What I Saw Last Week
Retail Sales increased a solid 1.1% in February after rising an upwardly revised 0.2% (from 0.1%) in January. This was well above my call for an increase of 0.2% and suggests that the effect of the tax increases following the fiscal cliff deal have not stunted overall demand.
The strong gains in wages that were detailed in the February employment report also played an important part in keeping consumption levels higher than expected. Those gains allowed consumers to spend more while also adding to their savings. As long as employment — and wages — can continue at February’s pace, consumption will likely exceed our projections.
Initial Unemployment Claims fell to 332,000 for the week ending March 9 from an upwardly revised 342,000 (from 340,000) for the week ending March 2. That is the lowest, nonbiased initial claims reading since January 2008.
It is safe to say that the labor market is finally showing solid signs of improvement. For months, the initial claims level had languished between 350,000 and 400,000. Only unexpected seasonal biases caused by weather, holidays, or shifts in auto manufacturing would temporarily cause the claims level to deviate from that path.
For three consecutive weeks, the initial claims level has fallen below 350,000. Importantly, none of the drops below that level have been caused by seasonal adjustment problems.
Layoffs are now at levels that are typically associated with economic recovery and growth. These numbers support job gains above 200,000.
Inflation, as measured by CPI, rose 0.7% in February – marginally above my call for an increase of 0.5%. I am not overly concerned by this as it was largely due to a surge in energy costs. If we take those out of the equation, core prices rose by a more modest 0.2%.
There was nothing unusual in the core data and core price growth should remain moderate over the next several months. Core prices are up 2.0% year-over-year, which is at the bottom range of the Fed’s normal target level of 2.0% – 2.5%.
Consumer Sentiment fell from 77.6 to 71.8 in early March – this was well below my forecast for an increase to 78.5. Reaching new all-time highs in the equity market did little for the preliminary reading. Typically, consumer confidence/sentiment reacts to changes in equity values, gasoline prices, employment trends, and events in the media. The aforementioned equity gains and recent improvements in employment levels were not enough to offset the weakness from higher gasoline prices, elevated tax rates, and the negative effects of the sequestration.
What to Watch for This Week
The National Association of Homebuilders releases their Index for March and I expect that we will see some of the recent gains start to evaporate. Look for the index to drop from 46 to 44 as sales slow. This is mainly due to the lack of “in-stock” inventory. Builders are not inclined to build much speculative product but buyers want to be able to move quickly.
Data on Housing Starts and Building Permits should give us a better idea as to how builders are feeling in the longer term. I expect to see starts rise modestly from 890,000 to 900,000, while permits are likely to rise from 904,000 to 915,000 (SAAR).
Initial Unemployment Claims should rise slightly to 345,000.
I expect to see Existing Home Sales come in a little higher in February as they take some market share from builders. Look for around 5M sales (SAAR) from 4.92M seen in January.