March 29, 2013
As I'm sure you've noticed, today Wall Street is closed in observance of Good Friday. And between you and me, I'm glad for the break because it gives me a chance to really dig into the intriguing updates we received on the U.S. economy this week. From yesterday's market-moving GDP report to two contradictory consumer confidence reports, the economy is clearly at a juncture.
So I'm making it my business to identify the hot (and cool) economic trends so we can better assess where the profit opportunities are on Wall Street. Let's run down what we've learned from the past week.
In February, durable goods orders surged 5.7%; this topped the 5% consensus forecast. February's results also represented a reversal from the 3.8% we saw in January—while commercial aircraft orders plunged 24% last month, they boomed over 95% this month. Also notable is that vehicle orders rose 3.8% in February. Excluding volatile transportation orders, durable goods orders declined 0.5%, which marks the first decline in six months. So overall, durable goods orders are rising, but predominately in the volatile transportation sector. This month's results prove how important it is to read into the details behind every economic report.
In February, sales of new homes declined 4.6% to an annual rate of 411,000 units. However, this still came above economists' expectations; the consensus called for a rate of 400,000 units. Meanwhile, the inventory of new homes remained tight at a 4.4 month supply—near a record low. The median sales price for new homes advanced 3% to $246,800. While at face value this sounds like a lukewarm report, keep this in mind: The pullback follows the 13.1% jump in new home sales that we saw last month. January's sales pace represented the highest level since September 2008, so it's understandable that new home sales would moderate after that record turnout. The fact that inventory remains tight (six months is considered a healthy balance between supply and demand) means that there should be some upward pressure on housing prices.
Last week, initial claims for unemployment advanced 16,000 to 357,000. Economists had expected initial claims to fall to 335,000, so this came as somewhat of a surprise. At the same time, the closely-watched four-week average of new claims rose by 2,250 to 343,000. Due to this sudden uptick in new unemployment claims, all eyes will be on next week's March payroll report. Even so, we are still comfortably under the 400,000 benchmark which demarcates a contracting labor market.
In February, personal income advanced 1.1%, above the 0.9% gain forecast by economists. This is also a turnaround from the 3.7% drop we saw in January. Even accounting for taxes, disposable personal income also grew 1.1%, following last month's 4% decline. At the same time, personal spending climbed 0.7%, also topping the 0.6% consensus estimate and the 0.4% gain we saw in January. The personal savings rate climbed to 2.6%, up from 2.2% in January. Following the short-term hit we saw from payroll taxes in January, consumers are now making more, spending more and saving more. These three fronts are essential to the economic recovery so I hope this trend will continue.
In February, the consumer confidence index clocked in at 59.7, down from a revised reading of 68 in January. This came below economists' expectations of a reading of 65. The main drag was the present situation index, which fell from 61.4 to 57.9. Meanwhile, the future expectations index also declined from 72.4 to 60.9. This report suggest that the sequester, the $85 billion in automatic government spending cuts, is weighing on consumers' minds. We have yet to see how this will impact economic growth going forward, but I will keep you up-to-date on the situation.
In February, the University of Michigan consumer sentiment index jumped to 78.6—a four month high. This also surpassed the consensus estimate, which called for a reading of 72.6. The current conditions index rose from 89 last month to 90.7 this month, while the future expectations index also climbed from 70.2 to 70.8. We are now seeing a divergence between the Conference Board's consumer confidence index and this index. So it's becoming trickier to gauge how the nation as a whole feels about the economy; once we get more details on the effect of the budget cuts, this should help clear things up a little.
In the fourth quarter, the U.S. economy grew at a revised 0.4% annual pace. This is an improvement over the previous GDP estimate of 0.1% growth. The big change came from higher than expected business investment, which was revised up from a 5.8% gain to a 16.7% jump. Meanwhile, exports were revised to a 2.8% decline, up from the previous estimate of a 3.9% drop. The one metric that slightly dragged down the final figure was a downward revision in consumer spending; while economists previously estimated a 2.1% gain, they now calculate a 1.8% rise. This report helped push the S&P 500 to a record high on Thursday. As for me, I think the most exciting component of this report is the fact that corporate profits rose 3.3% to an all-time high.
Have a happy Easter weekend and I'll check back in with the latest Portfolio Grader revisions first thing on Monday morning.