Economic Notes – April 29, 2013


Written by: Jon McGraw

(0/-) The advance estimate of real GDP for the first quarter came in a bit weaker than expected, at an annualized +2.5%. It was better than last quarter’s +0.4%, but a bit slower than the +3.0% consensus estimate. However, some of the underlying figures were improved (which is why this is considered more of a ‘neutral’ than ‘negative’ assessment).

Within the dataset itself, things looked a bit better. Personal consumption expenditures were stronger than expected at +3.2% (vs. a forecast of +2.8%), business fixed investment rose just over +2% and final sales rose. Inventory investment added +1.0% to the bottom line, which stood in contrast to the negative impact it made in Q4. What accounted for the slight disappointment? Government spending continued to look weak with both pre-emptive cuts and sequester effects, shaving almost 1% off of GDP—the biggest part of which being defense spending. The trade deficit widening (more imports than exports) caused a further 0.5% takeaway. As you can see, those smaller numbers start to add up after a while.

From a pricing standpoint, the GDP price index grew +1.2%, a tenth of a percentage point under forecast and the Core PCE price index rose by the same amount (a tenth-percent above estimates). These show that input costs remain contained.

Another interesting item relating to GDP is that it will soon (as in this July, for the 2nd quarter) be undergoing an update that the government feels will better reflect the nature of our ‘modern economy.’ Specifically, the gross investment (or ‘I’ figure in the underlying formula GDP = C + I + G + (X – M)) will begin to include capitalized spending on research and development, as well as other creative work associated with entertainment. It has been described as acknowledgment of the increasing impact of ‘intangible’ work on goods/services in the economy, such as background development for music and movie production as economically relevant, as opposed to the large focus on the manufacturing of physical goods we’re used to. The change will expand the size of our economy by an estimated 3%, but since historical results will be adjusted upward as well, we won’t see a large jump in the growth figure we look most closely at quarter-to-quarter. The adjustment is a double-edged sword, though. Manufacturing output is relatively easy to count, while the work involved in producing intellectual property could be much more difficult to quantify. Then again, GDP is an estimate and a moving target, anyway, so we can only expect so much from it.

(-) Headline durable goods orders for March were disappointing, falling -5.7% for the month versus an expected drop of -3.0%. The primary catalyst here was a -48% decline in non-defense aircraft orders. Following that effect, durable goods ex-transport dropped only -1.4%, which also disappointed compared to the expected gain of +0.5%. Core shipments were higher, however, by +0.3%. The weakness in the overall report was fairly broad, but concentrated in industrial metals-related areas, with drops in primary metals, fabricated metal products and electrical equipment. Manufacturing inventories rose a tenth of a percent, which was still positive but a bit slower than the pace earlier in the year.

(-) The Richmond Fed manufacturing survey came in at -6, which was weaker than the expected +2 forecasted result, and was in line with similar regional surveys of the past few weeks. Softening was seen in shipments, new orders and employment. Notably, expectations about the future deteriorated in several areas—however, the district is a hotbed for defense contracting activity, so this may not be a big surprise.

(-) Existing home sales were a bit weaker than expected in March, falling -0.6% versus a forecasted gain of +0.4%. This brought the year-over-year growth trend to +10.3 (still strong), despite the past six months showing a deceleration from the first six months of that cycle. February growth was also revised down from +0.8% to +0.2%. The decline was primarily due to the condos/co-ops sector (down -3.2%) while single-family home sales were only down a few tenths of a percent. Regionally, the West and South incurred the largest drops (down -1.7% and -1.5%, respectively). The months supply of homes ticked up from 4.6 to 4.7 months. Interestingly, it appears that ‘distressed sales,’ which include foreclosure purchases and short sales ended as 21% of the total, down from almost 30% of the total a year ago—this may not seem especially notable by itself, but does reinforce the ongoing ‘normalization’ of the housing market.

(+) New home sales rose +1.5% for March to 417k, which exceeded the median forecasted level of +1.1% growth. Year-over-year gains are +18.5%, which points to continued recovery in this sector. For the most part, the results from the past month were attributable to gains in the Southern U.S.

(0) The FHFA house price index gained +0.7% in February, which was in line with forecast—which resulted in a +7.1% 12-month gain. The ‘South Atlantic’ (Delaware to Florida, basically) and ‘East South Central’ (Kentucky to Alabama) posted the strongest gains, while the Pacific and Mountain areas were also up 1%. The ‘Middle Atlantic’ area (NY, NJ, Penn.) declined on the month and was the worst-performing group on the year.

(+) The final results from the April University of Michigan consumer sentiment survey were a bit better than expected, with a 76.4 reading, and much better than the initial results of 72.3 (as opposed to a consensus estimate of 73.5). Consumer assessments of current conditions and future expectations were both revised higher, although levels were lower than in March. Inflation expectations moved up slightly to 3.1% for the upcoming 1-year period and to 2.9% for the 5- and 10-year estimates, but both fall within their historical ranges.

(+) Initial jobless claims for the April 20 week fell more than expected again, to 339k, versus the forecasted figure of 350k. This remains a ‘transition’ time of the year, though, so the weekly numbers may continue to look choppy on occasion. Continuing claims for the April 13 week came in at 3,000k, which was a bit lower than the 3,060k expected and represents the lowest level since mid-2008. Despite the trend of stubbornly slow employment growth and persistent claims, the moving average for both series have demonstrated continued declines.

Market Notes

For the week, equity markets ended up with a net gain on mixed earnings reports and better commodity price results. Energy and technology fared best on the week, as did materials—all up over 3%. Losers included staples and healthcare, which actually ended up with a slight negative return. As it stands now, S&P earnings for the first quarter are 7% higher, while revenues are 4% higher. This is certainly worse than the first quarter, but less than the improvement expected in the third and fourth quarters, back into double-digits.

On Tuesday, markets experienced another brief but significant plunge (1%) triggered by a false/hacked AP news Twitter feed stating the White House had been bombed, with the President injured. Naturally, once the information was confirmed, the hiccup was corrected within a minute. In diagnosing the chain of events, it appeared that the initial ‘panic’ sales that occurred in response to the tweet may well have caused other automatic algorithmic trades to activate, causing a cascading effect. Such is the nature of markets, but in today’s world of computer-driven trading, the time it takes to synthesize such data has shortened from seconds and minutes to fractions of a second. In this case, the nosedive and recovery were just as quick. But these events are disconcerting nonetheless.

Foreign developed market stocks were the winners on the week, with European names such as Greece, Italy and Spain leading the way, although most larger European country markets rose (in fact, European stocks overall experienced their largest gain in five months). This occurred as hopes for additional ECB easing were coupled with many of the continent’s largest firms reporting better than expected results. Emerging markets were also positive, but less so, with Mexico, Indonesia and India posting slight losses on the week.

Bonds earned slight gains with yields ticking downward by a few basis points. High yield, TIPs and developed market foreign debt fared best, but investment-grade corporates and emerging markets also ended up in the positive, compared to the BarCap Agg. MBS and floating rate brought up the rear.

In real estate, European REITs and U.S. retail were the best performers, up 2%, while Asian REITs lost roughly an equivalent amount. The broad U.S. market was flat on the week.

Commodity markets have been especially newsworthy as of late (mostly to the negative), with strong recent drops in gold and ongoing weakness in energy and industrial metals. However, last week saw a rebound in both crude oil (up 5%) and gold (up 4%) to buck that trend as ‘value’ buyers entered the fray. Regardless, the DJ-UBS ended up with a slight positive result as several larger agricultural contracts like wheat, sugar and corn all lost value to offset the gains just mentioned. In keeping with recent planting reports and weather updates, it appears this coming growing season is looking more ‘normal’ so far, causing the fears of a surplus to outweigh those of a shortage. Food prices can/will reflect these (at a lag), so we may see the food price inflation of the past year begin to moderate. The input price is where it all starts.

Back to the gold story… according to holdings data, roughly half of ownership in the second largest ETF in the world, SPDR Gold Shares, is institutional (‘half’ the fund represents 20,000,000 ounces, or 50,000 400 oz. bars of standard ‘good delivery’ gold bullion), leaving the other half in the hands of retail investors. While central banks continue to be buyers, at least of physical gold, the translation of gold investment into an ETF form has certainly contributed to the ‘ease’ in expressing bullish or bearish views, as has been in the case in many commodity markets. In our opinion, providing yet another good reason why diversified commodities exposure smoothes the ‘ride’ a bit in this asset class where individual contracts appear to be as volatile as ever.

Have a great week!