First Quarter GDP and March Pending Home Sales

KEY DATA: GDP: +0.2%; Consumption: +1.9%; Structures: -23.1%/ Pending Sales (Month): +1.1%; Year-over-Year: +11.1%

IN A NUTSHELL: “The slowdown in growth was a little greater than expected and it raises the question whether this was just a normal first quarter pause or a real slowing in activity.”

WHAT IT MEANS: We knew the economy didn’t do a whole lot during the first three months of the year and now we know it did even less. Growth managed to stay positive, but not by much and the details reflected that weakness. And as usual, there were some results that raise questions. Consumers spent at a less than ebullient pace but why purchases of nondurable goods actually fell is anyone’s guess. The services component had been problematic, but that is now doing well. Since this is the largest single element in the GDP, that is good news. As the flow of spendable income from lower energy costs builds further, we should see that money being spent, so consumption is expected to rebound in the coming quarters. As for investment, a collapse in the energy sector led to a huge decline in structure spending that reduced growth by 0.75 percentage point. While the rig count is expected to decline further, the negative impact from energy investment should moderate. Residential investment was also soft, but if we believe the permit data, construction should already be picking up. There was also a major widening in the trade gap. A stronger dollar has started to slow exports but the West Coast port strike has made understanding this component impossible. The deficit may continue widening, but not at the pace we experienced this winter. We also saw that state and local government spending was down. That seems to fly in the face of almost all other reports as most governors are proposing bigger, not smaller budgets. While all of those factors argue for a lot better growth in the second quarter, there is one that could cause growth to moderate. Inventories rose much more than expected and that should turnaround this quarter. On the inflation side, consumer prices declined overall and were up only modestly even when food and energy were excluded.

Pending home sales continued its rise in March, with contract signings up solidly. With a double-digit rise over the year, it looks like sales should be increasing strongly as we go through the spring. While these are existing home data, to the extent that the new home market follows, this report buttresses the belief that housing starts will rise going forward.

MARKETS AND FED POLICY IMPLICATIONS: The Fed is finishing its two-day meeting and this report will likely cause a downgrade in the economy’s condition. But first quarter growth has been much less that the rest of the year for quite some time now. For the 2010 to 2014 period, the economy expanded at an average of 2.2% while the first quarter increases averaged only 0.6%. So before anyone panics, keep in mind that what happens in the first quarter doesn’t tell us anything about what happens in the rest of the year. But a weak first quarter allows the Fed to hold the fort, at least for another meeting. Let’s see the April and May jobs and spending numbers before we decide how further out this report pushes the Fed. June looks out, but July cannot be excluded, even if there is no scheduled press conference.

March New Home Sales and Weekly Jobless Claims

KEY DATA: Sales: -11.4%; Prices (Year-over-Year): -1.7%/ Claims: up 1,000

IN A NUTSHELL: “I guess few people could visit the construction sites earlier in the year, which may explain why new home sales tanked in March.”

WHAT IT MEANS: Sometimes, the data have odd patterns. New home sales rose solidly in January and February, though how anyone in certain parts of the country could get to where the homes were being built is anyone’s guess. But those increases were unwound in March as demand cratered to its lowest level since November of last year. Sales largely disappeared in the Northeast, fell sharply in the South and were down moderately in the West. Only the Midwest reported a gain. About the only explanation I have for this surprisingly large drop was that the snow and ice in January and February prevented visits to the developments, so fewer people were prepared to sign contracts in March. Since builder confidence soared in late March and early April, I am guessing all those missing buyers have started showing back up. What is also strange is the decline in prices. Prices had been rising in the 5% to 8% range for a couple of years and there seems little explanation for the sudden decline other than the data are volatile. We have seen this type of up and down before, so don’t be surprised if we get a large rise in prices when the April numbers are released.

The labor market remains quite firm as new claims for unemployment insurance were essentially flat last week. The level remains below 300,000 and that points to a pretty solid April jobs report.

MARKETS AND FED POLICY IMPLICATIONS: Yesterday we learned that existing home sales surged in March but today we found out that new home demand tanked. What should we make of this contradictory pattern? First, these are two distinctly different samples, especially in the way they are counted. Existing home sales are closings while new home sales are signed contracts. Thus, an existing home sale in March may have come from a deal made in December or January. That would argue for a slowdown in sales in the next few months as the winter probably limited house visits. On the other hand, the inability to get to the construction sites should have slowed demand in January and February for new construction, yet it didn’t. In other words, I am somewhat confused, a not uncommon but very uncomfortable state for me. All that said, new home sales in the first quarter were at the highest pace in seven years. We are still way below a normal market, but the healing process continues, despite the relatively weak March numbers. Also, the number of homes on the market is rising and that should help sales. So taken together, this is a disappointing report but not one that points to any sudden weakness in the housing market. That should be the takeaway for investors, though with earnings coming out, who knows if these data will matter? But a less than stellar March should temper the Fed’s view of the housing market and the members were concerned about it the last statement.

March Existing Home Sales and February FHFA Housing Prices

KEY DATA: Home Sales: +6.1%; Median Prices (Year-over-Year): +7.8%; FHFA Prices (Monthly): +0.7%; FHFA Prices (Year-over-Year): 5.4%

IN A NUTSHELL: “Spring has sprung and so have home sales and prices, further indications that the economic slowdown was largely weather driven.”

WHAT IT MEANS: March is the transition month from winter to spring and as such, we should start getting indications of the extent to which the weather whacked the economy. It looks like it was a lot. The National Association of Realtors reported that existing home sales soared in March. The increases were across the nation but were led by large rebounds in the winter-battered Midwest and Northeast. Both single-family and condo purchases rose strongly, with condo demand up double-digits. As for prices, they are starting to rise faster and were up sharply over the year. The deceleration in home price gains looks like it is over, driven in part by limited supply. While the number of homes on the market rose, given the jump in the sales pace, the number of months it would take to sell all those available homes dropped. The inventory level is about ten percent where it should be for a healthy market.

The Federal Housing Finance Agency’s House Price Index rose solidly in February, supporting the view that home price increases are accelerating once again. There was a slowdown in the second half of 2014, but that appears to be behind us.

MARKETS AND FED POLICY IMPLICATIONS: It looks like the end of winter is leading to a housing rebound. But there are a large number of factors at play that will affect the housing market over the next year or so. With prices rising, the number of underwater/marginally positive homes is falling while the delinquent home overhang is moderating rapidly. That should provide for more homes coming on the market. On the other side, continued unease about relocating for job reasons is limiting the willingness to move and therefor supply. A better job market, improving balance sheets and time, which is allowing households to eliminate bankruptcies on their records, is increasing potential demand as more households can qualify for mortgages. Rising prices have yet to make a large impact on new home buyers but they raise a warning flag that reduced demand from this group is possible. The sector is coming back from its winter doldrums and most of the factors argue for even more improvement going forward. That should buoy investors, who are uncertain about future profits. As for the Fed, the FOMC commented in its March 18th statement that the housing market recovery remains slow. That may no longer be the case. The Committee meets next (April 28-29), so we will see what the thinking is soon enough, but the really important meeting is June. With two jobs reports, first quarter GDP and a variety of inflation indicators to be released, the run up to that meeting will help determine the timing of the first rate hike. It may not happen in June, but it is coming and the housing data only add to that belief.

March Consumer Prices, Real Earnings and Leading Indicators

NAROFF ECONOMIC ADVISORS, Inc.

Joel L. Naroff

President and Chief Economist

215-497-9050

joel@naroffeconomics.com

KEY DATA: CPI: +0.2%; Excluding Food and Energy: +0.2%/ Real Hourly Earnings: +0.1%/ Leading Indicators: +0.2%

IN A NUTSHELL: “Inflation and earnings are rising moderately, not minimally, but I am not sure the Fed members want to admit that.”

WHAT IT MEANS: As long as inflation remains well below the Fed’s target, the members can be patient, even if they don’t use that word anymore. Well, we don’t have high inflation, but neither do we have low inflation. Consumer prices rose moderately in March, led by rising energy costs. But it wasn’t all oil, by any means. Vehicle costs jumped and there were moderate increases in clothing, medical care and shelter expenses. The only major categories where prices went down were food and utilities. Services inflation is stabilizing somewhat but that is being offset by a pick up in commodity inflation. Over the year, consumer costs excluding energy are nearing the Fed’s 2% target.

The battle over who should get what share of earnings is raging and with the number unemployed and underemployed falling, the pendulum is swinging. In March, for the fourth time in five months, real average hourly earnings for all workers rose and the gain over the year remains above 2%. While that is nothing great, it is enough to allow consumers to spend at a decent pace.

Will the economy continue to grow at a solid pace? The Conference Board’s Leading Economic Index rose moderately in March, but the gains have been smaller than we saw for much of the past year. That is not a positive sign for strong growth. Indeed, it implies only an average expansion going forward. However, the University of Michigan’s mid-month reading on consumer confidence rose to its second highest level in eight years. With incomes growing, that bodes well for future spending.    

MARKETS AND FED POLICY IMPLICATIONS: The FOMC starts its next two-day meeting in eleven days and there is little in the data to cause the members to stop believing that patience is still a virtue. As long as they continue to believe that, they can leave us in the dark about when rate hikes will come. But the music will likely stop playing sometime soon, and the monetary authorities and investors will have to face reality. Right now, the worries are foreign, with Greece and China once again at the top of the list. It’s not as if the problems in those countries had gone away, it’s just that they were put on the back burner. What those concerns remind us is that the Fed’s ability to return to normal interest rates faces an awful lot of hurdles even if the U.S. economy is not one of them.

 

March Housing Starts, April Manufacturing Surveys and Weekly Jobless Claims

KEY DATA: Starts: +2%; 1-Family: +4.4%; Permits: -5.7%; 1-Family: +2.1%/ Phila. Fed: +2.5 points; Employees: +8 points/ MAPI: -2 points/ Jobless Claims: up 12,000

IN A NUTSHELL: “While builders are still slow in getting more shovels in the ground, the signs point to a lot more activity in the next few months.”

WHAT IT MEANS: While builders are becoming more positive about conditions, they are not doing that much about it. Housing starts rose in March, but the rise did not unwind the large February decline. First quarter activity was nearly 9% below the fourth quarter 2014 average. That is hardly a surprise given the winter weather. The data were all over the place. Better weather led to a more than doubling of construction in the Northeast and a 31% surge in the Midwest. In contrast, starts fell by nearly 20% in the West and by over 3% in the South. No pattern there. What caused only a limited rise in construction activity was a major downturn in multi-family activity, especially in the West. That is likely the result of normal volatility in the data, implying we really shouldn’t be too worried that starts didn’t rebound more in March. Indeed, there is every reason to believe that the April report will be quite strong. First, single-family construction is not faltering. Second, and more fundamentally, there were roughly 300,000 more permits taken out during the first quarter than there were starts – and almost all of them were for multi-family dwellings. As I always note, builders are not paying for permits for the fun of it. Those permits are going to be used in the spring.

The manufacturing sector took a big hit this winter as both weather and a strong dollar slowed the sector down. The latest data don’t indicate any major improvement. The Philadelphia Fed’s manufacturing survey rose modestly in early April. Firms are hiring a lot more people but how long that will last is uncertain as new orders are growing more slowly. Expectations rose, but minimally. A second survey, one done quarterly by the Manufacturers Alliance for Productivity and Innovation (MAPI), indicated that activity also eased modestly in the first quarter. Despite a rise in current orders, capacity utilization and investment, most other indicators declined. My take away is that conditions moderated but didn’t fall greatly.

Jobless claims rose a touch, but they remain at levels consistent with solid to strong job gains.

MARKETS AND FED POLICY IMPLICATIONS: The headline housing numbers didn’t tell the full story. While construction failed to rebound sharply in March, I would be shocked if the April numbers were not robust. Sharp declines in multi-family starts often are followed by large increases, and the gap between permits and starts in that segment points to that happening. The strong dollar is taking a toll on manufacturing and that is likely to be an issue for a while. But the sector is holding in, even if it is not leading the way. All in all, the first quarter was a disappointment but there is reason to expect conditions to improve as we go forward. But we need data to show that is happening before the Fed does anything.

March Industrial Production and April Home Builders Confidence

KEY DATA: IP: -0.6%; Manufacturing: +0.1%/ Home Builders Index: 56 (up 4 points)

IN A NUTSHELL: “Manufacturing is starting to come back and with developers pretty optimistic, the outlook for spring economic activity is becoming a lot brighter.”

WHAT IT MEANS: Spring is here and guess what? Builders have smiles on their faces once again. The National Association of Home Builders/Wells Fargo Housing Market Index jumped in April. It is nearing levels that would be consistent with pretty strong home construction. Expectations about current and future sales were up sharply. I have little doubt that the warmer weather is heating things up. Don’t be surprised if the February housing start collapse is totally wiped out in March. I expect housing activity to get back to 2007 levels by the end of spring.

While April may be the month the economy flowers, March continues to growl. Industrial production fell sharply in March, but the major reason was a cut back in utility activity as the winter started to break and a major reduction in oil and gas production, which we all knew was coming. As for manufacturing, output did rise, but only modestly. But vehicle assembly rates have bounced back and business equipment production was up, so there seems to be some signs that conditions are firming. That said, the New York Fed’s manufacturing index tanked in early April, so we need to be cautious before we say that the industrial sector is getting back up to speed.

MARKETS AND FED POLICY IMPLICATIONS: We still have quite a few more March numbers before we get the spring data, so don’t expect the reports that are coming out to be great. The winter hurt but we just don’t know how much and we may have to wait about two more months before we have a clearer picture of the economy. That, of course, brings us to June, so it is looking like a rate hike that month is becoming unlikely – as much as I don’t want to admit that. While two great employment reports and an acceleration in wages could bring that month back into play, the Fed probably wants to soften up the beaches for a rate hike and there may not be time to do that. As for the markets, investors have earnings to deal with and rate hikes to put out of their minds, even if the Fed is highly likely to move within the next six months. Failing to plan for that is done at your own peril.

March Retail Sales and Producer Prices

NAROFF ECONOMIC ADVISORS, Inc.

Joel L. Naroff

President and Chief Economist

215-497-9050

joel@naroffeconomics.com

KEY DATA: Sales: +0.9%; Excluding Vehicles: +0.4%/ PPI: +0.2%; Goods less Food and Energy: +0.2%

IN A NUTSHELL: “Consumers are picking up the shopping pace but they can spend a whole lot more.”

WHAT IT MEANS: It finally looks a lot like spring but that doesn’t mean the winter weather still isn’t with us, at least when it comes to economic data. Retailers took a hit because of the cold and snow and the March data seem to indicate that as conditions moderated, consumers started venturing out to the stores again. Retail sales jumped, helped by a sharp rebound in motor vehicle purchases. Indeed, vehicle purchases jumped 5.5%, though dollar sales were up less. There was also strong demand for furniture, clothing, building supplies and general merchandise. People also ate out a lot when they shopped. But not every segment got some additional loving by consumers. Sales of electronics and food for home fell and we also didn’t do a lot of shopping online. There was also a strange decline in gasoline purchases. Gasoline prices were up over 10% but sales, which are not adjusted for prices, were down. That doesn’t make much sense.

On the inflation front, wholesale costs rose moderately in March. Rising energy costs helped, though even excluding energy, producer prices increased a touch. Goods prices had been falling for several months, but no matter how you sliced or diced the data – and the report does that in a wide variety of ways – costs were up in March. That, actually, is a good sign as it indicates demand may be coming back. Services inflation, which has softened recently, moved back into the positive range. We had not been seeing much there as lowered transportation costs kept services prices under control. Looking down the road, the price increases in intermediate and unprocessed products generally fell only modestly. That points to a possible further slowing in the wholesale disinflationary process.

 

MARKETS AND FED POLICY IMPLICATIONS: March was a transition month as the weather eased, but not everywhere and not as much as most of us would have liked. The solid, though not spectacular, retail sales numbers point to a consumer that is finally venturing out. The rapidly improving April weather should lead to another solid rise in spending, though we will not know that for another month. This is the first indicator that supports the view that it was the weather, not a general economic slowdown, that led to the weak first quarter reports. That would normally make investors a little more comfortable, but we are in the midst of earnings season, so the hits and misses coming from companies will likely be the driving force in the markets. Since the Fed members try not to react to any given monthly number, the retail numbers should remind them that the April and May data, which will be out before the June FOMC meeting, could be telling. However, inflation remains quite subdued, so the Fed doesn’t have to be impatient. In other words, the April 28,29 FOMC will likely be non-event as there will be few non-weather-impacted data points that will be released before then that could cause a change in the statement.

 

March Import and Export Prices

KEY DATA: Imports: -0.3%; Nonfuel: -0.4%; Exports: +0.1%; Farm: -1.7%

IN A NUTSHELL: “Declining import prices provide fuel to the argument that the Fed doesn’t have to worry about inflation, at least for now.”

WHAT IT MEANS: The debate over when the Fed should or will raise rates continues to rage as the hawks and doves weigh in on an almost daily basis. If you believe the Fed members, rates should either be increased in June or next year. I guess that is a tight shot pattern when it comes to Fed policy. Just kidding. In any event, since the Fed claims to be data driven, what do the numbers tell us about potential Fed actions? Well, on the inflation front, there doesn’t seem to be much to worry about. Import prices fell in March and once again, fuel was not the driving factor. Indeed, for the seventh month in a row, nonfuel import costs declined. Every major category, included food, was down. Nonfuel import prices are of by 1.9% over the year, a clear restraint to any attempt by U.S. firms to raise prices. As for our exports, the farm sector continues to be battered by lower prices – they are down 13.5% since March 2014. Only fish prices are up.

MARKETS AND FED POLICY IMPLICATIONS: Controlling inflation while keeping growth solid is the Fed’s dual mandate. With the dollar strong, import prices are likely to be well contained, limiting to an extent domestic inflation. That can allow the Fed to focus more on growth, at lest that is the argument that the doves are making. The hawks simply say that the stronger dollar and low energy prices are transitory factors keeping prices low. Continued trend or above trend growth, coupled with a tightening labor market, improving worker incomes and the eventual turnaround in the dollar and energy prices imply that rising inflation is not that far off. Who will win the debate? My view is the data will firm sharply over the next two months. That may come too late for a June increase, but not for a July or September one. What worries me about the public discussion, especially by non-Fed commentators, is the apparent broadening of the perceived Fed mandate. Those that worry about the dollar argue the Fed cannot raise rates because it would further increase the dollar, lowering exports and restraining inflation and growth. Those that are focused on the equity markets argue that a rate hike would shock the markets, causing a correction so the Fed has to make equity prices a concern. The bond market gurus say that negative interest rates around the world make it impossible for the Fed to raise rates or limit its capacity to do so, implying that the bond market should control Fed actions. So now the Fed seems to actually have a quintuple mandate: Control inflation while keeping the economy solid, equity prices high, the dollar from getting too strong and limiting the impact on bond markets. Huh? People, we are approaching the six-year mark for this expansion. The post-World War II average is 5 years. The last three expansions averaged almost 8 years, with the longest being 10 years. In other words, one other thing the Fed has to consider is that the next recession could occur within a few years and if rates are not up by then, it will be forced to resort, once again, to non-traditional policies. The Fed has to raise rates back to more normal levels and the longer it waits, the faster it will have to act.

December Consumer Prices, Real Income and Industrial Production

KEY DATA: CPI: -0.4%; Excluding Energy: 0%; Food: +0.3%/ Real Earnings: +0.1%/ IP: -0.1%; Manufacturing: +0.3%

IN A NUTSHELL:   “Falling prices may worry some but households are ecstatic and manufacturers are gearing up to meet the growing demand.”

WHAT IT MEANS:  Horrors of horrors, energy prices are falling.  If you watch the business news, that is what you would think.  With another sharp drop in gasoline, the Consumer Price Index posted its largest decline in six years.  So, should we worry?  Not really.  Excluding energy, prices were flat and over the year, non-energy costs were up nearly 2%.  That is not deflation.  The December report was really odd.  There were a large number of components that posted outsized changes.  Apparel and used vehicle prices fell by over 1% while medical goods and energy services rose 1%.  Just about every major category was either up or down by 0.2% or more and that is not a normal pattern.   As for deflation, don’t tell that to people who have to spend a lot of their money on food and utilities.  Those costs were up solidly.  My suggestion: Stop looking at the headline number because when oil turns around, and it just might be starting to do that, the sign will simply change even if the magnitude doesn’t.

Real earnings rose modestly in December and that is distressing.  When prices fall sharply, if all you can get is a small rise in spending power, there are real problems out there.  This economy would be a lot better off with a little more money going to workers.

It will take additional quarters of strong growth to get to the point in the labor market where businesses will have to start raising wages faster and that growth is likely to occur.  Industrial production fell in December but a warm December (hoorah!) caused utility output to tank.  Meanwhile, manufacturing production rose solidly once again, despite a small pull back in vehicle assembly ratesThe University of Michigan’s mid-month reading of consumer sentiment rose to its highest level in eleven years.  It’s almost as if happy days are here again. The lower gas prices are going to wind up in the economy and better wage gains could trigger robust consumption.

MARKETS AND FED POLICY IMPLICATIONS: The economy is growing solidly and households are a happy bunch of campers once again, so it looks like 2015 should be a really good year.  Strong growth, coupled with oil price stability or even increases, will make people forget the idea of deflation and turn to the more important issue: When will the dam that is holding back wage gains break?  Normally, labor shortages lead to rising wages, which begin slowly once the inability to find workers starts appearing.  That is not happening this time.  Instead, we are creating the next “bubble”, which is the pent-up demand for higher wages.  The longer we go without slowly raising wages, the greater the surge will be.  The Fed may think it has time because labor compensation growth is largely non-existent.  But if my view is correct, when the capitulation occurs, wages will jump, catching the Fed with its rates down.

December Retail Sales and Import Prices

KEY DATA: Sales: -0.9%; Gasoline: -6.5%; Internet: -0.3%/Import Prices: -2.5%; Nonfuel: -0.1%; Exports: -1.2%; Farm: -0.7%

IN A NUTSHELL:  “It doesn’t look like consumers shopped ‘till they were tired, let alone ‘till they dropped in December.”

WHAT IT MEANS:  In the critical holiday shopping season, it doesn’t look like the urge to splurge took hold.  Retail sales fell in December, but that was not a shock.  We knew that vehicle purchases had come down from unsustainable heights to more reasonable levels and gasoline prices had crashed.  These data are not adjusted for prices, so the decline in gasoline purchases was likely a price issue.  But there were weaknesses in other categories.  Electronics and appliance demand, which had been largely going nowhere, turned negative.  You mean everyone didn’t go out and buy a curved screen TV for a couple of grand?  Prices were low but there are no affordable new products that have caught peoples’ attention.  Phone sales seemed to be solid, but I guess not good enough.  The milder winter, at least compared to last year, probably helped create the sharp drop in Home Depot/Lowes type stores.  Households bought less clothing, sporting goods and general merchandise as well.  But we did spend more money on food – both at home and away – as well as on furniture.  That was it.  Not a lot of shopping went on.

On the inflation front, there is none.  Import prices fell sharply as energy drove the decline.  Excluding fuel, costs were off modestly.  Consumer and capital goods costs edged downward while vehicle prices were flat.  Unfortunately, food costs keep rising and that is not good news for the consumer.  On the export side, prices were down pretty much across the board, led by a huge drop in energy and a sharp decline in agricultural prices.

MARKETS AND FED POLICY IMPLICATIONS:  Rising consumer optimism, more jobs and lower energy costs were expected to create a really good holiday shopping season.  It doesn’t look like that happened.  I guess for all those workers who didn’t see any increase in incomes, buying a whole lot more was not in the cards.  We need better wage gains so the 147 million people employed have more money in their paychecks.  That still is not happening, so business people who are disappointed by the economy should keep in mind that if they don’t pay their workers more, their workers cannot spend more.  The other thing to remember is that the additional money left in peoples wallets when they leave the gas station is relatively small.  It takes time for the impact to build up.  Thus, while spending should rise, don’t expect it to surge. So, what do these reports mean for the markets and the Fed?  Investors will not like the retail sales report as it relates to earnings.  But a solid but not robust economy, coupled with no inflation means the Fed can be very patient.  That should assuage some of the angst.  Regardless, I have no idea what is driving investors at any given moment these days and given the volatility, I don’t think anyone does.

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