What I Saw Last Week
The Case Shiller Index did not disappoint with the 20-City composite index rising by 6.8% in 2012 – marginally above my forecast for it to increase by 6.6%. Seattle grew by 8.2%, again slightly above my forecast for an increase of 7.8%.
The chart below shows the 12-month change in the Seattle index over time. As can be seen, after the temporary jump seen in 2010 – due to the homeowner tax credit – the market dropped gain but this has been followed by a nice direction that started in the Fall of 2011.
Case Shiller Seattle Index – 12- Month % Change
The Federal Housing Finance Authority also released their data on home prices which showed that homes insured by Fannie Mae & Freddie Mac rose by 5.8% in 2012 – slightly below my estimate of a 6% growth rate. It was interesting to see that the Pacific region grew by 12.6% (second only to the Mountain States where prices grew by 14.7%). The Seattle metro area market increased in value by 11% in 2012.
New Home Sales in January jumped by 15.6% to 437,000 (SAAR) and above my call for a more modest increase to 380,000. Sales in January were the strongest since July 2008 and exceeded the stimulus-added bump when the home buyers’ tax credit was available in 2010.
Inventories fell to 4.1 months at the current sales rate from 4.8 months. Actual inventories remained at 150,000.
The median sales price increased 2.1% y/y to $226,400 in January. Builders will need to be aware that continued increases in prices will keep the price premium of a new home versus a comparable existing one well above market norms. Prices growth will need to moderate or the new home sector will risk being priced at an uncompetitive level. The new home price premium has not declined even though prices of existing homes have been on the rise. If that trend continues, price conscience buyers may shift toward the existing home sector.
Consumer Confidence rebounded as anticipated in February, increasing from 58.6 to 69.0 and above my estimate for an increase to 62.0.
The Present Conditions index increased to 63.3 in February from 56.2 in January. The Expectations Index increased to 73.8 from 59.9. That was the strongest Expectations reading since November.
Surging equity markets in February helped offset higher oil prices and was instrumental in driving confidence back to its highest level since November. These gains may reverse in March as cutbacks from the government sequestration directly affect households.
The Pending Home Sales Index jumped 4.5% – way above my forecast for 1% growth. This was due to the dramatic revision in the previous months data that was revised from -4.3% to -1.9%.
Initial Unemployment Claims fell from an upwardly revised 366,000 for the week ending February 16 to 344,000 for the week ending February 23 – below my call for 360,000. The continuing claims level fell from an upwardly revised 3.165M for the week ending February 9 to 3.074M for the week ending February 16.
That is the best initial claims reading since June 2008. Importantly, the DOL did not issue any special guidance that explains the decline in claims. That means the drop was the result of businesses laying off few workers than they have over the past several months.
It is early to suggest that labor conditions are finally improving. We will be more confident about this assessment if claims can hold at this level for the next few weeks.
The second take on US growth – as measured by GDP – did not surprise and, as expected, it was revised upward to show that the economy expanded by 0.1% in Q4 2012. More importantly, real final sales — which excludes inventories — were revised up to 1.7% from 1.1%. That suggests that the underlying trends in the economy improved, overall, in the fourth quarter from the advance reading.
Personal Incomes and Spending data showed that incomes fell by 3.6% (my forecast was for a 2.4% contraction) and spending rose by 0.2% (matching my forecast).
The expiration of the payroll tax cut and the giveback following the December boost to asset receipts were expected to lower income levels in January. Those two components accounted for 3.5 percentage points of the January pullback.
More concerning was that the remainder of the decline in income was the result of a 0.4% drop in employee compensation. The January Employment Situation report implied a monthly gain in aggregate wages. If wages continue on a downward trend, spending growth will not be maintained.
The increase in spending was entirely funded by consumers dipping into savings as the personal savings rate dropped from 6.4% in December to 2.4% in January. The savings rate had averaged roughly 3.4% for the 12-months prior to December. The drop below that explains why consumption was able to remain positive.
It is likely that the increase in payroll taxes which, according to the sentiment surveys, was not expected by most households, forced consumers into using their savings in order to maintain consumption behaviors in January. Now that consumers understand what their disposable income actually is, we anticipate that savings will return to 3.4% over the next few months. That means consumption spending in February and March will likely suffer as consumers compensate for the increase in taxes.
Consumer Sentiment in February was revised upward from 76.3 to 77.6 and above my forecast for it to remain at its previously announced level. The gain in confidence may be short-lived. The government cutbacks from the sequestration will likely negatively impact the lives of consumers, which may cause a fall in sentiment.
Surprisingly, Construction Spending contracted by 2.1% in January although my forecast called for it to grow by 0.5%. Private residential construction spending was flat after increasing 1.7% in December. New residential construction spending on structures was up a solid 3.3%. However, a severe pullback in spending on home improvement projects (-4.3%) completely offset that gain. Private nonresidential construction spending fell 5.1% in January after increasing 2.4% in December. Large declines in power (-14.5%) provided the bulk of the overall January contraction. Lodging (-6.1%) and manufacturing (-2.9%) also played a role in lowering nonresidential construction spending.
What to Watch for This Week
Just a couple of announcements in the first week of Sequestration, but they are very important ones.
Initial Unemployment Claims should rise modestly but will remain range bound. Look for 350,000.
Consumer Credit has been on the rise for several months. Look for growth of $12.8B driven by increases in non-revolving credit lines.
Non-Farm Payroll data for February will likely show that the US grew it’s employee base by 165,000; up from the 157,000 figure seen in January. I anticipate that private payrolls will grow by 178,000.
The Unemployment Rate will remain at 7.9%.