27 May 2011 Stormy Spring Slows Recovery
There were a few bright spots in an otherwise gloomy week for economic data. New home sales in April jumped over 7% and drew down new-home supply to 6.5 months. Corporate profits were up an annualized 25.6% for the first quarter. And personal income rose 0.5% in March as wages and salaries rose a modest 0.3%. But, from there the news was less encouraging. The government’s second estimate of economic growth for first quarter GDP was no higher than it’s initial estimate of only 1.8% annualized. Initial jobless claims rose 10,000 last week to a 424,000 level. And on the manufacturing front, damage from interrupted Japanese supply lines began to show in the numbers.
The beleaguered housing industry received some good news this week as new home sales surged a surprisingly strong 7.3% to an annualized rate of 323,000. In a sign that the bottom may be firming the supply of new homes available for sale fell from 7.2 months to 6.5 months. Only 175,000 new homes are now available for sale, which represents the lowest national number of new homes on the market since the data series began in 1963, according to Bloomberg.
Tight supply of new homes is a good sign for home prices overall. Prices for new homes were up 1.6% to a median price of $217,900. Hopefully existing home prices will soon follow suit. This week’s report from the FHFA showed the decline in prices slowed from 1.5% in February to 0.3% in March. The index has declined for five months in a row.
Unfortunately, today’s report of April’s pending home sales was considerably less sanguine. The index fell nearly 11 points to 81.9, down 11.6% from a downward revised 92.6 in March. The worst decline was in the largest region, the South, where pending sales fell more than 17%. The National Association of Realtors, trying to be as hopeful as possible suggested that recent severe weather in the region, rising gasoline prices, and unemployment claims, likely explains a significant part of the drop.
The government reported that corporate profits in the first quarter grew 6% to 
$1.450 trillion annualized from $1.369 trillion in the fourth quarter. Compared to the same quarter a year earlier, profits grew an impressive 25.6% which follows a 12.6% drop in the fourth quarter of 2010. The excellent first quarter results are largely un-impacted by the devastating March 11th earthquake and tsunami in Japan. The extent of economic damage is just beginning to show in US economic data.
Bloomberg reports that the Chicago Fed’s national activity index fell to minus 0.45 in April for the lowest reading since August well down from March’s revised plus 0.32. April shows a month-to-month decline in manufacturing-related indicators which the report attributes in part to Japanese-related shortages in the auto sector. The three-month moving average is minus 0.12 for the first negative reading since December. The average indicates that economic activity was below trend in the month though it also indicates that inflationary pressures were subdued.
Orders for goods meant to last more than three years dropped 3.6% in April which followed a 4.4% rise in March. Excluding transportation, new orders for durable goods fell 1.5%, following a 2.5% rise in March. Weakness, according to the government was broad-based.
The most significant part of the economy, consumer spending, also showed weakness in April as it rose a disappointing 0.4% from a month earlier. The report showed that incomes rose by 0.4% a third straight month, but rising gasoline and food prices, won, at least for the month.
Surprisingly, consumers don’t seem to be as down as might be expected. Today’s Reuter’s/University of Michigan’s Consumer sentiment index for mid-May came in at 74.3, well up from a mid-month 72.4 and implying a 76.2 reading over the last two weeks. Bloomberg reports that this level is just shy of February’s recovery-best level of 77.5, which was registered before the spike in oil took hold and before the disaster in Japan struck.
Bloomberg goes on to say that it is “an especially good sign [that] May’s gain is centered in expectations which is the report’s leading component. The expectations index rose to 69.5, up more than two points from mid-month and up nearly eight points from April. Inflation readings are also favorable showing a major downtick in the one-year outlook to 4.1 percent, three tenths lower than April and the lowest reading since February. This reading suggests that consumers may have already adapted to $100 oil and $4 gas.”
The government reported it’s second of three estimates of overall US economic growth this week without revision. Domestic output expanded at 1.8% annualized, considerably slower than the 3.1 percent pace in the fourth quarter. Bloomberg notes that even though GDP results were disappointing, most economists believe that the economy will not slow further in coming quarters. They say that momentum is still favorable for consumer spending, equipment investment, exports, and inventories. We agree with this assessment. As the economic impact wanes from recent disruptions such as the Japanese supply constraints, the rapid boost in food and energy prices, and horrible weather in the mid-west and south, we will hopefully learn more about the resiliency of the recovery.
Hope you have a wonderful and safe Memorial Day Weekend. In observance of the holiday, our office will be closed on Monday.
