Economic Notes – March 3, 2014


Written by: Jon McGraw

(-) The second estimate of 4th quarter GDP was a disappointment, although many watchers expected as much—the initial estimate of +3.2% was revised down to +2.4% (a tenth lower than the expected revision). The majority of the difference came from lower personal consumption expenditures (up +2.6% instead of the +2.9% expected), net exports and inventories—in roughly equal amounts. On the positive side, business fixed investment gained a half-percent over the first measure. There is one more remaining revision next month, but the +2.5% growth rate is right in line with trend over the past year; and is neither great nor terrible—it’s in line with positive, but tempered growth we’ve come to expect. Similarly, the PCE price index, which is the GDP inflation component, was revised upward a few ticks to +1.3%, but that remains at +1.2% pace over the past year and is quite tempered as well.

For the current 1st quarter 2014, GDP estimates are running in a similar range of 1.8-3.2% or so (round if off to 2-3% if you like), with the inventory ‘payback’ component being the tipping point. But we have some time for these to change. Extreme winter weather impacts are likely, the amount of which is to be determined, but could be upwards of several tenths of a percent.

(0) Durable goods orders for January fell -1.0%, which was slightly better than the -1.7% expected drop. The headline number was affected by a drop in civilian aircraft orders (Boeing specifically), which fell -20% and can be choppy; however, defense orders gained +23%. Core capital goods orders rose +1.7% (vs. consensus expectations of a -0.2% drop), helped by gains in fabricated metal and computers/electronics—both over +5%. Core shipments fell by almost a percent, but remained a few tenths of a percent better than expected. While some December numbers were revised downward, this wasn’t a terrible report considering the negative expectations surrounding the winter season. The shipments part may lower GDP for the first quarter a bit.

(+) The Chicago PMI for February came in better than expected, up a few ticks from 59.6 last month to 59.8—far better than the forecasted 56.4. Despite the strong expansionary headline result, the underlying components were mixed, with new orders and production down a point or two, while employment rose by 10 points (which was quite dramatic).

(+) The FHFA house price index of conforming mortgaged-financed homes gained +0.8% for December, beating the median forecast of +0.3%. Gains were widespread, including the West South Central (i.e. Texas) region that rose +2%, while the Mid-Atlantic and New England regions lost a half-percent. The trailing 12-month gain is +7.7%.

(+) Similarly, the Case-Shiller home price index also rose +0.8% for December, compared to an expected +0.6% rise. The biggest winners on the month were Miami, Detroit and San Francisco, which all gained just over a percent, while 19 of the 20 indexed cities (exception being Cleveland) gained ground. Over the past year, the index is up +13.4%, which is substantial.

(-) Pending home sales for January rose +0.1%, but fell short of the +1.8% forecasted increase, but at least ended a half-year of declining results. December’s growth was also revised upward by 3%, but remained sharply negative.

(+) New home sales for January rose +9.6% to 468k, which sharply outperformed the forecasted decline of -3.4%; additionally, the December number was revised upward a bit (by +3%, cutting the month’s decline in half). Sales were widespread here as well, with the exception of the Midwest region, so the break in a few negative housing reports was welcome. Again, housing statistics are depressed during the winter season, so it will require early spring results to show more consistency.

(+) The final University of Michigan consumer sentiment survey for February rose a bit from the initial and expected final 81.2 to 81.6. Consumer assessments of the present situation improved by several points, while future expectations declined. Inflation expectations also softened a bit over the year-ahead view (still at +3.2%), while the longer-term expectations were just under 3%, on par with the long-term range.

(-) The Conference Board’s consumer confidence survey for February came in at 78.1, which was lower than January’s 80.7 and the 80.0 forecast. Consumer assessments of the present situation improved by several points, while future expectations interestingly declined somewhat. The respondents reporting that jobs were ‘plentiful’ versus ‘hard to get’ improved by just over a point, on par with other data noting improvement on a still-low base. Overall sentiment remained good relative to the improving trend seen over the post-recession era.

(-/0) Initial jobless claims for the Feb. 22 ending week rose a bit to 348k, from 334k the prior week and above the 335k estimate. Continuing claims for the Feb. 15 week rose also, to 2,964k, from the previous weeks’ 2,956k (expectations called for 2,985k).

Market Notes

U.S. stocks, as measured by the S&P 500, are back in record territory again, as February gains more than offset January weakness. Cyclical consumer discretionary and materials stocks led while defensive telecom and utilities lagged. Ongoing commentary of accommodative policy from Janet Yellen offset some geopolitical uncertainty in the Ukraine, with reports of possible and later confirmed Russian intervention. This crisis could carry over into this coming week.

Foreign stock returns were weaker than those in the U.S. on net, with 1% gains in Europe and Japan, and a flat week in the U.K. Underlying those number, there was fairly divergent performance within the developed and emerging market indexes, with strong gains in the smaller European nations and stronger emerging markets (such as Korea and The Philippines), while Russia, Turkey and Mexico lost several percent.

Chinese stocks were flat on net, but experienced a bit of volatility during the week as news surfaced of the country’s largest banks suspending certain types of financing in the real estate sector for a period of time; at the same time, property prices showed the slowest rate of gains in several years due to such tightened standards. The yuan also experienced its worst day in six years, falling -0.50% against the dollar, as the central bank looked to be increasing foreign exchange interventions.

Bonds experienced a strong week with lower rates later in the week in a ‘risk-off’ response to the geopolitical unrest in the Ukraine. Naturally, long treasuries led, with gains of nearly 2% on the week, while a half-percent dollar decline boosted international bond results, in both developed and emerging markets. The bulk of bonds gained, with the exception of floating rate and other short debt, which stood flat.

In real estate, mortgage REITs gained a few percent on lower interest rates, followed by U.S. residential and office/industrial. Asian REITs lagged, with a -1% on market volatility in China, as Hong Kong is a major component of that index.

Commodity indexes gained about a half-percent on the week, in keeping with dollar weakness. Coffee prices were up 6% again, and have unbelievably risen 60% in two months year-to-date (albeit a small part of the overall index). Livestock, soybeans and other minor index components also gained strongly, while crude oil was just barely positive. Natural gas lost -5% after another volatile week, in part due to weather and otherwise as a response to the Ukraine crisis (Russia is a major commodity supplier, so any geopolitical issues involving them tend to have at least some carryover).

Just when many investors were again ready to give up on them as a portfolio diversifier, commodities have actually fared quite well year-to-date, with the DJ-UBS index gaining 7%, but remain under the radar with investors still stinging from recent losses. The strength is broad, with all sectors higher, with the exception of industrial metals (large index component copper is off -6% due to emerging market demand concerns and higher supplies).

Have a great week!