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%

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.

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 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 rise as we approach that date and thereafter if purchases are ceased.

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.