Economic Notes – October 22, 2012


Written by: Jon McGraw

Retail sales for September rose more than expected, at +1.1% versus a consensus estimate of +0.8%. When looking at the ‘core’ sales (which subtracts autos, gasoline and building materials), the result was the same (+1.1%), relative to expected (+0.7% in that case). Sales for July and August were also revised upward, which is a positive move. Interestingly, the new iPhone 5 seems to have played a role in the robust numbers for the most recent month, since electronics sales and non-store retail were up +4.5% and +1.8% on the month, respectively.

The consumer price index for September rose more than expected at a seasonally-adjusted +0.6%, versus analyst consensus of a +0.5% rise—mostly due to higher gasoline prices (gas was up 7.0% in the month). The year-over-year CPI ticked upward from 1.7% to 2.0%. The core part of the index, which excludes volatile food and energy, moved a much more modest +0.15%, taking the core year-over-year inflation figure from 1.9% to 2.0%. On the core side, owners’ equivalent rent and apparel prices made the biggest difference.

As a whole, core inflation has remained relatively stable, as seen by the year-over-year number. Headline inflation, of course, has been a bit more volatile due to the swings of oil (and particularly, rises in gasoline prices) in recent quarters. Gas prices are sporadic, but can prove to be as important a ‘tax’ on consumers as any other from a week-to-week budgeting perspective.

Industrial production was better in September, and better than expected, as the key index rose +0.4% compared to a consensus estimate of +0.2%. Manufacturing output was a primary positive factor, although vehicle production was down. Capacity utilization came in at 78.3% for September, which ended up being spot-on with forecast.

On the housing front, housing starts rose by a strong +15.0% in September to an annualized rate of 872k units. This was far better than the median forecast of +2.7% for the month, and we continue to see strength in both single and multi-family starts (although multi-family has been the stronger of the two). Building permits also jumped +11.6% in September, relative to the expected increase of +1.1%. The NAHB homebuilder sentiment index rose from 40 in August to 41 in October, representing six consecutive months of increases. While current and expected future sales readings were unchanged, prospective buyer traffic rose to the highest levels since spring 2006.

Existing home sales fell by -1.7% for September, month-over-month, which was within a 0.1% or so of expected, as was the sales level of an annualized 4.75 million figures. Single-family dwellings exclusively accounted for drop, as condo sales were flat. However, sales on a year-over-year basis are up 11% from a year ago. The months’ supply number fell slightly from 6.0 to 5.9 months.

We will have more housing reports in this coming week, but we continue to see improvement in many areas here, and across a broad range of housing indexes. Based on figures from the Goldman Sachs economics department, it is estimated that housing weakness took away a quarter percent of GDP growth or so in 2010-11 and is adding a quarter-percent or so this year…so it isn’t as large of a component as some would make it out to be, but it is significant. It appears we are finally moving away from trough housing ‘production’ (if you view building houses in the same sense of factory work) into more ‘normal’ levels more appropriate for demographic demand. However, despite the excitement in these numbers in recent months, this is a slow-moving process and may well continue to take time.

The New York Fed’s Empire manufacturing survey rose from -10.4 in September to -6.2 for October, although the result was a bit below expectations of -4.0. The underlying numbers for new orders, while better, remain weak; inventories moved from negative to flat; shipments and employment fell into negative territory. All-in-all, a mixed report.

The Philadelphia Fed index rose higher than consensus expectations in October (of +1.0), going from a -1.9 negative figure to +5.7. The composition was dicey, as it often is in these regional indexes, with new orders and expectations for business activity down, while shipments rose.

On the jobs front, initial jobless claims for the Oct. 13 week rose more than anticipated to 388k, more than the forecast 365k, although the four-week moving average didn’t budge much at that level of 366k. There has been some discussion by analysts regarding various ‘distortions’ and later ‘paybacks’ of these numbers due to seasonal adjustments made this time of year, but many of these have generally appeared to offset week-to-week. Continuing claims for the Oct. 6 were a bit lower at 3,252k versus an expected 3,275k.

Lastly, from the U.S., the Conference Board’s index of leading economic indicators showed a jump in September—of +0.6% —which was better than expected and somewhat surprising, considering the drop-off the previous month of August. Per the official report, housing has played a significant role in the index’s better performance, the details of which are noted above. The coincident and lagging indicators also rose, but by only a fraction of a percent. The LEI isn’t really meant to show anything earth-shattering. But what it does do is take components (ten to be exact) that cover manufacturing, building, stock prices, credit/interest rate spread conditions and surveys into one combined index that correlates to forward-looking business activity—all else equal. One can micromanage the component parts (and sometimes we do), but is also useful to look at broader historical relationships based on what indicators look like as a combined unit. A firmer stock market and easy credit conditions are forward-looking components, as is sentiment. These aren’t perfect, but they do offer us a glimpse into a ‘probability’ of outcomes currently being discounted in.

The Chinese announced that their third quarter GDP had fallen to 7.4%, which is the lowest in three years. While somewhat disappointing to some investors, it does appear in some ways that the intended ‘soft landing’ is indeed happening to some degree. China appears to be entering a second, more mature stage of growth, which may well result in lower GDP readings and an improvement in ‘quality’ rather than just ‘quantity’ of growth. (This has been an intended policy goal of the administration as well.) This is in line with the natural progression of a nation as it emerges from a low income and production base as a crude emerging market, incomes and standards of living begin to improve and a consumer base develops. Being especially sensitive to social stability, Chinese administrators realize a more diversified economic base (beyond low-cost, high-volume goods to be exported overseas) is critical to less cyclicality and a better economic foundation for sustainable growth. This process takes time, however. What keeps the emerging markets interesting is that every nation finds itself on its own unique place in the progression and timing of that cycle, whether it be Brazil, Russia, Indonesia, etc.

Markets were up slightly on the week (better early, but a terrible Friday) largely on day-to-day fluctuations in sentiment driven by corporate earnings for Q3—which we’re in the heart of. From a sector standpoint, materials and financials led, while technology and telecom lagged. Google was in the midst of this, as shares plummeted after a poorly-received ‘partial’ and ‘early’ release, and several other blue chips like IBM, Microsoft, McDonald’s and General Electric were hit on disappointing earnings numbers.

Bonds, and particularly, government bonds were generally weaker with higher long rates, which steepened the curve on the long-term end. On the positive side, high yield, bank loans and international debt had a good week.

European REITs were dramatically higher, and U.S. REITs also gained on the week. Residential and industrial REITs outperformed retail names, which isn’t surprising considering broader equity sentiment.

In commodities, agricultural contracts gained nearly 2% on the week, while energy and precious metals lost the most ground. Part of the negative sentiment for energy was due to Goldman Sachs cutting their 2013 Brent crude oil price forecast from $130 to $110 a barrel, as much larger than expected output in the U.S. and Canada is increasing supply. Long-term, prices are expected to stabilize in the $90/barrel range… in the words of Goldman, very “1990s” like. At the same time, we are importing less from West Africa and the Middle East—production from which may be directed towards demand from the Far East.