What I Saw Last Week
Retail Sales rose by 0.1% in January -matching my forecast while the core rate (that excludes vehicle sales) increased by 0.2%.
The expiration of the payroll tax cut and the increase in taxes on high income earners as a result of the fiscal cliff — which will eventually reduce average incomes by roughly $1,000 per household over the whole of 2013 — was first felt in the beginning of January. However, it was interesting to note that the negative effect from the income loss was not enough to drive overall spending levels lower in January. The fact that spending held relatively strong in the face of declining incomes should be looked at as a net positive for overall economic conditions.
As a counterweight to this, however, in order for spending growth to stay positive in January, consumers were forced to dip into their savings. Since many consumers were unaware that their tax rates were going to increase – namely because they did not realize that the payroll tax cut was not permanent – it is quite possible that consumers budgeted for January spending at their previously higher income levels. Now that households understand that their income has permanently declined, the spending cuts that come with any drop in income may occur this month.
Initial Unemployment Claims fell from an upwardly revised 368,000 for the week ending February 2 to 341,000 for the week ending February 9. That is the lowest initial claims reading — excluding the biases from poor seasonal adjustment figures in the beginning of January — since February of 2008 and well below my call for a modest drop to 366,000.
The continuing claims level fell from 3.244M for the week ending January 26 to 3.114M for the week ending February 2.
The Department of Labor is not reporting any unusual factors that caused the initial claims level to drop below the 350,000 – 400,000 range where it has been for the better part of the last year. If claims stay at this level for the next couple weeks, I would have to suggest that it would be a clear signal that labor market conditions are improving.
However, it is possible that the drop in the claims level was not due to normal market conditions and that winter storm Nemo disrupted businesses and may have played a role in causing the initial claims level to break out of its previous range. Now, if this is the cause of the drop in claims, then the initial claims level will likely spike next week before settling back around 365,000 by the end of the month.
Consumer Sentiment strengthened in February moving from 73.8 to 76.3. The February reading was the first improvement in sentiment since the fiscal cliff scare came to the forefront of consumers’ minds in December and was above my forecast for a slight drop in the index.
The Expectations Index increased to 68.7 from 66.6 in January while the Present Conditions Index rose to 88.1 from 85.0.
I am offering a word of caution. As we get close to the beginning of the sequestration on March 1, damaging media reports about the economy may temper any further gains in sentiment.
What to Watch for This Week
After holding at 47 in December, the National Association of Home Builders Market Index for February should rise by one notch to 48. Builders are feeling somewhat happier, albeit cautiously so.
Data on Housing Starts and Building Permit activity in January will be an interesting barometer on the overall economy. Starts grew by 12.1% in December – the most starts since June of ’08. I believe that the January figure will show a very slight contraction to 980,000 (SAAR).
Permit activity grew, albeit modestly, in December and I expect this number to continue to rise. Look for a figure of around 918,000 (SAAR).
Initial Unemployment Claims will head back up to the recent average level. Look for 358,000.
Inflation – as measured by the Consumer Price Index – has been declining or flat since October with the core rate (that excludes food and energy) flat for several months. I do not believe that price trends are likely to shift in the coming months, therefore look to a figure of plus 0.1%.
Existing Home Sales in the US disappointed in December with a drop of 1% over the previous month, but were still 9.2% higher than seen in 2011. I am not expecting much movement as inventory limitations are affecting sales volumes. Look for the figure to remain at 4.94M units (SAAR).