overall business investment grew at a 5% rate, which should add 0.6 points to the real GDP growth rate (5 times the 12% business investment share of GDP equals 0.6).
Home Building: Somehow, despite the weather, the housing rebound persevered through Q1. Even as weather held down starts, builders focused on finishing the homes near completion. We see a 10% annualized gain in home building in Q1 adding 0.3 points to the real GDP growth rate (10 times the home building share of GDP, which is 3%, equals 0.3).
Government: Public construction projects were slowed by weather in Q1 and military spending continued to head down. As a result, it looks like real government purchases shrank at a 1% annual rate in Q1, which should subtract 0.2 percentage points from real GDP growth (-1 times the government purchase share of GDP, which is 18%, equals -0.2).
Trade: At this point, the government only has trade data through February, but what we have doesn’t look very good. On average, the “real” trade deficit in goods has grown larger in Q1. As a result, we’re forecasting that net exports subtracted 0.4 points from the real GDP growth rate.
Inventories: Inventories surged in Q3 and Q4. Now, with partial data only through February, it appears companies were accumulating inventories much more slowly in Q1, subtracting 1.2 points from the real GDP growth rate.
Add-em-up and you get 0.5% for Q1.
If accurate, some investors will be ready to run for the hills and the short-sellers will be more than ready to chase them there. Don’t fall for this weather-induced economic head-fake. The spring thaw has de-iced the Plow Horse and her pace will be much faster in Q2.
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| | 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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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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