An Economic Outlook by Jack Lavery - April 18, 2010 – “A Tale of Two Consumers”
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A Tale of Two Consumers
On April 13, March retail sales surged 1.6%, stronger than the consensus call, and on top of an upwardly revised 0.5% increase in February, which had previously been reported as rising 0.3%. January was also revised higher to an advance of 0.5%. The March increase benefitted from a sizable rise in auto dealer sales. But, even excluding auto dealer activity, nominal retail sales advanced 0.6% in March and 1.0% in February. Auto dealer sales jumped 6.7% in March, following a 1.9% decline in February.
Nominal retail sales increased at a 7.9% annualized rate in 1Q:’10, following a 7.5% annual pace in 4Q:’09. Retail sales have now increased for four consecutive quarters. The March 2010 retail sales were 7.9% above March 2009. This was the strongest y/y rise since January 2006. Retail sales and food services have escalated at an 11.7% annualized rate over the last six months.
The central yardstick of retail sales is the “retail control” group. Retail control excludes volatile parts of retail sales, such as building materials and autos. Retail control is the best harbinger of personal consumption expenditures (PCE) feeding into GDP. Control increased 0.4% in March. Our expectation, considering the PCE deflator, is that real PCE (durables, non-durables and services) rose at an annualized rate of 3.7% in 1Q:’10.
The ICSC-GS chain store measure, also released on April 13, increased 0.1% week over prior week. This growth, following the large jump from an early Easter is meaningful, in that the week following an Easter jump usually declines. The y/y comparisons for this chain store measure are up 4.0% y/y in the latest week and 4.7% y/y the prior week, very strong comparisons, indeed.
In contrast with the above, the ABC News Consumer Comfort Index (CCI) declined four points to -47 in the week ending April 11, only three points better than the worst reading in the last year. The April 16 release of the preliminary April reading of the Reuters/University of Michigan Index of Consumer Sentiment was a big disappointment. It declined to 69.5 in April from the 73.6 final March report, and showed slippage in both components: current conditions as well as expectations six months ahead. The decline of 4.1 points was far worse than expectations, level since November 2009.
Housing data from February and lingering concerns about the labor market hurt the current conditions reading of the consumer sentiment measure, which slipped 1.7 points from the March final level. The expectations component of the consumer sentiment index deteriorated 5.6 points from the final March reading. Inflation expectations also rose in the consumer sentiment survey. We expect the weakness of the April 16 release will largely be offset by the final March reading, reported on April 30.
On April 14, the Federal Reserve Beige Book reported on economic activity. The Beige Book said: “Overall economic activity increased somewhat since the last report across all Federal Reserve Districts except St. Louis, which reported “softened” economic conditions.” The New York and Kansas City Districts reported the strongest expansion. The Beige Book report reflected information collected on of before April 5, 2010. Trouble spots across the nation were commercial real estate and sluggish loan volume.
Economic Indicators in the Week Ahead:
Monday, April 19 10:00a.m. March Leading Economic Indicators
With the stronger than expected rise in building permits (one of the leading indicators) in March, we have elevated our expectations for the Conference Board estimate of the March index of leading economic indicators (LEI) to a gain of 1.3% m/m, following the 0.1% rise in February. If we are correct, the LEI would be up 11.1% y/y, suggesting increasing momentum in the economy, as the February LEI was 9.5% above its year-earlier level. The real driver to the LEI in March was the rebound in manufacturing hours worked. Rising equity prices and the steep yield curve also support the March LEI advance. At this writing, the consensus expectation for the March LEI is a 1.0% rise.
Thursday, April 22 8:30a.m. Jobless Claims, Wk. Ending 4/17/10 Jobless claims have a long record of volatility around Easter. The Labor Department has made it very clear that the back-to-back weekly increases in jobless claims is a function of administrative backlogs and is not an economic issue. The question now is whether or not the administrative backlogs continue to push the number up in the week ending April 17. We expect the answer is no. We envision a decline in initial jobless claims from 484,000 to 435K. The decline would be amplified by a snap-back from the backlogs bloated level. At this writing, the consensus expects a decline to 450K.
Thursday, April 22 8:30a.m. March Producer Prices and Core PPI
We expect the headline finished goods PPI to increase 0.4% in March m/m, following a larger than expected decline of 0.6% in February. Our expectation of a 0.4% increase in the headline finished goods PPI would bring that measure to an 18 month high of 5.9%. The core PPI, excluding food and energy, likely rose 0.1% in March m/m, lowering the core producer price index to a y/y rate of 0.8% in March from 1.0% in February. Slack in the economy restrains the ability to raise prices. The March import price index was weaker than expected, and prices of industrial supplies, excluding petroleum, declined in March. Last week’s release of the March CPI revealed subdued price readings in most areas.
Thursday, April 22 10:00a.m. March Existing Home Sales
Existing home sales likely rose around 6.6% to 5.35 million units annualized from February’s reported 5.02 million. Pending home sales, from the National Association of Realtors were up 8.2% in February, following a drop of 7.8% in January. Pending home sales can be an excellent leading indicator of existing home sales. The expanded home buyer tax credit is due to expire at the end of April, but should benefit home sales in March and April. We suspect the tax credit will again be extended. Improved housing affordability and better labor markets can help the housing market, but bank credit has to cooperate. Mortgage rates on 30-year fixed rate mortgages fell to 5.07%, per the latest weekly survey from Freddie Mac, released April 15. At this writing, the consensus is below us with a March expectation of 5.30 million existing home sales, at an annual rate.
Thursday, April 22 10:00a.m. February FHFA House Price Index
The Federal Housing Finance Agency (FHFA) reported that its purchase-only house price index (HPI) declined 0.6% m/m in January. That January drop was on top of a downwardly revised December decline of 2.0% m/m, which had previously been reported as down 1.6%. The January HPI was down 3.3% y/y, and December 2009 was off 1.9% y/y. The only y/y increase that the HPI has registered since September 2007 was recorded in November 2009, up 0.1% from its year earlier level. By comparison, the seasonally adjusted Case-Shiller index of home prices for 20 major metropolitan areas increased 0.3% in January m/m, the eighth consecutive monthly increase, but was down 0.7% y/y. We expect the FHFA HPI fell 0.3% in February, reflecting the general weakness in housing sales, and ample foreclosures and distressed sales keeping a governor on home prices.
Friday, April 23 8:30a.m. March Durable Goods Orders
We anticipate durable goods orders rising 0.4% in March m/m, following gains of 0.9% in February and 3.9% in January. Transportation orders could fall, based on Boeing’s orders. Ex transportation, durable goods orders will likely be up 1.1%. At this writing, the consensus sees a 0.1% increase in March durable goods orders vs. our call of up 0.4%. What matters more than all of this is what happens to two core yardsticks: non-defense capital goods orders, excluding aircraft and non- defense capital goods shipments, excluding aircraft. These measures will give us the best fix on 1Q:’10 capital spending in the National Income Accounts. The advance report on Real GDP in 1Q:’10 is released on April 30th. ISM new orders were strong, but that won’t tell the capital spending story.
Friday, April 23 10:00a.m. March New Home Sales
We see new home sales in March at 330K units annualized, a 7.1% increase over February’s depressed reading of 308K. The Mortgage Bankers Association’ purchase index supports our view. There’s a weather related snap-back as well. But, new home sales are not in for a strong sustained advance. Builder confidence edged higher in the latest National Association of Home Builders Housing Market Index. It is still, however, extremely low. High foreclosures, distressed sales, and tight credit conditions will constrain housing prices and extend builder concessions.
Jack W. Lavery
CEO & Chief Economist of Lavery Consulting Group, Senior Executive Fellow in Financial Economics at the University of Maine