by Bill McBride on 1/19/2013 11:21:00 AM
Saturday, January 19, 2013
Most of the data released last week was encouraging. Housing starts were up 28% annually in 2012 - a strong increase, and starts are still very low - and that suggests further increases for starts over the next few years and is good news for the economy. Note: There is a strong seasonal adjustment for housing starts in December (typically a slow month), so I'd use the monthly sales rate with caution - but the annual increase was solid.
There were other positive reports: retail sales in December were stronger than expected, industrial production increased, and weekly unemployment claims fell sharply (although there are strong seasonal adjustments in January). Still, the 4-week average of initial weekly unemployment claims is near the post-recession low.
On the negative side, both the NY Fed (Empire State) and Philly Fed manufacturing indexes indicated contraction in January. Even though housing is picking up, manufacturing remains weak. Another negative was consumer sentiment - probably being impacted by Congress (maybe by the payroll tax increase too) - but it now appears that Congress will pay the bills, so sentiment will probably improve.
It appears that economic growth is picking up, although the fiscal agreement will mean a drag of 1.5 to 2.0 percentage points on GDP growth in 2013 - so we should expect another year of sluggish growth.
Finally, I heard one analyst on CNBC ask why the Fed is staying so accommodative even with a pickup in growth. The answer is simple: the unemployment rate is 7.8% (very high), and inflation is below the Fed's target (see graph below).
And here is a summary of last week in graphs:
• Housing Starts increase sharply to 954 thousand SAAR in December
Click on graph for larger image.
Total housing starts were at 954 thousand (SAAR) in December, up 12.1% from the revised November rate of 851 thousand (SAAR). This was well above expectations of 887 thousand starts in December.
Housing starts increased 28.1% in 2012 and even after the sharp increase, the 780 thousand housing starts last year were the fourth lowest on an annual basis since the Census Bureau started tracking starts in 1959 (the three lowest years were 2009 through 2011). This was also the fourth lowest year for single family starts since 1959.
Starts averaged 1.5 million per year from 1959 through 2000. Demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will come close to doubling from the 2012 annual level.
Since residential investment and housing starts are usually the best leading indicator for economy, this suggests the economy will continue to grow over the next couple of years.
• Retail Sales increased 0.5% in December
On a monthly basis, retail sales increased 0.5% from November to December (seasonally adjusted), and sales were up 4.7% from December 2011.
Sales for November were revised up to a 0.4% gain.
This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).
Retail sales are up 25.4% from the bottom, and now 9.7% above the pre-recession peak (not inflation adjusted)
This was above the consensus forecast of a 0.3% increase, and suggests the initial "soft" reports for December were too pessimistic.
• Fed: Industrial Production increased 0.3% in December
This graph shows industrial production since 1967.
From the Fed: Industrial production and Capacity Utilization "Industrial production increased 0.3 percent in December after having risen 1.0 percent in November when production rebounded in the industries that had been negatively affected by Hurricane Sandy in late October. ... Capacity utilization for total industry moved up 0.1 percentage point to 78.8 percent, a rate 1.5 percentage points below its long-run (1972--2011) average."
This graph shows Capacity Utilization. This series is up 12 percentage points from the record low set in June 2009 (the series starts in 1967).
Capacity utilization at 78.8% is still 1.5 percentage points below its average from 1972 to 2010 and below the pre-recession level of 80.6% in December 2007.
Both Industrial Production and Capacity Utilization were slightly above expectations.
• Philly Fed and NY Fed Manufacturing Surveys show contraction in January
From the Philly Fed: January Manufacturing Survey "Manufacturing activity declined moderately this month, according to firms responding to the January Business Outlook Survey. ... The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a revised reading of 4.6 in December to ‐5.8 this month". Earlier this week, the Empire State manufacturing survey also indicated contraction in January.
Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through January. The ISM and total Fed surveys are through December.
The average of the Empire State and Philly Fed surveys decreased in January, and is back below zero. This suggests another weak reading for the ISM manufacturing index.
• Weekly Initial Unemployment Claims decline to 335,000
The DOL reported: "In the week ending January 12, the advance figure for seasonally adjusted initial claims was 335,000, a decrease of 37,000 from the previous week's revised figure of 372,000. The 4-week moving average was 359,250, a decrease of 6,750 from the previous week's revised average of 366,000."
The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 359,250.
This was the lowest level for weekly claims since January 2008, and the 4-week average is near the low since early 2008. Note: Data for January has large seasonal adjustments - and can be very volatile, but this is still good news.
• Key Measures show low inflation in December
This graph shows the year-over-year change for four key measures of inflation. On a year-over-year basis, the median CPI rose 2.2%, the trimmed-mean CPI rose 1.9%, the CPI rose 1.7%, and the CPI less food and energy rose 1.9%. Core PCE is for November and increased 1.5% year-over-year.
On a monthly basis, median CPI was at 1.9% annualized, trimmed-mean CPI was at 1.1% annualized, and core CPI increased 1.2% annualized. Also core PCE for November increased 1.6% annualized. These measures suggest inflation is below the Fed's target of 2% on a year-over-year basis.
With this low level of inflation and the current high level of unemployment, the Fed will keep the "pedal to the metal".
• CoreLogic: House Prices up 7.4% Year-over-year in November, Largest increase since 2006
This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.
The index was up 0.3% in November, and is up 7.4% over the last year.
The index is off 26.8% from the peak - and is up 9.6% from the post-bubble low set in February 2012 (the index is NSA, so some of the increase is seasonal).
The next graph is from CoreLogic.
The year-over-year comparison has been positive for nine consecutive months suggesting house prices bottomed early in 2012 on a national basis (the bump in 2010 was related to the tax credit).
This is the largest year-over-year increase since 2006.
Since this index is not seasonally adjusted, it was expected to decline on a month-to-month basis in November - instead the index increased, and, considering seasonal factors, this month-to-month increase was very strong.
• Preliminary January Consumer Sentiment declines to 71.3
The preliminary Reuters / University of Michigan consumer sentiment index for January declined to 71.3 from the December reading of 72.9.
This was below the consensus forecast of 75.0. There are a number of factors that can impact sentiment including unemployment, gasoline prices and other concerns - and, for January, the payroll tax increase and Congress' threat to not pay the bills.
Back in August 2011, sentiment declined sharply due to the threat of default and the debt ceiling debate. Unfortunately it appears Congress is negatively impacting sentiment once again.