Economic Notes – June 3, 2013


Written by: Jon McGraw

In a shortened holiday week, only a few memorable economic releases were featured.

(-) Consumer spending for April was weaker than expected, falling -0.2% versus an anticipated flat reading and March growth was revised downward a tenth. Sales as gas stations dropped a seasonally-adjusted -9% due to lower prices, which caused the bulk of the change. However, utilities spending also fell as temperatures in April moderated in much of the nation. Personal income came in flat for April, relative to expectations of nominal +0.1% growth, with wages/salaries and the savings rate unchanged from the previous month.

(0) The PCE price index declined -0.3% for April, a tenth more than anticipated, while core PCE grew at a mere hundredth of a percentage point (vs. an estimated +0.1% rise). The difference between the two was yet another fall in energy prices. On a year-over-year basis, the headline and core PCE measures rose +0.7% and +1.1% respectively, again demonstrating that inflationary pressures have remained tempered by almost any way you measure it (PCE, PPI, CPI, etc.).

(+) The Richmond Fed index came in stronger than expected, at an improved -2 versus -4, but remained in negative/contractionary territory. In keeping with this, the underlying results reflect decreased manufacturing activity in that mid-Atlantic district, as new orders and employment fell; however, shipments and future expectations for activity and forward-looking capital expenditures improved somewhat. This regional report is in keeping with the Phila. and N.Y. Empire surveys, which have also been recently sluggish.

(+) The Chicago PMI surprised analysts a bit, though, coming in better than expected (to 58.7 versus an anticipated 50.0 reading) considering the lackluster readings from other manufacturing surveys in prior weeks. Results in underlying components such as new orders, production and employment were also sharply higher.

(+) The May University of Michigan sentiment survey was revised upward from its initial 83.7 reading to an even-higher 84.5, with gains seen in both the current conditions and forward-looking expectations components. Inflation expectations for the year ahead remain at +3.1%, which is certainly higher than the current pace, but quite in line with long-term historical averages. The 5- and 10-year look-ahead expectations were a shade below that at +2.9%.

(+) The Conference Board’s consumer confidence survey rose to a higher level than expected to 76.2, versus a consensus level of 71.2. Assessments of the present situation as well as expectations about the future both improved, as did the ‘labor differential,’ which measures how plentiful versus hard-to-get jobs appear to be. That pushed the overall index to its highest level since early 2008, but, as we know, readings can be fickle and quite short-sighted from month-to-month.

(-) Pending home sales for April were +0.3% higher, which disappointed relative to an expected +1.5% increase. The Northeastern and Midwest regions gained in the month (the latter by over 11%), while the West fell by almost 8%. This measure points to signed contracts, that are typically converted to ‘existing’ home sales within a few months.

(+) The Case-Shiller home price index continued to show gains in March, up +1.12% versus an expected +1.00%. This and an upwardly-revised Feb. figure brought the year-over-year increase to +10.9%, which is the strongest yearly result since spring 2006 and has brought the index back to roughly its 2003 level. The largest positive gainers on the month were Detroit and Las Vegas (both up over 3%), while the year was led by Las Vegas, Phoenix and San Francisco (all up over 20%)—notably weak markets during the mortgage crisis period that have seen some recovery since. Even the ‘worst’ markets (New York and Cleveland) were at least positive on the year.

While several markets remain below pre-crisis peaks, ‘value’ investing activity and fewer foreclosures have stopped the bleeding, so to speak, and prompted some recovery prospects. This has even fueled additional talk of a new housing ‘bubble,’ which of course leaves investors with something fresh and new to worry about. The market certainly is bifurcated, both by region/city and house price segment, so it’s difficult to make national generalizations, but there has been a general lack of mortgage applications (and acceptances), while inventory has remained low, which has created a lower supply environment that can create its own pricing dynamics.

That said, we’ve been reading quite a few optimistic reports on the housing industry in general over recent weeks/months. While the price improvements of home values themselves have been obvious and well-covered through the Case-Shiller reports and others, the homebuilding industry has also begun to claw back from the brink. We’re still not producing enough homes to keep up with demographics and required long-term household creation demand. We might say ‘big deal’ at an industry that currently only represents 3% of GDP (relative to its 30-year average weight of 5%), but when other industry impacts are considered (peripheral industries like furniture, appliances, insurance, etc.), it is estimated that the total impact is closer to 20%. That type of number can make a more meaningful impact on GDP over time.

(0) Initial jobless claims for the May 25 week rose to 354k, versus a consensus of 340k, but were somewhat ‘contaminated’ by estimated figures from several states and a holiday weekend—which always tends to convolute the figures. Individually, California improved, with a large decline in claims due to fewer service layoffs and reversing larger layoffs earlier in the month. Continuing claims for the May 18 week rose a bit to 2,986k, which was lower than the 2,955k expected. These have fallen by 200k over the course of the 2013 so far.

(0) The first revision of 1st quarter GDP was a downward one from the original estimate (which was the same as consensus guess on the update) of 2.5% to 2.4%. However, the underlying details were a touch better, with improved numbers in consumer spending (3.2% to 3.4%), particularly in non-durable goods consumption, while growth in inventories was revised down along with government consumption (no surprise on poor results from the latter). Non-residential structures investment was revised downward by several percentage points, while equipment/software was revised upward.

The Markets

Tracking estimates for 2nd quarter GDP are mixed. The lower estimates fall in the range of 1.5-2.0%, while more optimistic economists are calling for a number closer to 2.5%. One common theme, however, is a bit of an upswing in the second half of the year, particularly the fourth quarter, which is largely expected to show growth in the 2.5-3.0% range—particularly due to lessening fiscal tightening effects and continued improvement in the housing market. We didn’t think that type of growth would appear especially exciting, but in the environment we’re in, this looks relatively robust.

Following a poor previous week, U.S. equities started the week off decently but trailed off towards the end of the week. From a sector standpoint, technology and financials were the best performers, while consumer staples, and utilities lagged by the largest amounts. While equity mutual funds experienced continued inflows (according to Lipper), last week represented the smallest positive inflow so far this year.

Foreign stocks in both developed and emerging nations suffered a bit compared to U.S. stocks, but several areas gained—including Mexico, South Korea and Italy. The worst performance was registered from Turkey, Brazil, Russia and Japan—the latter perhaps being some profit-taking from the strong gains over the past six months mixed with skepticism regarding the ability for the JCB to achieve its aims.

With the exception of a few foreign bond markets, fixed income performed poorly, as yields rose over the week. Emerging market debt, municipals and long treasuries fared the worst, although some other indirect exposures to interest rates, such as preferred stocks and utility stocks have suffered. Tuesday was an especially challenging day as discussion centered on the possibility of a tapering off of the Federal Reserve’s quantitative easing program. With this artificial demand for Treasuries holding down rates, the removal (inevitable at some point) could almost certainly push rates higher. Whether this happens any time soon, however, is speculation and could be exaggerated

Then again, any type of world uncertainty could also spur another flight to quality and keep Treasury prices up/rates contained—it’s happened several times over the past few years and managed to keep the Treasury market somewhat range-bound. Interest rates are like any other ‘investment,’ in that they reflect current market dreams/fears and can under- and over-shoot like any glamour stock can. As 1.6% may have been too low and overestimated the amount of spring economic weakness, recoveries can overshoot (or undershoot) as well. We just know that rates in their natural form should likely be higher than lower.

Real estate markets were generally down strongly (again, with direct interest rate exposure), with Europe and Asia holding up the best and U.S. residential REITs losing significant ground.

Commodity markets were led by a bounce back in several industrial metals, including lead and aluminum, as well as strong weak in soybeans. Energy contracts generally lost ground, with natural gas falling -7% and composite crude oil and gasoline down over -2%. Most other areas were generally flat for the week, with returns +/- 1%.

Have a great week!