Economic Notes – April 22, 2013


Written by: Jon McGraw

It was a busy economic week—particularly in terms of housing and inflation indicators.

(0) The March Consumer Price Index declined -0.2% on a headline level, which was lower than the flat reading expected. The core CPI, which excludes food and energy prices, rose +0.11%, which was below the forecasted +0.2%; so this, too, was tempered. The primary difference between the two measures was the -4% decline in seasonally-adjusted gasoline prices during the month, while the core figure was affected by a -1% decline in apparel prices (which sheds additional color on the decline in retail sales on the month) and fraction of a percent rise in owners’ equivalent and primary residence rental measures. On a year-over-year basis, headline and core CPI rose +1.5% and +1.9%, respectively, which are both in line with continued subdued inflation pressures.

(+) Housing starts rose +7.0% for March, which strongly outperformed expectations of a +1.4% gain and came on top of a similar gain for Feb. (based on an upward revision from the original +0.8% to an updated +7.3%). Single-family starts fell -5%, but multi-family led the way with a +31% gain—then again, both of these measures tend to be volatile month-to-month as we all know. On a year-over-year basis, total starts are up an astounding +47% (the single-family portion of which was up +29%). Building permits fell -3.9% relative to a forecasted gain of +0.3%.

(-) The NAHB housing market index, which acts as a leading indicator of housing starts going forward, fell in April to 42 (a disappointment from the forecasted level of 45). In the underlying survey assumptions, homebuilder assessments of sales fell, as did prospective buyer traffic. On the other hand, expectations about future sales improved. The index fell across the entire U.S., but particularly fell off in the Midwest. While this index has continued to show strength in the housing market over the past year generally, it has tempered a bit over the past quarter.

(+) Industrial production rose +0.4% in March, which outperformed expectations of a +0.2% gain. Some of this was weather related, as natural gas utilities output rose with the colder temperatures. Other manufacturing measures declined slightly on a net basis, but strength was seen in auto parts, while metals and appliances represented areas of weakness. Capacity utilization for the month came in at 78.5%, which was a tenth of a percent over forecast despite a drop in manufacturing capacity.

(-) The New York Empire manufacturing index declined more than expected, from +9.2 in March to +3.1 in April (a deterioration from the +7.0 level expected). While the positive reading continues to suggest positive economic activity, it does reflect slowing in the data. Specifically, new orders and shipments fell but still remained positive, while the inventory component remained in the negative. On the more positive side, the employment index improved, as did company capital spending expectations.

(-) The Philadelphia Fed survey looked much like the New York version, falling from March’s +2.0 reading to +1.3, which was quite a bit below expectations of +3.0. New orders and employment were weaker; however shipments rose and six-month-ahead cap spending plans improved.

(+) In summarizing much of this regional business activity, the April Fed beige book characterized national business activity as expanding at a continued ‘moderate’ pace, which was actually an improvement on the March beige book, which used the term ‘modest to moderate.’ In the underlying text, it appeared that consumer spending grew, housing activity strengthened further and manufacturing activity rose—particularly in the areas of residential construction and autos. Negatives were acknowledged in the form of higher gasoline prices (which have since retraced back), payroll tax cut expiration and some winter weather issues serving as a headwind. Inflation from a wage and price standpoint appears contained on a broader basis.

(-) The index of Leading Economic Indicators fell slightly, down -0.1% for March, in contrast to the solid increases experienced for the first two months of the year. Per the press release from the Conference Board, the stronger and weaker components were roughly balanced, with stronger financial components like interest rate spread, credit index and stock market gains tempered by a lower ISM result, lighter consumer expectations and a drop in housing permits. Similarly, the coincident indicator index also fell by a tenth of a percent (from a drop in personal income), while the lagging economic indicator index rose +0.3%. The general trend from the trough in early 2009 is strongly positive, however, despite a few mid-year hiccups along the way, and the six-month trend has been more positive than it has been negative—despite the sometimes choppy week-to-week data.

(-) Initial jobless claims for the Apr. 13 week moved up a bit, to 352k, relative to the forecasted figure of 347k. Some of the seasonal spring break effects appear to be lessened in the more recent report. Continuing claims for the Apr. 6 week came in at 3,068k, which was a bit lower than the 3,103k expected.

In other, more obscure economic news, the famous study proposed in 2010 by Carmen M. Reinhart and Kenneth Rogoff of Harvard (who also wrote the oft-quoted This Time Is Different: Eight Centuries of Financial Folly book on financial crises) is being questioned by University of Massachusetts researchers at the Political Economy Research Institute.  The original Reinhart/Rogoff study asserted that economic growth of nations has slowed dramatically when the ratio of government debt to GDP has exceeded 90%. Specifically, for nations over that threshold, growth rates reportedly fell by 1% or more, depending on the level of debt. The study has been cited repeatedly by policymakers and economists as a rationale for reducing budget deficits and reducing overall government debt, in no small part because the underlying relationship seems intuitive (especially to politicians wanting a research-based reason for cutting spending).

The counter-study found a simple spreadsheet error (imagine that). In fact, the researchers found that the growth rates for highly-indebted nations were just over 2% as opposed to the flat to slightly negative growth rates the original study found. That said, there have been other studies that seem to validate the original high debt-equals-slower growth results, so no doubt there will be additional work done to get a better handle on things here.

Market Notes

Stocks started off the week selling off sharply, and didn’t quite recover as fears of slower economic growth and mixed earnings prompted an inevitable tempering of the strong uptrend we’ve experienced so far this year. On the earnings front last week, 15% of firms in the S&P 500 reported and over 70% have exceeded estimates, although revenue gains haven’t been as robust in this or recent past quarters. As revenue growth activity is strongly related to overall economic growth, this isn’t entirely surprising. Next week will be the biggest week of the season, in terms of volume of reports (a third of the S&P’s market cap).

Profit margins are certainly peaking, and that worries some investors, since companies can only cut and improve the revenue-to-cost relationship so much before it becomes counterproductive or impossible. However, it isn’t always a sign of equity returns coming to an end. In fact, it has been shown that, in most cases, stock prices have continued to improve for some time after these peaks—it’s the source of the input that changes.

In foreign markets, India experienced a particularly strong week in a bit of a recovery on the terrible previous week, followed by other Asian nations like Taiwan, Thailand and Indonesia. European and U.K. equities were generally negative, in line with U.S. stocks. Chinese growth fell from 7.9% in the fourth quarter of 2012 to 7.7% in Q1, which spooked EM investors even more, who are worried about a further growth slowdown. However, many analysts expect this growth to improve modestly in the 2nd and 3rd quarters. If that turns out to be case, the more recent downturn in EM stocks may prove to be an exaggeration.

Bond prices rose during the week, as investors moved away from equities and yields drifted downward. Long government bonds and investment-grade corporates earned positive absolute returns, while emerging market debt and high yield bonds fared the worst.

Commodities have experienced one of their stranger weeks in some time. ‘Soft’ commodities (items grown in the tropics, generally) like cocoa and coffee gained, while economically-sensitive contracts from energy to industrial metals as well as precious metals all lost significant ground on the week. Year-to-date, with the exception of natural gas that moved upward 25% when everyone had given up on it, metals of all kinds, but also wheat and oil have led indexes downward.

Gold was in the news as it experienced one of its worst sessions in 30 years—selling off dramatically (-7% on the week). Cyprus liquidating some gold reserves was certainly a catalyst, but there has been a reversal in the positive sentiment here now that it appears global catastrophe has been averted (such as in Europe) and inflation fears in the U.S. have retreated in recent months with the slow economic growth pattern. Ironically, attempted inflation in Japan may not have too many believers yet, since the JCB moves to create inflation haven’t caused much panic in that regard. This is a good reminder that any commodity, gold included, can be a useful non-correlated piece in a portfolio, but can experience its own dramatic dynamics that many investors often forget (especially when it’s on the downside). There is no free lunch, despite what the gold people tell you on TV.

In other commodity contracts, oil prices continued to drop (Brent crude under $100/barrel for the first time since mid-2012) as concerns over global demand growth were the overriding factor. However, there are some seasonal components upcoming, such as ramping up of post-maintenance refinery efforts and Chinese restocking that may keep this tempered somewhat. At the same time, there are longer-term supply issues at play that have ‘changed the game’ in non-OPEC production—notably the Bakken and other shale fields in North America that have ramped up production capacity dramatically and look to continue to in coming years.

Have a great week!