Weekly Economic Update

(0/-) The advance estimate of real GDP for the first quarter came in a bit weaker than expected, at an annualized +2.5%.  It was better than last quarter’s +0.4%, but a bit slower than the +3.0% consensus estimate.  However, some of the underlying figures were improved (which is why this is considered more of a ‘neutral’ than ‘negative’ assessment).

Within the dataset itself, things looked a bit better.  Personal consumption expenditures were stronger than expected at +3.2% (vs. a forecast of +2.8%), business fixed investment rose just over +2% and final sales rose.  Inventory investment added +1.0% to the bottom line, which stood in contrast to the negative impact it made in Q4.  What accounted for the slight disappointment?  Government spending continued to look weak with both pre-emptive cuts and sequester effects, shaving almost 1% off of GDP—the biggest part of which being defense spending.  The trade deficit widening (more imports than exports) caused a further 0.5% takeaway.  As you can see, those smaller numbers start to add up after a while. 

From a pricing standpoint, the GDP price index grew +1.2%, a tenth of a percentage point under forecast and the Core PCE price index rose by the same amount (a tenth-percent above estimates).  These show that input costs remain contained.

Another interesting item relating to GDP is that it will soon (as in this July, for the 2nd quarter) be undergoing an update that the government feels will better reflect the nature of our ‘modern economy.’  Specifically, the gross investment (or ‘I’ figure in the underlying formula GDP = C + I + G + (X – M)) will begin to include capitalized spending on research and development, as well as other creative work associated with entertainment.  It has been described as acknowledgment of the increasing impact of ‘intangible’ work on goods/services in the economy, such as background development for music and movie production as economically relevant, as opposed to the large focus on the manufacturing of physical goods we’re used to.  The change will expand the size of our economy by an estimated 3%, but since historical results will be adjusted upward as well, we won’t see a large jump in the growth figure we look most closely at quarter-to-quarter.  The adjustment is a double-edged sword, though.  Manufacturing output is relatively easy to count, while the work involved in producing intellectual property could be much more difficult to quantify.  Then again, GDP is an estimate and a moving target, anyway, so we can only expect so much from it.

(-) Headline durable goods orders for March were disappointing, falling -5.7% for the month versus an expected drop of -3.0%.  The primary catalyst here was a -48% decline in non-defense aircraft orders.  Following that effect, durable goods ex-transport dropped only -1.4%, which also disappointed compared to the expected gain of +0.5%.  Core shipments were higher, however, by +0.3%.  The weakness in the overall report was fairly broad, but concentrated in industrial metals-related areas, with drops in primary metals, fabricated metal products and electrical equipment.  Manufacturing inventories rose a tenth of a percent, which was still positive but a bit slower than the pace earlier in the year.

(-) The Richmond Fed manufacturing survey came in at -6, which was weaker than the expected +2 forecasted result, and was in line with similar regional surveys of the past few weeks.  Softening was seen in shipments, new orders and employment.  Notably, expectations about the future deteriorated in several areas—however, the district is a hotbed for defense contracting activity, so this may not be a big surprise.

(-) Existing home sales were a bit weaker than expected in March, falling -0.6% versus a forecasted gain of +0.4%.  This brought the year-over-year growth trend to +10.3 (still strong), despite the past six months showing a deceleration from the first six months of that cycle.  February growth was also revised down from +0.8% to +0.2%.  The decline was primarily due to the condos/co-ops sector (down -3.2%) while single-family home sales were only down a few tenths of a percent.  Regionally, the West and South incurred the largest drops (down -1.7% and -1.5%, respectively).  The months supply of homes ticked up from 4.6 to 4.7 months.  Interestingly, it appears that ‘distressed sales,’ which include foreclosure purchases and short sales ended as 21% of the total, down from almost 30% of the total a year ago—this may not seem especially notable by itself, but does reinforce the ongoing ‘normalization’ of the housing market.

(+) New home sales rose +1.5% for March to 417k, which exceeded the median forecasted level of +1.1% growth.  Year-over-year gains are +18.5%, which points to continued recovery in this sector.  For the most part, the results from the past month were attributable to gains in the Southern U.S.

(0) The FHFA house price index gained +0.7% in February, which was in line with forecast—which resulted in a +7.1% 12-month gain.  The ‘South Atlantic’ (Delaware to Florida, basically) and ‘East South Central’ (Kentucky to Alabama) posted the strongest gains, while the Pacific and Mountain areas were also up 1%.  The ‘Middle Atlantic’ area (NY, NJ, Penn.) declined on the month and was the worst-performing group on the year.

(+) The final results from the April University of Michigan consumer sentiment survey were a bit better than expected, with a 76.4 reading, and much better than the initial results of 72.3 (as opposed to a consensus estimate of 73.5).  Consumer assessments of current conditions and future expectations were both revised higher, although levels were lower than in March.  Inflation expectations moved up slightly to 3.1% for the upcoming 1-year period and to 2.9% for the 5- and 10-year estimates, but both fall within their historical ranges.

(+) Initial jobless claims for the April 20 week fell more than expected again, to 339k, versus the forecasted figure of 350k.  This remains a ‘transition’ time of the year, though, so the weekly numbers may continue to look choppy on occasion.  Continuing claims for the April 13 week came in at 3,000k, which was a bit lower than the 3,060k expected and represents the lowest level since mid-2008.  Despite the trend of stubbornly slow employment growth and persistent claims, the moving average for both series have demonstrated continued declines.

Period ending 4/26/2013

1 Week (%)

YTD (%)

DJIA

1.17

13.13

S&P 500

1.76

11.65

Russell 2000

2.51

10.53

MSCI-EAFE

3.63

9.01

MSCI-EM

1.11

-3.11

BarCap U.S. Aggregate

0.20

0.91

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2012

0.05

0.25

0.72

1.78

2.95

4/19/2013

0.05

0.24

0.72

1.73

2.88

4/26/2013

0.05

0.22

0.68

1.70

2.87

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