LSA Connect

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. Continue reading →

0) The CPI inflation number for January was flat, which was a bit less than the slight increase of +0.1% expected. However, the core inflation number—which excludes more volatile food and energy prices—gained +0.3% as opposed to an expected +0.2%. The difference was mainly due to an energy price decline in the headline figure, as well as marginal gains in apparel, tuition/child care and tobacco in the core number. Year-over-year, the headline inflation number was up +1.6% and core +1.9%. Similarly, the Producer Price Index for January rose +0.2% which was a tick below the expected +0.3% increase (and a year-over-year result of +1.4%). The core number rose by an identical amount, in line with expectations.

Overall, inflation results remain well-contained, if the CPI and PPI are used as one’s primary measures. Of course, if one uses one of the many ‘underground’ metrics available, such as one of several historical methodologies or lifestyle-based calculations, you might find a different number—but these are based on different rules and product mixes (one must also account for the technological differences implied in these assumptions). For example, our food might be cheaper, but many of us might argue cable TV, tuition and health care certainly aren’t. It’s hard to find a perfect measure here. But the differences do become important for retirees and future retirees if/when cost of living adjustments for Social Security benefits are tweaked and CPI starts to mean something. Then, those getting the benefits will begin to care about the calculation a lot. In that situation, retirees will naturally benefit from the highest (‘most realistic’) inflation number possible, while it will behoove the government (for program sustainability reasons) to keep these increases as low as possible, which may or may not track the actual inflation many of us experience on a day-to-day basis. Continue reading →

With employment, ISM and GDP all in the news, this was one of the higher-profile reporting weeks in some time.

(0) To set the tone, the Federal Open Market Committee met mid-week and no changes in policy were announced (see last Wednesday’s special note) and the theme remained accommodative, as expected. The statement addressed the continued challenges in the economy—continued high unemployment and last quarter’s negative effects from Hurricane Sandy and uncertainty surrounding the fiscal cliff. However, it also acknowledged the lessened strains in global financial markets and an improvement in the economic outlook in the form of business fixed investment in the U.S. Still, the Fed remains in easing mode and continued the treasury/mortgage bond-buying program and low interest rate policy with a stated goal of 6.5% unemployment up to a limit of forward-looking 2.5% inflation. Now, questions revolve around when an eventual exit strategy will occur from this extraordinary level of stimulus. The ‘stable prices’ mandate may necessitate this before the ‘maximum employment’ mandate will.

(-) The preliminary estimate of real GDP for 4th quarter 2012 was released—the result being negative growth of -0.1%, which was even lower than already-tempered expectations for a +1.1% annualized gain. The two primary factors accounting for the poor early result were government defense spending (which fell at a -22% annualized rate) and inventory investment (both of which, when combined, took -2.6% away from the total nominal number). Of course, concerns about the fiscal cliff sequester certainly played a role in spending and overall sentiment during the quarter. But, there were some bright spots, as personal consumption spending rose at a rate of +2.2% and business fixed investment rose +8.4%. Continue reading →

(-) Existing home sales for December fell by -1.0%, which ran contrary to an expected +1.2% gain, and obviously was a bit of a disappointment.  Single family home sales dropped by -1.4%, which were offset somewhat by condo sales, which gained +1.7%.  From a regional level, weakness in the Midwest (nearly -6%) and South overwhelmed gains in the Northeast and Western portions of the country.  Net-net, a choppy report, but not entirely surprisingly considering the time of year we’re in.

(0) The FHFA home price index, that takes into account prices of homes with Fannie Mae/Freddie Mac mortgages, gained +0.6% for November, which just fell short of consensus by a tenth of a percent.  The Pacific and Mountain regions experienced gains near two percent, and drove the broader upward movement.  The more critical measure, year-over-year price movement, registered a gain of +5.6%, making 2012 the first positive year in six years.

(-) New home sales for December were lower than expected in December, falling -7.3% month-over-month, which ran counter to an expected consensus gain of +2.1%.  Some of this difference was due to some revisions for November (the gain for which was boosted from +4.5% to over +9%), but the volatility is typical of this series and this time of year.  Year-over-year, sales are up +9%, which is positive.

The new home sales story has been a positive one, and may very well contribute meaningfully to U.S. GDP in 2013—inching further towards normal after plodding along at very low levels for years coincident with the financial crisis.  In fact, it could add up to a large percentage of the total GPP number—which, in the slow growth period we’re in, is meaningful.  There are other effects as well, such as indirect demand for household goods and a general improvement in the ‘wealth effect’ that helps consumers feel richer and better able to spend (since their homes are worth more). Continue reading →