Weekly Economic Update

The big news of the week from an economic front was arguably the government sequester that took hold as promised on March 1. Interestingly, this strategy has traditionally been considered as an option so unpalatable to politicians that it would force policymakers towards a better way. That ‘better way’ was never agreed upon, so we’re left with an aftermath of cuts. Cuts are incremental in nature, peaking in later 2013 and 2014, and are enough to shave our GDP by ½ a percentage point this year. This wouldn’t be the end of the world in most cases, but with our growth so low anyway, ½ percent is significant. But it’s not too late. Seeing Congress postponing this retroactively wouldn’t be out of the question, and would be entirely within their trend of recent behavior.

Abroad, the Italians made their voices known in a protest vote that led to more gridlock. The success of a populist, anti-establishment/anti-austerity former comedian did not help the situation. Until this gets unraveled, it means several things to the investment world (no surprises here): markets fall—both equities and bonds, as we see yields rise relative to their European counterparts and ‘risk-free’ options like German debt. Now, if the parties can agree to come together to form a functional government (it is unlikely not to happen, at least at some point), markets may respond more favorable when better ‘certainty’ is available.

(+) Back to the U.S., the well-watched ISM manufacturing survey came in for February as better than expected, with a reading of 54.2 compared to a forecasted 52.5. The underlying components of the ISM were also strong, with new orders and production up. However, the employment piece notched down (again) and continues to be a weak spot in several of these surveys, which you’ll also likely note below. The ISM is the big one that everyone watches and logs into other metrics, so this is certainly a positive for measurement of economic growth generally.

(0) Durable goods orders fell by -5.2% in January, versus a forecast decline of -4.8%, primarily due to a major drop in the non-defense aircraft orders area. With that removed from the equation, the core durable goods orders piece gained +6.3% (relative to an expected flat result), which was a significant surprise. Orders for machinery represented the biggest portion of this increase, which bodes well for upcoming months’ shipments. Current shipments of core goods dropped by -1.0%, which was a small positive compared to an expected -1.3% decline. All-in-all, a mixed but not terrible report.

(-) Personal income fell in January by -3.6%, more than the forecasted -2.4%, so this represented a bit of a disappointment. However, it wasn’t entirely surprising due to an impact from the 2% social security withholding increase that removed an additional $127 billion from worker pockets this year so far and added some preemptive bonus and other dividend payouts in December done in anticipation of new year tax uncertainty. The personal savings rate also fell, but from an artificially high to an artificially low level—so we can’t take that as a meaningful trend. Consumer spending rose +0.2% on the month, which was largely in line with expectations.

(+) The Chicago PMI for February beat expectations of a 54 reading, with a 56.8 result. Underlying details of the report were fairly solid as well, with strong reports in new orders coupled with lower inventories; however, employment declined a bit. Several regional reports, other than the Philly survey, have been relatively good as of late.

(+) The Richmond Fed manufacturing index rose from -12 in January to +6 in February (versus an expected -4 reading), so count this as another regional improvement. The underlying composition here, as with the Chicago survey, was strong with shipments, new orders and utilization rising; however, employment here performed better than Chicago. Respondents also appeared to be more optimistic about forward-looking business conditions.

(+) Motor vehicle sales for February rose a bit to a seasonally-adjusted rate of 15.3 million units, which surpassed the estimate of 15.1 mil. This increase occurred despite fears of consumption falling as a result of the payroll tax hike.

(-) Construction spending fell -2.1% in January, which underwhelmed compared to the forecasted gain of +0.4%. Non-residential construction was the big loser on the week, down over -3%; residential construction was flat for the month but reflects a year-over-year gain of over +20%.

(+) The S&P/Case-Shiller home price index gained +0.88% in December, which outperformed the forecast median of +0.65% by a bit. Although prices rose in all 20 survey cities, the more ‘cyclical’ recovery cities worst hit in the housing downturn rose the highest—including Las Vegas, Los Angeles, San Francisco and Phoenix. Looking back over the past year, the Case-Shiller results have gained +6.8% for the full 2012 year.

(+) The FHFA house price index, that measures home prices with Fannie Mae/Freddie Mac-guaranteed loans, gained +0.6% in December which was right on par with consensus. The West Coast had the strongest gains, consistent with other results.

(+) New home sales gained +15.6% for January to a 437k annualized rate, which was a strong improvement over the forecasted +3.0% increase. Gains were seen nationwide, but the West, again, saw the biggest jump. Interestingly, this large January gain represented the largest increase on a one-month basis in 20 years.

(+) Pending home sales also came in better than forecast—at a gain of +4.5% versus a forecast +1.9% (year-over-year growth of over +10%), and was broad-based from a nationwide basis. This also bodes well for forward looking existing home sales a few months out.

(+) The Conference Board’s consumer confidence survey came in at 69.6, which was better than the expected 62.0 and reversed the January drop. It appears that consumer assessments of both present conditions and future expectations have improved—including the more fickle employment component (the job environment being seen as ‘plentiful’ versus ‘hard to get’). However, the overall moving average of this survey still remains below where it was near the end of last year.

(+) The Univ. of Michigan/Reuters sentiment survey also rose more than expected, to 77.6 (compared to a forecast 76.3). Like the Conference Board survey, assessments of both current conditions and outlook for the future were better, with across the board improvements for both families below and above the $75k income level. Job gains were also better, which surprised the surveyors somewhat.

Fed chair Bernanke spoke to Congress last week in his twice-yearly Humphrey-Hawkins testimony to the Senate Banking Committee. While the Fed minutes during the previous week spooked markets a bit, due to some apparent ambiguity in conviction on the effectiveness and potential duration of quantitative easing, last week’s comments to Congress and subsequent Q&A session were much more benign and supportive of continued easing. For example, he downplayed the amount of market disruption from a sudden exit (as in there wouldn’t be a sudden exit), as well letting bond holdings ‘roll off’ without selling—even for a period as long as 3-5 years. In short, consistent with other comments made, job market slowness continues to take precedence over economic growth factors. Therefore, in the Fed’s view, the pros of stimulus continue to outweigh any potential costs.

(+) Initial jobless claims for the Feb. 23 week dropped more than expected, to 344k, relative to the forecasted figure of 360k. The figures also seem a bit more ‘normal’ now, following a period of year-end seasonal adjustments. Continuing claims for the Feb. 16 week came in at 3,074k, which was a bit lower than the 3,143k expected.

(-) Lastly, the 2nd estimate of fourth quarter 2012 GDP was revised upward from the initial negative growth figure of -0.1% to a slight positive +0.1% (still, a disappointment from what economists expected—a +0.5% growth revision). It appears that business investment in non-residential building was revised up strongly, as were net exports, which helped the final net figure. Government spending, as in the initial release, remained weak. While there is still at least a third revision to go before the GDP number is considered remotely final, it highlights the difficult track of slow growth being measured in tenths of percents, rather than whole percentage points.

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