Durable Goods « Harmonic Investment Advisors

Sep 17th

Economic Insight: Harmonic Notes e-newsletter, Sept 2010

Author: Kenn Lamson

The data released since the August edition of the Harmonic Notes e-newsletter suggests that, like a patient recovering from an illness who suffers an alarming relapse, the global economy seems to have regained its path towards gradual recovery — at least for the moment. Unlike last month, when the data was across-the-board sour, some data series have recently stabilized or risen.

CONSUMER

- Home sales were abysmal after the expiration of the homebuyers’ tax credit, consumer credit continued to decline (although this is a necessary evil and a therefore a mixed blessing) and of course unemployment remains sickeningly high.

+ Retail sales, however, came in stronger than expected, as did other measures of consumer spending. Also, the Consumer Price Index rebounded to show marginally positive month-over-month growth (not that we’re rooting for inflation, but it’s better than outright deflation.) Finally, although private payrolls were uninspiring (the US economy needs about +120K new jobs each month to keep up with population growth, so +67K isn’t up to snuff) the figure improved from July and was better than expected, and the Average Hourly Earnings rose a solid +0.3%.

BUSINESS

- Business productivity turned negative as costs rose during 2Q10, and the ISM Service Index fell again (although it remains marginally in expansionary territory).

+ Industrial Production and Capacity Utilization were reported better than expected, though CapU remains at a very low level. Business inventories also grew. Importantly, the ISM Manufacturing Index unexpectedly rose well into expansionary territory.

INTERNATIONAL TRADE

+ Exports rose and imports fell as the July trade gap narrowed significantly, reversing June’s drop.

GENERAL

- Second quarter GDP growth was revised further down, to 1.6%.

+ The Chicago Fed National Economic Activity Index rebounded to neutral. One of our favorite leading indicators, the ECRI Weekly Leading Indicator, has trended sideways for the last 2 months; after a precipitous decline it hasn’t deteriorated further, so we’ll consider that a positive.

FISCAL POLICY

Tax policy is an issue that has the potential to push the economy one way or the other. We’re not hard-core anti-tax advocates, but it seems obvious that an economy experiencing such a fragile recovery will have a difficult time bearing the weight of higher taxes. We’re pleased, therefore, to see some dialogue about extending the lower capital gains and dividend tax rates passed during the previous administration. Doing so isn’t a panacea to the US economic problems but a 1-2 year extension might keep a little more cash in consumers’ and businesses’ pockets that they could use toward helping the economy recover.

We’re in wait-and-see mode on the recently proposed additional stimulus measures, like road and rail infrastructure spending, extension of research tax credits and a 100% write-off of business investments. Our constant refrain may sound like a broken record, but job creation is the key to driving the economy forward: To the extent these measures create jobs we’re in favor. However, it should be noted that the proposed infrastructure bill is only $50 billion, a drop in the bucket compared to the size of the US economy, and any legislation faces (1) an extremely contentious election season until early November, when political points are worth more than solutions, and (2) a lame duck Congress from November through early January.

NO DOUBLE-DIPPING

The more positive tone of the recently released data buttresses our assertion that a double-dip recession seems unlikely. Very importantly, the consumer has for the moment risen to the occasion by heading back to retail stores after an early summer pause, and the small (12% of GDP) but crucial manufacturing sector continues to expand. Though significant headwinds remain – surveys of truckers, retailers and homebuilders have recently weakened, and a recent CFO survey showed a sharp decline in optimism, so second half economic growth won’t be stellar – our view on the currently available data is that growth won’t be negative.

Risk remains clearly skewed to the downside, however. It may be that, like an aircraft taking off, a certain amount of velocity is required for an economy to “get lift” without stalling. That supposed level is about 2% according to ISI Group, so we need to see more growth than the revised 1.6% 2Q10 figure.

Quarter-over-quarter GDP growth, 3Q05 – 2Q10

BLESSED ARE THE WEAK…

Recent further weakening in the US Dollar helps, since it makes US exports more attractive abroad. As the alarms predicting an imminent collapse of Eurozone have faded, the Euro has strengthened against the US$. The German economy has been an unexpected bright spot. The Yen has also strengthened against the US$, recently hitting a 15-year high.

CASH IS KING

It’s well known that corporations are holding a substantial amount of cash on their balance sheets. Interpretation of this fact is in the eye of the beholder: For those with a negative outlook, the roughly $2 trillion in liquid assets held by nonfinancial firms is seen as companies creating their own “insurance policy”, rational behavior in a highly uncertain (or deflationary) economic environment. According to ISI Group companies also about $1 trillion in unrepatriated foreign earnings of US firms. For those with a more sanguine outlook, those balances are potential fuel for a market rally.

“FEELING” BETTER (SORT OF)

Obvious to even the unseasoned observer (although not to the economists that have been blinded to reality by theory) is that sentiment plays an enormous role in the workings of economies and markets. While consumers and businesses apparently “feel” a little better than they did when we wrote last month’s newsletter, they remain very uncertain about the long-term prognosis.

Aug 17th

“Disposable Society?”

Author: Kenn Lamson

Comments: 0

It’s reasonably well known and commonsensical that durable goods purchases are cyclical; that is, when the economy’s doing well they rise, and vice versa. The data series is produced monthly (also quarterly as part of the GDP release) and can be used as a signal of consumer participation in economic activity; when other indicators point to an economic expansion or contraction beginning to take hold, this is one data point that can confirm whether consumer (the traditional engine of US economic activity) has jumped on board.

When observing the data series since its 1961 start I noticed an interesting trend: Not only is consumer spending on durable goods cyclical as expected, but there’s an obvious long-term trend towards a lower percentage of consumer spending being dedicated to durable goods.

The implications of this trend are more numerous than I can name, but the list might begin with the impact of lower consumer demand on durable goods production in the US, the reduced number of jobs required to manufacture those goods, a confirmation that the US has become a more service-driven economy, the environmental impact of consumption of goods that are intended to be “disposable”, etc.

I have asked the Federal Bureau of Economic Analysis for their insights and will update the post when it’s available.

To complete the chart-fest, here are the other two components of consumer spending, nondurable goods and services, over the same time-frame:

NONDURABLE GOODS

SERVICES

If you’re a real data junkie, here is the BEA’s description of the 2009 revision of the PCE classifications.

Apr 02th

“Separating Wheat from Chaff”

Author: Kenn Lamson

Comments: 0

As even a casual observer would recognize, there are hundreds of pieces of economic data available from various departments within the Federal government and private research firms. There’s also lots of anecdotal information, too. Unfortunately, as a relatively young (17 month anniversary is tomorrow, 3 April!) investment and research firm we don’t have time or the patience to try to analyze and write about what we find interesting, much less every thing that’s available. It’s clear, though, that some data are more important than others, because:

they have a higher information content,
their methodology is more robust,
they’re more timely,
they tend to “move the market”,
or they’re familiar to the public at large.

With the able assistance of intern Vu Ngo, a senior majoring in finance at Boise State University, we’ve “separated the economic wheat from the chaff” by creating a list of about 15 indicators on which our research will focus.

We segmented our list by the component of the economy about which it informs us. The list looks like this:

CONSUMER

Retail Sales
Univ of Michigan Consumer Sentiment
New & Existing Home Sales
Consumer Credit
Real Personal Consumption Expenditures (aka consumer spending)
Unemployment Situation
Consumer Price Index
S&P / Case-Shiller Home Price Index

BUSINESS

ISM Manufacturing Index
ISM Service Index
Durable Goods Orders
Industrial Production & Capacity Utilization
Productivity and Costs

FOREIGN TRADE

International Trade

OVERALL MACROECONOMIC ACTIVITY

GDP
Chicago Fed National Activity Index
Economic Cycle Research Institute Weekly Leading Index

Of course we’ll keep our finger on the pulse of other data, and this list may change if items lose their efficacy. We think, however, it strikes a good balance between data overload and having too narrow a focus.

Mar 26th

Weekly Economic Insight, 22 March – 26 March 2010

Author: Kenn Lamson

Comments: 2

The week ending 26 March saw indicators that provided incremental information on housing, the manufacturing sector, the American consumer’s mindset and the overall economy. The data confirms our thesis that economic growth will continue to be lead by the industrial sector rather than households. We note also that the 4Q09 inventory- and stimulus-driven growth spurt appears to be waning, suggesting a significantly lower 1Q10 GDP print.

RELEASE (leading, coincident or lagging indicator)	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT
Chicago Fed National Activity Index 3-month moving average (coincident)	February	-0.39	NA	-0.13	Three of the four broad categories of indicators that make up the index deteriorated, with only the sales, orders and inventories making a positive contribution.
*Durable Goods Orders (leading)*	February	+0.5%	+1.0%	+3.0%	Orders excluding transportation rose +0.9% month-over-month.
New Home Sales (leading)	February	308K	315K	309K	New home sales plummeted for a fourth month, down -2.2% MoM.
Existing Home Sales (leading)	February	5.02M	5.00M	5.05M	Sales slipped again, dropping -0.6%.
GDP (lagging)	4Q09 final	+5.6%	+5.9%	+5.9%	The final look at 4Q09 economic growth shaved the rate from earlier reports. Still, the pace of economic growth was the fastest in more than 6 years.
Univ of Michigan Consumer Sentiment (leading)	March	73.6	73.0	73.6	American consumers’ opinion held steady in March.

CHICAGO FED NATIONAL ACTIVITY INDEX

As discussed in last week’s Economic Insight, the CFNAI will replace the Conference Board’s Index of Leading Economic Indicators in our analyses.

The indicators that comprise the Index are drawn from four broad categories:

Production and income
Employment, unemployment and hours
Personal consumption and housing
Sales, orders and inventories

A zero value for the index indicates the national economy is expanding at its historical trend rate of growth; negative values and positive values indicate below- and above-average growth, respectively.

Month-to-month movements can be volatile, so the Index’s 3-month moving average is used to show a more consistent picture of national economic growth.

When the 3-month moving average value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the 3-month moving average value moves above -0.70 following a recession, there is an increasing likelihood the economic contraction has ended. When the 3-month average moves above +0.70 more than 2 years into an economic expansion there is an increasing likelihood that a period of sustained inflation has begun.

February’s 3-month moving average decreased slightly from January but was higher than at any point since December 2007. The negative reading suggests US economic growth is below its historical trend and that there is low inflationary pressure.

DURABLE GOODS ORDERS

While the overall orders figures fell short of consensus expectations, the important manufacturing sector once again showed solid growth. Month-over-month growth in new orders was seen in 4 of 8 major industry groups surveyed, including machinery (+4.7% and fabricated metal products (+1.9%). Weakness was centered in electronic equipment (-3.3%) and transportation equipment (-0.7%).

January’s durable goods inventory figure was revised upward to show +0.1% month-over-month growth, making February’s +0.3% figure the second consecutive month of inventory growth. Perhaps US manufacturers have finally seen the bottom of the inventory cycle that’s been long expected.

Durable goods orders (red) and consensus expectation (green), Jan 2000 – Feb 2010

EXISTING AND NEW HOME SALES

According to the National Association of Realtors, sales of existing homes dropped once again in February, following the combined 23% decline in December and January. As noted in earlier commentary the initial wave of first-time homebuyers crested in November but the second (assuming there is one) has not yet fully taken hold. Without sharply higher interest rates or other negative factor intervening, we’ll likely see another surge of first-time buyers in March and April.

The housing market continues to be supported through the Federal Reserve’s purchase of mortgage-backed securities, a key mechanism for providing liquidity to lenders and keeping mortgage interest rates down. Those purchases, however, expand the Fed’s balance sheet and exacerbate longer-term inflationary concerns. This program, like many of the other extraordinary liquidity programs in which the government has engaged, is slated to end on March 31, 2010; it’s an easy bet that rates will likely rise if purchases are ceased.

The NAR report also showed that the reported estimate of existing homes for sale rose for the third consecutive month, by +9.5% to 8.6 months of inventory. Also, the median home prices were essentially flat at $165,100 while the average price fell to $210,500. Lower prices are a logical outcome of lower demand and increased supply. It must also be kept in mind that the reported figures ignore the massive overhang of foreclosed and delinquent properties that have yet to be officially put on the market. According to one researcher, the actual supply is around 2 years’ worth, a far stronger headwind for the economy to lean against.

The decline was not adversely affected by the weather, as the Northeast and Midwest rose but South and West decreased.

As with existing home sales, the drop in new home sales can in part be attributed to a lull in purchases via the first-time homebuyer tax credit. Also like the existing home sales release, supply was reported to have risen, in this case from 8.9 to 9.2 months. Unlike the report on existing homes, though, the median and average homes sales prices rose 6% to $220,500 and 5% to $282,600 respectively.

New (white) and existing (red) home sales, February 2005 – February 2010

“FINAL” GDP

This release is the third and final look into the final quarter of 2009, which once again beat the consensus expectations. The “final” report is based on more complete data than was available at the time of the “preliminary” estimate last month or January’s “advance” estimate. The report confirmed that fourth quarter growth was dominated by an enormous inventory adjustment. The downward revision from the “preliminary” report a month ago was cause by adjustments to spending on inventories, consumer spending and “nonresidential fixed investment.”

For 2009, this report puts full-year economic growth at -2.4%.

Accounting for the additional data released in the “final” report the contributions to growth looked like this:

SEGMENT	CONTRIBUTION
Consumer spending	+1.16%
Gross private domestic investment	+4.39%
Net exports	+0.27%
Government spending and investment	-0.26%
TOTAL PERCENT CHANGE AT ANNUAL RATE	+5.56%

The problem with inventory restocking-driven growth, of course, is that it’s temporary – once the proverbial shelves are full manufacturers will return to lower production levels. In order to create a self-sustained economic growth we need to see demand from domestic consumers and businesses and/or foreign ones. As regular readers know, the downward pressure on demand is why we continue to focus so much of our work on understanding the unemployment trends.

CONSUMER SENTIMENT

The U of M Consumer Sentiment Index held steady at 73.6 for March. The measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, rose to 82.4 in March, the highest reading of this cycle. Ominously, however, the index of expectations six months from now, which more closely projects the direction of consumer spending, again worsened, declining to 67.9 from 68.4 a month earlier.

As we’ve noted elsewhere, economic improvement appears to be centered in manufacturing, not in housing and employment, two areas much closer to consumers.

Feb 26th

Weekly Economic Insight: 22 February to 26 February 2010

Author: Kenn Lamson

Comments: 0

The week ending 26 February saw indicators that provided incremental information on housing, the manufacturing sector, inflation and the overall economy. The data confirms our thesis that economic growth will continue to be lead by the industrial sector rather than households.

RELEASE (leading, coincident or lagging indicator)	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT
Case-Shiller 20-city Home Price Index (lagging)	December (MoM)	145.90	NA	146.28	Home prices showed a slower rate of decline for the eleventh consecutive month. All 20 cities showed year-over-year improvement in the rates of decline and 4 showed month-over-month price raises. Prices stand at their summer2003 levels.
New Home Sales (leading)	January	309K	360K	342K	New home sales plummeted for a third month, down -11.2% MoM.
*Durable Goods Orders (leading)*	January	+3.0%	+1.5%	+0.3%	Orders excluding transportation fell -0.6% month-over-month.
GDP (lagging)	4Q09 preliminary	+5.9%	+5.7%	+5.7%	The second look at 4Q09 economic growth showed higher-than-expected growth, the quickest rate in more than 6 years.
Univ of Michigan Consumer Sentiment (leading)	February	73.6	73.7	73.7	American consumers’ opinion slipped back from 74.4 in January, the highest level in 2 years in January.
Existing Home Sales (leading)	January	5.05M	5.50M	5.45M	Sales plummeted -7.2% after December’s -16.2% drop.

S&P / CASE-SHILLER HOME PRICE INDEX

The Index fell -0.2% month-over-month. While the overall level of home prices appears to be slowly improving, this report suggests a bifurcation of trends. As noted in the table, 4 of the 20 cities saw month-over-month price increases; also, 6 cities saw year-over-year price improvement. However, 3 cities reported new lows in prices. The Index is down -3.1% year-over-year.

The variance from the price increases reported in the existing and new home sales reports can be explained by the difference in methodology between the measures. As previously noted, the Case-Shiller Index uses only sales of homes in specific markets with two or more transfers; condos and co-ops are excluded. As with other lagging indicators, this data is a bit stale and projections made from it may be suspect.

NEW HOME SALES

The margin of error for New Home Sales month-over-month decrease was 14.0%, so as usual the initial estimate should be taken with a grain of salt. Also, the decline was not distributed evenly across the US, as the Northeast plummeted -35.1% and the Midwest saw a 2.1% increase.

As with existing home sales, the drop in new home sales can in part be attributed to a lull in purchases via the first-time homebuyer tax credit. Also like the existing home sales release, supply was reported to have risen, in this case from 8.1 to 9.1 months, and the NAR reported that median and average home prices fell -5.6% to $203,500 and -8.3% to $254,500 respectively from December.

DURABLE GOODS ORDERS

While the overall orders figure spiked on a surge in aircraft orders, if transportation equipment is excluded orders fell a worse-than-expected -0.6%, reversing December’s jump. Month-over-month growth in new orders was seen in 6 of 9 major industry groups surveyed, including transportation equipment (+15.6%) and primary metals (+1.9%). Weakness was centered in the machinery (-9.7%) and “other durable goods” (-0.4%). New orders rose 3.8% in the important manufacturing sector.

Durable goods inventories continued to fell for the thirteenth consecutive month in January, frustrating those that have for months have predicted increases in production to restock. We expect that this trend will reverse in 2010, however. The tentative resumption of business spending, whether demand originates from overseas or domestic sources, will help underpin broader economic growth, especially when companies begin hiring.

“PRELIMINARY” GDP

This release is a second look into the final quarter of 2009, which once again beat the consensus expectations. The “preliminary” report is based on more complete data than was available at the time of the “advance” estimate last month. The report confirmed that fourth quarter growth was dominated by an enormous inventory adjustment. The upward revision from the “advance” report a month ago was cause by adjustments to spending on inventories, exports and “nonresidential fixed investment.” Imports were revised higher, as was consumer spending.

While one can only infer this conclusion by the consumption trends reported elsewhere in this release (and Thursday’s durable goods orders report), it would appear that most of the restocking was in nondurable goods. The other major categories that comprise GDP also rose:

Accounting for the additional data released in the “preliminary” report the contributions to growth looked like this:

SEGMENT	CONTRIBUTION
Consumer spending	+1.23%
Gross private domestic investment	+4.63%
Net exports	+0.30%
Government spending and investment	-0.23%
TOTAL PERCENT CHANGE AT ANNUAL RATE	+5.93%

For 2009, this report puts full-year economic growth at -2.4%. We’ll get a third look at 4Q09 GDP, with more complete data, in the “final” report on March 26^th.

CONSUMER SENTIMENT

Consumers may be losing faith in the economy’s improvement in recent days; the U of M Consumer Sentiment Index slipped from 74.4 in late January to 73.6. The measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, rose to 81.9 in February, the highest reading of this cycle. The index of expectations six months from now, which more closely projects the direction of consumer spending, worsened to 68.4 from 70.1.

As we’ve noted elsewhere, economic improvement appears to be centered in manufacturing, not in housing and employment, two areas much closer to consumers.

EXISTING HOME SALES

According to the National Association of Realtors, sales plummeted once again in January as the initial wave of first-time homebuyers crested in November but the second (assuming there is one) has not yet fully taken hold. Without sharply higher interest rates or other negative factor intervening, we’ll likely see another surge of first-time buyers in March and April.

The NAR report also showed that the reported estimate of existing homes for sale rose again, from 7.2 months to 7.8 months of inventory. Also, median and average home prices reversed course from previous months, falling -3.4% to $164,700 and -3.1% to $212,000 respectively from December. Lower prices are a logical outcome of lower demand and increased supply. It must also be kept in mind that the reported figures ignore the massive overhang of foreclosed and delinquent properties that have yet to be officially put on the market. According to one researcher, the actual supply is around 2 years’ worth, a far stronger headwind for the economy to lean against.

Jan 29th

Weekly Economic Insight: 25 January – 29 January 2010

Author: Kenn Lamson

Comments: 0

This wasn’t a great week of data for consumer-related data, with sales of new and existing homes seen to plummet and consumer sentiment improving but still depressed. Manufacturing showed signs of life, with better-than-expected ex-transportation durable goods orders. The week’s capstone was a 5.7% pop in the initial estimate of fourth quarter GDP. A jump was expected, given the boost to consumption provided by the first-time homebuyer tax credit and other stimulatives, the anticipated replenishment of inventories and the rising strength in exports.

RELEASE

(leading, coincident, or lagging indicator)

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

Existing Home Sales (leading)

December

5.45M

5.90M

6.54M

Sales plummeted in the largest monthly decline since 1968.

S&P Case-Shiller 20-city Home Price Index (lagging)

November (MoM)

146.28

146.80

146.58

Home prices showed a slower rate of decline for the tenth consecutive month. All 20 cities showed year-over-year improvement in the rates of decline and 5 showed month-over-month price raises. Prices stand at their autumn 2003 levels.

New Home Sales (leading)

December

342K

370K

355K

New home sales tumbled for a second month, down -7.6% MoM.

Durable Goods Orders (leading)

December

0.3%

1.6%

0.2%

Orders excluding transportation rose a better-than-expected 0.9% month-over-month.

GDP (lagging)

4Q09 advance

5.7%

4.5%

2.2%

The first look at 4Q09 economic growth showed higher-than-expected growth, the quickest rate in more than 6 years.

Univ of Michigan Consumer Sentiment (leading)

January

74.4

73.0

72.8

American consumers’ opinion jumped to the highest level in 2 years in the final January reading, outpacing expectations. However, the overall reading remains very low in a historical context.

EXISTING HOME SALES

Government stimulus clearly underpinned the housing market in recent months, where buyers rushed to “get under the wire” to receive the first-time homebuyers credit, initially scheduled to expire in November. According to the National Association of Realtors, December sales plummeted in the largest monthly decline since 1968 as the initial wave of first-time homebuyers crested in November but the second (assuming there is one) has not yet fully taken hold. Without sharply higher interest rates or other negative factor intervening, we’ll likely see another surge of first-time buyers in March and April.

The housing market’s also being supported in a less obvious way, through the Federal Reserve’s purchase of mortgage-backed securities, a key mechanism for providing liquidity to lenders and keeping mortgage interest rates down. Those purchases, however, expand the Fed’s balance sheet and exacerbate longer-term inflationary concerns. This program, like many of the other extraordinary liquidity programs in which the government has engaged, is slated to end on March 31, 2010; it’s an easy bet that rates will rise as we approach that date and thereafter if purchases are ceased.

Positively, the NAR reported that median and average home prices rose 4.9% and 6.4% respectively from November. However, those figures must be taken in the context of actual and potential supply; the NAR report also showed that the reported estimate of existing homes for sale spiked from 6.5 months to 7.2 months of inventory. It must also be kept in mind that the reported figures ignore the massive overhang of foreclosed and delinquent properties that have yet to be officially put on the market. According to one researcher, the actual supply is around 2 years’ worth, a far stronger headwind for the economy to lean against.

Existing home sales: 5 years through Dec 09

S&P / CASE-SHILLER HOME PRICE INDEX

The Index fell -0.2% month-over-month. While the overall level of home prices appears to be slowly improving, this report suggests a bifurcation of trends. As noted in the table, 5 of the 20 cities saw month-over-month price increases; also, 4 cities saw year-over-year price improvement. However, 4 cities reported new lows in prices. The Index is down -5.2% year-over-year.

The variance from the price increases reported in the existing and new home sales reports can be explained by the difference in methodology between the measures. As noted last month, the Case-Shiller Index uses only sales of homes in specific markets with two or more transfers; condos and co-ops are excluded. The Index has declined -29.2% since its peak in the second quarter of 2006. As with other lagging indicators, this data is a bit stale and projections made from it may be suspect.

S&P / Case-Shiller Home Price Index: 5 years through Nov 09

NEW HOME SALES

The margin of error for New Home Sales month-over-month decrease was 14.6%, so as usual the initial estimate should be taken with a grain of salt. Also, the decline was not distributed evenly across the US, as the Northeast and West regions saw an uptick; the Midwest reversed November’s gain. The NAR reported that 374,000 new homes were sold in 2009, a -22.9% decline from 2008.

As with existing home sales, the drop in new home sales can in part be attributed to a lull in purchases via the first-time homebuyer tax credit. Also like the existing home sales release, supply was reported to have risen from 7.6 to 8.1 months, and the NAR reported that median and average home prices rose 5.2% and 7.6% respectively from November.

New Home Sales: 5 years through Dec 09

DURABLE GOODS ORDERS

While the overall orders figure fell below the consensus expectation due to weakness in aircraft orders, if transportation equipment is excluded orders rose a better-than-expected 0.9%. Month-over-month growth in new orders was seen in 2 of 9 major industry groups surveyed, including primary metals (+8.1%) and machinery (+6.0%). Weakness was centered in the computers and electronic equipment, especially computers (-3.0%) and electronic equipment, appliances and components (-3.9%). New orders fell -0.2% in the important manufacturing sector. Over the past 12 months durable goods orders have dropped -20.2%.

Durable goods inventories continued to fell for the twelfth consecutive month in December, frustrating those that have for months have predicted increases in production to restock. We expect that this trend will reverse in 2010, however. The tentative resumption of business spending, whether demand originates from overseas or domestic sources, will help underpin broader economic growth, especially when companies begin hiring.

Durable Goods Orders: 6 years through Dec 09

CONSUMER SENTIMENT

Consumers may be breathing ever-so-slightly easier in recent days; the U of M Consumer Sentiment Index rose to 74.4 from 72.8 in mid-January and 72.5 at the end of December. Friday’s reading represents the highest level in 2 years. That said, they apparently don’t expect much of an improvement in their own personal financial situation despite forecasts by the economy’s cheerleaders.

The measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, rose to 81.1 in December from 78.0 in November and 66.5 in October. The index of expectations six months from now, which more closely projects the direction of consumer spending, rose to a still-dismal 70.1 from 68.9.

U of MI Consumer Sentiment Index: 5 Years through Jan 10

“ADVANCE” GDP

This release is a first look into the final quarter of 2009, which beat the consensus expectations handily. The report was dominated by an enormous inventory adjustment that accounted for the majority of the 4Q change. While one can only infer this conclusion by the consumption trends reported elsewhere in this release (and Thursday’s durable goods orders report), it would appear that most of the restocking was in nondurable goods. The other major categories that comprise GDP also rose:

Consumer spending (called personal consumption expenditures in the report) rose +2.0%
Spending on goods rose +2.6%, driven by nondurables
Spending on services rose +1.7%

“Real nonresidential fixed investment” rose +2.9%. All of this increase was due to a…
+13.3% spike in investment in equipment and computers, while…
Investment in structures fell -15.4%.

Housing (called real residential fixed investment) rose +5.7%

Exports jumped +18.1%, while imports (a subtraction from GDP growth) increased +10.5%

Total government spending fell -0.2%
Federal government spending increased +0.1%, but…
State and local government spending fell -0.3%

The contributions to growth looked like this:

SEGMENT	CONTRIBUTION
Consumer spending	+1.44%
Gross private domestic investment	+3.82%
Net exports	+0.50%
Government spending and investment	-0.02%
TOTAL PERCENT CHANGE AT ANNUAL RATE	+5.74%

Other bright spots in Friday’s report were a +4.8% increase in disposable personal income and a savings rate that crept higher from 4.5% in 3Q09 to 4.6% in 4Q09.

GDP growth: 8 Years ending 12/31/09

For 2009, this initial report puts full-year economic growth at -2.4%. We’ll get a second look at 4Q09 GDP, with more complete data, on February 26^th.

Dec 24th

Weekly Economic Insight: 21 Dec – 24 Dec

Author: Kenn Lamson

Comments: 0

RELEASE	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT
*(leading, coincident, or lagging indicator)*	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT
GDP (lagging)	3Q09 final	2.2%	2.7%	3.5%	The lowered estimate of third quarter economic activity was primarily driven by downward revisions to consumer and business spending.
Existing Home Sales (leading)	November	6.54M	6.25M	6.10M	Sales spiked as first-time buyers and those purchasing “distressed” homes drove demand.
Consumer Spending (leading)	November (MoM)	0.5%	0.6%	0.7%	On an inflation-adjusted basis, MoM spending rose 0.2%.
Univ of Michigan Consumer Sentiment (leading)	November	72.5	73.5	73.4	American consumers’ opinion about the economy remained quite sour in November, although this was the highest reading in 3 months.
New Home Sales (leading)	November	355K	440K	430K	New home sales tumbled 11% MoM at the same time the prior two months were also revised lower.
*Durable Goods Orders (leading)*	November	0.2%	0.5%	-0.6%	Orders excluding transportation rose 2.0% month-over-month.

“FINAL” GDP

This release is a look into the relatively distant past; the 1.3% variance between the initially released figure and today’s final one demonstrates the sometimes substantial revisions that change the image as the picture becomes more clear. This was our third and last look at 3Q GDP, which was revised downward more than expected. If the obvious stimulative effect of “cash-for-clunkers”, the first-time homebuyer’s tax incentive, and other measures were removed, the growth rate would clearly be significantly lower. The downward revisions to consumer and business spending are troubling, since (1) business investment is a precursor of stability in the manufacturing sector, widely touted as likely to be a key driver of the US economy out of recession, and (2) as we have consistently observed, since the US consumer represents about 70% of economic activity, demand from that sector is critical. As a reminder, these are the same categories that were also revised lower in last month’s second, “preliminary” GDP release. Given the historical nature of this data, however, conclusions to be drawn are tentative at best.

EXISTING HOME SALES

Government stimulus is clearly underpinning the housing market, where buyers rushed to “get under the wire” to receive the first-time homebuyers credit, initially scheduled to expire in November. According to the National Association of Realtors, over half of November’s buyers were “first-time”. Scavenging was also a driver of sales volume, with 33% of November sales either “short sales” or foreclosed homes. All-cash purchases were 19% of the total. It’s reasonable to assume that without sharply higher interest rates or other negative factor intervening, we’ll see another surge of first-time buyers in March and April.

The housing market’s also being supported in a less obvious way, through the Federal Reserve’s purchase of mortgage-backed securities, a key mechanism for providing liquidity to lenders and keeping mortgage interest rates down. Those purchases, however, expand the Fed’s balance sheet and exacerbate longer-term inflationary concerns. This program, like many of the other extraordinary liquidity programs in which the government has engaged, is slated to end in early 2010; it’s an easy bet that rates will rise as we approach that date and thereafter.

Positively, the reported estimate of existing homes for sale continued to fall; the measure now stands at 6.5 months. However, it must be kept in mind that the reported figures ignore the massive overhang of foreclosed and delinquent properties that have yet to be officially put on the market. According to one researcher, the actual supply is around 2 years’ worth, a far stronger headwind for the economy to lean against.

CONSUMER SPENDING

Consumer spending continued on its gradual uptrend, albeit at a slower rate than expected. November’s increase was lead by nondurable items, which jumped 1.4% month-over-month. The personal savings rate remained at 4.7%, the same as in October. We believe it’s exceptionally unlikely that the American consumer will resume spending at pre-recessionary levels anytime soon (perhaps for many years), given the elevated unemployment level and other sources of economic distress; however, stabilization and moderate growth in spending driven by increases in wages and employment while simultaneously reducing outstanding credit and raising the savings rate is our fervent hope.

CONSUMER SENTIMENT

Within the U of M Consumer Sentiment Index, the measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, leapt to 79.1 in November from 68.8 in October and 73.7 in September. The index of expectations six months from now, which more closely projects the direction of consumer spending, rose slightly to a still-dismal 68.9 from 66.5.

NEW HOME SALES

The margin of error for New Home Sales month-over-month decrease was 11.0%, so as usual the initial estimate should be taken with a grain of salt. Also, the decline was not distributed evenly across the US, as the Midwest region saw an uptick. As with existing home sales, the spike in new home sales can in part be attributed to the recently-extended and expanded first-time homebuyer tax credit. Without the seasonal adjustment new home sales are down year-to-date -23.9%.

The inventory-to-sales ratio now stands at 7.9 months, up from October but down from a peak of 12.4 months. As with the existing home sales data, it must be kept in mind that the reported figures ignore the overhang of foreclosed and delinquent properties that have yet to be officially put on the market. The sudden downward move in the new homes sales figures is a reminder of the perils of predicting a rebound in the housing market by extrapolating trends based on sketchy data.

DURABLE GOODS ORDERS

Orders for new long-lived goods maintained their reputation for volatility, spiking higher in November after a plunge in October and an earlier surge in September. Growth in new orders appeared broad-based, including communications equipment (+4.0%), computers & electronics (+3.7%), machinery (+3.5%) and electrical equipment (+3.2%). Weakness was centered in the transportation equipment, especially nondefense aircraft (-32.6%) and defense aircraft (-3.2%). Over the past 12 months durable goods orders have dropped -21.6%.

Durable goods inventories continued to fall in November, frustrating those that have for months have predicted increases in production to restock. The relatively broad based gains in new orders and the slow but (relatively) steady growth in the industrial sector may portend the end of this trend, however. The tentative resumption of business spending, whether demand originates from overseas or domestic sources, will help underpin broader economic growth, especially when companies begin hiring.

Nov 25th

Weekly Economic Insight, 23 November – 27 November

Author: Kenn Lamson

Comments: 0

RELEASE	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT

*(leading, coincident, or lagging indicator)*
Existing Home Sales (leading)	October	6.10M	5.70M	5.57M	Removing seasonal adjustments that call into question the accuracy of the “headline” figure, existing home sales rose 6.6% from September and 20.8% from a year ago.
GDP (lagging)	3Q09 preliminary	2.8%	2.8%	3.5%	The lowered estimate of third quarter economic activity was primarily driven by an upward revision to imports and downward revisions to consumer and business spending.
S&P Case-Shiller 20-city Home Price Index (lagging)	September	146.5	NA	146.0	The rate of price declines fell for the fifth consecutive month, to -9.4% compared to the same month last year. Nineteen of the 20 MSAs showed year-over-year improvement in prices and 9 showed month-over-month raises. Prices stand at their autumn 2003 levels.
*Durable Goods Orders (leading)*	October	-0.6%	0.5%	2.0%	Orders excluding transportation fell -1.3% and excluding defense-related items rose 0.4%. Monthly bright spots included orders for primary metals (+3.6%), electrical equipment (+2.7%) and nondefense aircraft and parts (+50.8%). Weakness was seen in defense aircraft (-6.5%), computers (-7.2%) and machinery (-8.0%). Over the past 12 months durable goods orders have dropped -23.0%.
Consumer Spending (leading)	October (MoM)	0.7%	0.5%	-0.6%	On an inflation-adjusted basis, MoM spending rose 0.4%.
Univ of Michigan Consumer Sentiment (leading)	November	67.4	67.0	70.6	American consumers’ opinion about the economy remained very sour in November. October’s figure was revised upward from 66.0.
New Home Sales (leading)	October	430K	410K	405K	New home sales have risen 31% from their cycle low in January 2009. The inventory-to-sales ratio now stands at 6.7 months, down from a peak of 12.4 months.

Positively, the estimate of housing stock outstanding continued to fall; the measure now stands at 7 months. Government stimulus is clearly underpinning the housing market, where buyers rushed to “get under the wire” to receive the first-time homebuyers credit, initially scheduled to expire in November. The housing market’s also being supported in a less obvious way, through the Federal Reserve purchase of mortgage-backed securities, a key mechanism for providing liquidity to lenders and keeping mortgage interest rates down. Those purchases, however, expand the Fed’s balance sheet and exacerbate longer-term inflationary concerns.

This week’s release is our second look at 3Q GDP, which was revised downward as expected. If the obvious stimulative effect of “cash-for-clunkers”, the first-time homebuyer’s tax incentive, and other measures were removed, the growth rate would clearly be significantly lower. The downward revisions to consumer and business spending are troubling, since (1) business investment is a precursor of stability in the manufacturing sector, widely touted as likely to be a key driver of the US economy out of recession, and (2) as we have consistently observed, since the US consumer represents about 70% of economic activity, demand from that sector is critical.

Orders for new long-lived goods rebounded lower from a surge in September. While a useful anticipatory measure of manufacturing sector activity, the data on durable goods orders is a very volatile series.

As expected consumer spending data was boosted by the “cash-for-clunkers” program. Personal savings declined slightly, to 4.4% from 4.6% in September.

Within the U of M Consumer Sentiment Index, the measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, fell to 68.8 from 73.7, which was the highest in a year. The index of expectations six months from now, which more closely projects the direction of consumer spending, decreased to 66.5 from 68.6.

The margin of error for New Home Sales 6.2% month-over-month increase was 17.6%, so as usual the initial estimate should be taken with a grain of salt. Also, the gains were not distributed evenly across the US, as the South saw most of the uptick. As with existing home sales, the spike in new home sales can in part be attributed to the recently-extended and expanded first-time homebuyer tax credit. The declining volume of new homes for sale reflects both that purchase activity has increased and that, as indicated in the recently discussed construction statistics, homebuilders have slowed the pace at which they’ve added to the housing stock.

Oct 30th

Weekly Economic Insight: 26 Oct – 30 Oct

Author: Kenn Lamson

Comments: 0

Many of this week’s releases failed to reach the consensus estimates, weighing on an already heavy-feeling market.

Arguably the “less negative” print on the Case-Shiller Home Price Index is due to bargain hunting in deeply oversold housing markets. The breadth of the move higher is encouraging, though, as is its four month trend.

Dampening the marginally positive news of the Case-Shiller data was the lower-than-expected new home sales figure. The decline in this report was undoubtedly due to the expiration of the $8000 first-time homebuyer credit. Since new home sales data are recorded when contracts are signed (as opposed to existing home sales, which are recorded at closings) and buyers had to close by November 30 to receive the credit, signing a contract in September is cutting it close.

Although a direct linkage is difficult to demonstrate, we’d argue that the continued exceptionally weak confidence numbers are largely due to the difficult job market. For comparison, consumer confidence readings have historically averaged 72.0 in recessions.

Durable goods orders rose for the fourth time in six months, although this week’s release fell short of expectations. Interestingly, durable goods inventories declined for the ninth consecutive month; 3Q09 was supposed to be one in which companies restocked.

The advance GDP figure, bolstered by consumer spending (particularly through the Cash-for-Clunkers program), surprised on the upside. Residential investment spiked at an annualized rate of 23% during the quarter; clearly the $8000 first-time homebuyer tax credit boosted this figure so it remains to be seen whether this strength will continue. Inventory building contributed 0.9% to GDP (given the decline in durable goods inventories noted above, this must’ve been driven by nondurables), and business investment fell at an annualized -2.5% rate. As we’ve stated before, there was little question that 3Q09 GDP would be substantially positive; the real question surrounds the sustainability of that trend, especially when the “stimulus” runs out or is removed.

Like the GDP data, consumer spending was largely driven by the effect of the “Consumer Assistance to Recycle and Save” Act (aka, “cash-for-clunkers”). From August to September, the annualized rate of spending on durable goods, nondurable goods and services fell -7.0%, rose 0.7% and 0.2% respectively. The growth in services spending continues a narrowly positive trend over the past six months. Consumers saved 3.3% of their disposable personal income in September, down from 4.8% in August.

RELEASE	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT
*(leading, coincident, or lagging indicator)*	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT
S&P Case-Shiller 20-city Home Price Index (lagging)	August	146.00	NA	144.23	The rate of price declines fell for the seventh consecutive month, to -11.3% compared to the same month last year. Nineteen of the 20 MSAs showed year-over-year improvement in prices and 16 showed month-over-month raises. Prices stand at their August 2003 levels, and have declined -29.3% from their peak.
Consumer Confidence (leading)	October	47.70	54.00	53.40	Confidence fell to its lowest level since July, as both the “present situation index” and “expectations index” declined.
*Durable Goods Orders (leading)*	September	1.0%	1.5%	-2.6%	Orders excluding transportation rose 0.9% and excluding defense-related items rose 0.5%. Monthly bright spots included orders for machinery (+7.9%) and defense aircraft and parts (+12.5%). Weakness was seen in nondefense aircraft (-2.1%) and communications equipment (-7.0%). Over the past 12 months durable goods orders have dropped -24.1%.
New Home Sales (leading)	September	402K	440K	429K	New home sales have risen 22% from their cycle low in January 2009. The inventory-to-sales ratio now stands at 7.5 months, down from a peak of 12.4 months.
GDP (lagging)	3Q09 advance	3.5%	3.0%	-0.7%	This stronger-than-consensus release marks the end of the longest and deepest recession of the post WW2 era.
Consumer Spending (leading)	September (MoM)	-0.5%	-0.5%	1.4%	Consumer spending declined -0.3% year-over-year. On an inflation-adjusted basis, MoM spending fell -0.6%.

Sep 25th

Weekly Economic Insight, 21 September — 25 September

Author: Kenn Lamson

Comments: 0

While the volume of economic releases this week was moderate, most provided data that historically has offered insight into the economy’s future direction.

RELEASE	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT
*(leading, coincident, or lagging indicator)*	PERIOD	ACTUAL	EXPECTED (consensus)	LAST	HIA COMMENT
Leading Economic Indicators (leading)	August	0.6%	0.7%	0.9%	LEI rose for the fifth consecutive month. A sister index, the Coincident Economic Index, has also stopped falling.
FOMC Rate Decision		0.25%	0.25%	0.25%	While the Fed’s decision to leave the Fed Funds rate unchanged was unsurprising, the press release accompanying the meeting offered a few new developments. (1) The Fed effectively declared the recession over (“economic activity has picked up…”); (2) Indicated it saw no lurking inflation (“subdued for some time…, longer-term inflation expectations stable”); (3) The Fed intends to maintain its low rate policy even as growth expectations rise (“…exceptionally low levels of the Federal Funds rate for an extended period”).
Existing Home Sales (leading)	August	5.10M	5.35M	5.24M	Removing the previously noted seasonal adjustments that call into question the veracity of the “headline” figure, existing home sales were down -6.2% from July but up 2.0% year-over-year. Importantly, the “supply” of unsold homes continued to decline, to 8.5 months (7.3 months unadjusted for seasonality.)
New Home Sales (leading)	August	429K	440K	433K	Sales rose for the fifth straight month, but, like this month’s existing home sales, came in below expectations.
*Durable Goods Orders (leading)*	August	-2.4%	0.4%	4.9%	Excluding the transportation sector, orders were unchanged from July. This report is somewhat at odds with the recent rebound seen in the ISM Manufacturing index, but the Durable Goods series is notoriously volatile.

As with the bulk of the economic data seen over the past several months, this week’s releases suggest an economy that is recovering, albeit slowly, but has a long way to go before it could reasonably be considered robust and stable.

There is fodder for the skeptic in several of the releases:

The Fed’s stated intent to maintain an “exceptionally low” Fed Funds rate may exasperate those who would like to see liquidity withdrawn from the system as soon as possible in order to reduce the chances of later runaway inflation.
Both existing and new home sales didn’t meet analyst’s expectations. Given the sharp drop-off in auto sales after the expiration of the “cash-for-clunkers” program, one must wonder what will happen to home sales when the first-time homebuyer tax credit expires on December 1^st.
While the rebound in the ISM Manufacturing indices is from a more stable source, it’d be more comforting to have that data confirmed by growth in Durable Goods orders.

We are pleased, of course, to see the economy gradually rebounding from the depths of recession. We’re even happier that our clients and readers of our commentary have enjoyed substantial gains in their stock portfolios since the most recent market bottom in March. However, we remained concerned about:

the accuracy of some of the data trumpeted as evidence of that recovery (ie, enormous seasonal adjustments based on inapt historical periods);
the lack of focus by investors and the media on evidence of debt deflation, and the secular shift towards frugality that may be occurring;
the sustainability of that recovery post-stimulus;
the equity markets’ pricing in of the aforementioned recovery, and then some.

Economic Insight: Harmonic Notes e-newsletter, Sept 2010

“Disposable Society?”

“Separating Wheat from Chaff”

Weekly Economic Insight, 22 March – 26 March 2010

Weekly Economic Insight: 22 February to 26 February 2010

Weekly Economic Insight: 25 January – 29 January 2010

Weekly Economic Insight: 21 Dec – 24 Dec

Weekly Economic Insight, 23 November – 27 November

Weekly Economic Insight: 26 Oct – 30 Oct

Weekly Economic Insight, 21 September — 25 September

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