Economic Notes – January 21, 2013


Written by: Jon McGraw

(+) Retail sales numbers were better than anticipated, with a gain of +0.5% for December versus an expected +0.2% result. As usual, the embedded sub-categories added more color, but didn’t change the result much. The sales ‘ex-autos’ figure was a similar +0.3%, a shade above expected, while the ‘core/control’ group that excludes volatile autos, gasoline and building materials gained +0.6%—double what was expected (partially due to a gasoline price drop). What we can take from all this is that more substantive elements like health and personal care components performed well, when all cyclical components removed.

(-) Business inventories rose a bit for November, but largely in line with expectations, at +0.3%. This was a slower rate of accumulation than in the prior quarter, so a small negative in terms of overall growth measurement prospects.

(+) On the inflation front, the consumer price index for December came in flat, in keeping with the expected reading. The core CPI figure, which excludes more volatile food and energy prices, rose +0.1% compared to an expected +0.2% increase. Owner’s equivalent rent rose by +0.1%, which was less than trend, and medical expenditures fell by about half a percent, as did used cars. Year-over-year, the headline and core inflation measures rose +1.7% and +1.9%, respectively. Interestingly, the producer price index figures moved in the opposite direction from the CPI to some extent. The December headline number fell -0.2% relative to an expected -0.1% result, while the core number rose +0.1%—a fraction of the expected +0.2%—the difference in the two consistent with lower gas and food prices over the month. Both finished goods and intermediate good prices rose a tenth to a few tenths of a percent, which is quite minimal.

Overall, inflation remains contained on both a core basis as well as from the more volatile food and energy areas as of late, and is trending well below the Federal Reserve’s target limit of 2.5%. As economic growth continues to be slow and choppy, low inflation is not surprising and may well continue absent any geopolitical shocks or positive growth surprises.

(0) Manufacturing industrial production rose in December by +0.3%, in line with forecast. Results were led by strong gains in motor vehicle and parts production, as well as computer/electronics output. Utilities output fell, perhaps as a result of warmer-than-average winter weather. Capacity utilization for December was 78.8%, which was a bit higher than the expected 78.5%.

(-) In looking at several heavily-reviewed regional Fed indexes for January, the Philadelphia Fed index declined to -5.8, which was in stark contrast to the expected +5.6. The details of the report reflected this, including a deterioration in new orders, shipments and employment, as well as capital expenditures. Similarly, the New York Empire manufacturing index was weaker than expected, with a -7.8 reading relative to an expected flat result. As with the Philly report, many of the same underlying components were weak.

(0) The regional surveys were in line with a lackluster Fed Beige Book for January, which depicted a scenario of positive, but relatively tame economic activity across the nation. All twelve districts experienced ‘modest’ to ‘moderate’ growth with is in keeping with expectations and the recent trend of a ‘muddle through’ environment. Manufacturing comments were mixed, with roughly half of the districts reporting expansion, with a few noting shrinking activity. Anecdotal comments also mentioned concerns about budget cuts related to the government fiscal sequestration—particularly in areas of potential cutback, such as defense. Housing, however, was a plus in the report in all areas—consistent with housing data reported elsewhere.

(+) Housing starts for December were dramatically higher, with a gain of +12.1% relative to an expected +3.3% improvement. By way of differentiation, single-family starts were up +8.1% while multi-family continued its trend higher, growing over +20%, and the growth was seen in all areas of the country. December building permits, on the other hand, were ‘disappointing’ to the extent that the gain was +0.3% lagged the consensus +0.5% figure. These were led by gains in single-family permits, as opposed to multi-family.

(0) The NAHB homebuilder index for January posted an unchanged 47 reading (just a shade below the consensus of 48). This index has performed strongly during the past year, which points to potential for strong building activity looking forward.

(-) The preliminary University of Michigan survey of consumer sentiment fell again in January to 71.3, which was below the expected 75.0 reading. Consumer assessments of both current and future conditions deteriorated this month, and continues the trend of poor sentiment perhaps related to political wranglings in Washington. Interestingly, lower- to middle-income respondents were generally the most negative (perhaps related to the payroll cut expiration at year-end). Inflation expectations rose a bit to 3.4% for the year ahead, while longer-term estimates remained a shade below the long-term average of 3.0%.

(0) Initial jobless claims came in at much lower 335k, versus the expected 369k forecast for the Jan. 12 ending week and ended up being the lowest reading since January of 2008. However, being only one week, we will wait to see if a trend develops. Continuing claims for the Jan. 5 week came in at 3,214k, which was a bit higher than the 3,155k expected.

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U.S. large cap stocks were up again this week to five-year highs, giving 2013 a strong start. While we realize a lot of unique factors can play out in a given year, a strong start has resulted in an approximate 85% success rate in whether or not the year as a whole ends up with a positive return. (Past performance is no guarantee of future results, naturally.)

U.S. earnings season is in full swing, and were led last week by strong results from several financial institutions, such as Goldman Sachs, Morgan Stanley and JPMorgan Chase as well as economically-sensitive firms like General Electric. From a sector standpoint, energy and industrials led the way, while technology and telecom lagged the market. This far, 65% of firms have reported earnings above estimates, and 69% have registered above-estimate revenues (better than averages over the past four quarters). Earnings growth rates from Q3-2012 were slightly negative, but have come in at nearly +2% so far this quarter. This coming week will be a big one from an earnings release standpoint, with 11 Dow and 80 S&P firms reporting in.

In foreign stocks, emerging market names outperformed developed countries. Specifically, India, Russia and China closed the week strongest—with economic data showing better signs of a potential growth turnaround in these areas. By contrast, Japan and a few peripheral Asian nations lost ground.

Bonds gained slightly, with the yield curve largely unchanged. While absolute returns were fairly tempered, areas like emerging market debt and U.S. high yield outgained the broader index.

Real estate securities were led by strong weeks in U.S. industrial and mortgage, while European and Asian REITs lagged.

Commodities were generally higher, with strong bouncebacks from energy and grains (wheat specifically), while industrial metals showed weakness. Volatile natural gas was up 7% on the week, with silver reversing weakness from last month. For the year so far, commodities have performed well with improved expectations for global growth.

Have a great week!