Media
THE NORTHWEST ECONOMIC MAINLINE 05-21-2012 to 05-25-2012
What to Watch This Week
• Existing home sales tumbled in March, falling from 4.60M in February to 4.48M. I see a turnaround here. Look for a number around 4.65M following recent improvement in the Mortgage Bankers Association’s Mortgage Purchasing Applications Index.
• New home sales fell 7.1% in March as the large supply of distressed properties has caused a historic spike in the spread between new and existing home prices. This is calming somewhat - look for the figure to improve to 340,000 for April.
• Initial jobless claims should drop modestly to 365,000 and continuing claims should follow suit and drop to 3.25M from 3.265M.
• The final figure for consumer sentiment in May will likely show a small from 77.8 to 77.5 as concerns over Europe and recent contraction in the equity markets have a negative effect on consumers.
What I Saw Last Week
• I expected retail sales to rise by just 0.2% last week on weaker consumer demand and the figure came at a slightly worse 0.1%. Even though growth levels were down from March, the details of the report support improving trends in consumption. Most of the April weakness was due to pullbacks in spending that came from temporary distortions in spending patterns caused by warmer-than-normal temperatures during the winter (building material and supply dealers fell 1.8% after rising 2.7% in March) and a decline in gasoline prices (gasoline stations spending declined 0.3% after increasing 1.0% in March).
Core retail sales -- which exclude the highly volatile motor vehicle dealers, building materials and supplies dealers, and gasoline stations – increased a healthy 0.4%.
Continued improvement in the labor sector should cause acceleration in retail sales growth.
• Consumer prices increased 0.3% in March while the core rate increased by 0.2%. We expected that the core rate relative to consumer prices would remain at 0.2% and we were correct. Core price increases have been fairly consistent over the past few months. There was nothing in the report that suggests inflation will deviate from its current trend in the near future.
Inflation has been trending higher, but the market's inflation expectations remain in check due to underlying concerns about a global economic slowdown. The Fed will draw some comfort in the fact it is winning the fight against deflation, but macro issues will keep the Fed married to its belief that economic conditions are likely to warrant an exceptionally low level of the federal funds rate through at least late-2014..
• NAHB housing market index jumped from 25 to 29 – a far better improvement than my call for an increase to 26. This is the index’s strongest reading since May of 2007. Three out of four regions registered improving builder sentiment in May. This included a six-point gain to 32 in the Northeast, and five-point gains to 27 and 28 in the Midwest and South, respectively. Interestingly, the West posted a two-point decline, to 29.
• Housing starts jumped far more than we had anticipated and improved from 699,000 (SAAR) to 717,000 units (SAAR). We were so far off in oour forecast because there was a substantial revision in last months’ figure from 654,000 to 699,000.
The growth logically follows the improvement in the NAHB index. Recent job gains have likely made it easier for more Americans to purchase a home. Employers have added 1 million jobs in the past five months and unemployment has dropped a full percentage point since August, from 9.1 percent to 8.1 percent in April.
Mortgage rates, meanwhile, have fallen to record lows, making home-buying more affordable. Still, many would-be buyers are still having difficulty qualifying for home loans or can't afford larger down payments required by banks.
As we had expected, building permits shrank from a revised 769,000 (SAAR) to 715,000 (SAAR). We called for a reduction through a slowdown in apartment development and that was indeed the case with the multifamily sector dropping by 23%.
• Initial jobless claims were as expected and came in at 370,000 after being revised up from 367,000 for the week ending May 5. The continuing claims level increased from 3.247M for the week ending April 28 to 3.265M for the week ending May 5.
For the past three weeks, the initial claims level has remained near the 370,000 mark. sign that the elevated claims levels following the Easter holiday were due to poor seasonal adjustments and not a change in labor demand. Current claims are consistent with payroll gains in excess of 150,000 per month, yet the level may need to fall closer to 360,000 before it could support regular payroll gains above 200,000.
• The Seattle metro area job picture continued its upward trajectory in April with employers adding 3,100 positions last month and increasing by 38,000 from a year ago. This is a pleasing figure but I have a word of caution. The growth has been slowing down over recent months.
