What I Saw Last Week

Retail Sales in December exceeded my expectations with total sales rising by 0.5% and sales minus vehicles rising by 0.3%.  I had forecast lower total growth of 0.2% but, ex-autos, my forecast was on the mark.

The retail sales report was strong across the board. With the exception of a small 0.6% decline in electronics and appliance stores — which was likely due to slowing demand for the iPhone 5 after the initial release in late October — and a 1.6% drop in sales at gasoline stations — which was caused by lower prices and not weaker demand — all of the retail sectors showed solid sales growth.

Inflation remains benign with the December data showing the total rate at 0% and the core rate expanding by 0.1% which both matched my forecast.  Look for December to show that the Consumer Price Index remained static.  Inflationary pressures will remain tame until income growth accelerates from its current pace.

The National Association of Homebuilders Housing Market Index took a breath in January with the figure staying at the same level as seen the prior month.  Tight mortgage credit conditions, difficulties in obtaining accurate appraisals and the uncertain economic conditions continue to impact the housing recovery. The component gauging current sales expectations remains unchanged at 51, while the component gauging sales expectations in the next six months slipped 1 point to 49.

Surprisingly, Initial Unemployment Claims fell to to 335,000 for the week ending January 12.  That is the lowest initial claims level since January 2008 and well below my call for an increase to 375,000.   On the surface, the sharp drop in initial claims looks like an improvement in labor conditions. However, the BLS reported that the fall was more likely due to poor seasonal adjustments.

Typically, the unadjusted initial claims level reaches its highest point in the beginning of January as retailers lay off holiday staff. This year, however, the layoffs were much smaller-than-anticipated which resulted in a sharp drop as a result of the seasonal adjustment factor. This is not atypical of January numbers and it happened in January of 2007 and 2008.

It is unknown if the smaller-than-normal decline in layoffs was the result of weaker-than-normal hiring during the holiday season or if businesses are keeping more workers on staff. We will get a better understanding of the hiring situation when the January payroll numbers are released in the beginning of February.

Housing Starts increased by 12.1% to 954,000 and above my call for an increase to an annual figure of 889,000.  That was the most housing starts since June 2008, which was the last time housing starts were over 1M.

Single-family housing starts increased 8.1% to 616,000 from 570,000 in November. Multifamily construction increased 20.3% in December from 281,000 in November to 338,000.

Building Permits rose modestly to 903,000, just below my call for an increase to 905,000.

The early reading on Consumer Sentiment in January did not improve as I had anticipated.  The reading fell from 72.9 to 71.3 – that was the lowest confidence reading since December 2011.

The expectations index fell from 63.8 in December to 62.7 in January while the current conditions index fell from 87.1 to 84.7. The sentiment index dropped nearly 10 points in December as consumers caught wind of the potential, negative economic effects of the fiscal cliff and did not rebound as I had hoped for following the bipartisan compromise on the tax portion of the cliff issue.

What to Watch for This Week

Existing Home Sales strengthened in November from 4.76M to 5.04M (SAAR).  Look for some further improvement here.  I am forecasting an annualized figure of around 5.1M units.

Initial Unemployment Claims will rise after the very low number discussed above.  Look for 365,000 new claims and 3.2M continuing claims.

New Home Sales rose by 4.4% in November to 377,000 (SAAR) and I am looking for further growth.  Expect a figure of around 387,000 (SAAR). Home builders are actively attempting to increase new home inventories, and construction trends remain on a steep upward track.