Author: Chad Symens

April 30, 2014

The U.S. Bureau of Economic Analysis today reported 0.1 percent annualized growth in real Gross Domestic Product for the first quarter of 2014.

Economic growth in the first quarter was disappointing, beyond the anticipated slowdown related to the brutal winter weather conditions affecting major parts of the nation.  Based on these preliminary estimates, inclement weather had an even more negative impact than analysts had calculated.  Despite positive growth effects from continued consumer spending, these were offset by a strong decline in investments in residential and non-residential structures, and a sharp decline in exports.  However, there is little reason to expect a continued sub-par performance.  The strength in consumer spending in the first quarter is expected to continue into the second quarter.  In going forward, we receive similar positive signals from The Conference Board Leading Economic Index.  If the economy can deliver as much as 3 percent growth in the second quarter, and open more than 200,000 new jobs per month, it will help set the stage for a strong third-quarter performance.  In short, after a very disappointing first quarter, the economy, freed from headwinds such as a weak housing market or budget squabbles, and buoyed by catch up, low inflation and low interest rates, could finally realize its potential underlying dynamism.  That’s a more positive outlook than any time during the past five-year-post-recession period since 2009.

Source: The Conference Board

April 29, 2014

The Conference Board Consumer Confidence Index, which had increased in March, declined slightly in April.  The Index now stands at 82.3, down from 83.9 in March.  The Present Situation Index decreased to 78.3 from 82.5, while the Expectations Index was virtually unchanged at 84.9 versus 84.8 in March.

“Consumer confidence declined slightly in April, as consumers assessed current business and labor market conditions less favorably than in March,” said Lynn Franco, Director of Economic Indicators at The Conference Board.  “However, their expectations regarding the short-term outlook for the economy and labor market held steady.  Thus, while sentiment regarding current conditions may have slipped a bit, consumers do not foresee the economy, or the labor market, losing the momentum that has been building up over the past several months.”

Consumers’ appraisal of current conditions pulled back moderately in April.  Those claiming business conditions are “good” edged down to 21.8 percent from 22.6 percent, while those claiming business conditions are “bad” rose to 24.4 percent from 23.5 percent.  Consumers’ assessment of the labor market was also slightly more negative.  Those stating jobs are “plentiful” declined to 12.9 percent from 13.8 percent, while those saying jobs are “hard to get” increased to 32.5 percent from 31.4 percent.

Consumers’ expectations held steady in April.  The percentage of consumers expecting business conditions to improve over the next six months was unchanged at 17.4 percent, while those anticipating business conditions to worsen increased marginally to 10.3 percent from 10.1 percent.  Consumers were slightly more optimistic about the outlook for the labor market.  Those expecting more jobs in the months ahead increased to 15.0 from 14.1 percent, while those expecting fewer jobs edged up to 17.9 percent from 17.5 percent.  The proportion of consumers anticipating their incomes to grow increased to 17.1 percent from 15.3 percent, but those expecting a drop in their incomes also increased, to 12.9 percent from 11.5 percent.

Source: The Conference Board

April 25, 2014

Probably.  Starting in 2007, U.S. consumers began to build up savings, and pay off more old debt than the amount of new credit card, mortgage, or other household debt they incurred.  Of course, this had the impact of delaying the replacement of old vehicles or household appliances and furniture.  The bottom line, then, was a prolonged period of very slow growth in consumer spending.

Almost seven years later, household balance sheets are in much better shape.  Not so the stock of household goods.  If consumers are now more confident they will be able to pay off debt, sales of furniture and appliances could accelerate as early as this spring.  And this boost in consumer spending might even be enough to send overall GDP above 3 percent (annualized) and send job growth above 200,000 per month.

Is deleveraging over?  The ratio of household debt to income peaked at 129 percent in 2007.  By the fourth quarter of 2013, it was down to 104 percent – more the result of lower mortgage debt than any other factor.  Statisticians at the Federal Reserve in New York tried to calculate an equilibrium ratio of debt to income (based on factors like the ratio of mortgage debt outstanding to home price, mortgage rates, other collateral, income and income expectations, and so on).

Not only was the debt-to-income ratio down by the end of last year, but the actual ratio was closer to the calculated ratio configured by these Federal Reserve statistics.  In other words, excessive household debt was lower, reaching a more manageable level (given the current state of borrowing costs, mortgage and otherwise).  Therefore, if job growth maintains its current pace, and interest rates do not rise much, there could be a spurt in shopping this spring.

Does that mean saving rates will go down?  If job and wage growth accelerate, consumer spending might go through a spurt without any drop in the saving rate.  Like all economic forecasts, there are a lot of ifs, but the outlook looks more favorable than it has since the end of the Great Recession.

Source: The Conference Board

April 25, 2014

Last week: The Conference Board Leading Economic Index pointed to some faster growth in the U.S. economy this spring and summer.  Two important ingredients, beyond recovery from a bad winter, are improving sentiment and a pickup in demand, signaled by improving orders.  This past week, data on orders for durable goods suggested the ordering rate is gaining traction.  This coming week will provide a fresh read on the state of consumer sentiment.  One big question: Do consumers perceive the same economic gravity shown in the ordering and indicator data?

The Conference Board Consumer Confidence Index

The economic data point to an improving economic environment.  Are consumers buying it?  Confidence did gain a little in February and again in March.  Did this continue in April?

Gross Domestic Product – 1Q 2014 (Bureau of Economic Analysis)

This first read on the economy in the first quarter will show the impact of sharp and widespread inclement weather – reducing job growth and limiting consumer shopping.  If the rise in GDP comes in close to 1.5 percent (annualized), that number will be well below the underlying rate of growth in the economy, and set the stage for a second quarter report that will overstate it, as shopping and home building catch up.

Personal Income and Outlays, March (Bureau of Economic Analysis)

Income growth has generally been in a range of about 0.2 to 0.3 percent.  Spending was slower in February, due to sustained bad weather.  There is a chance that spending in March rose faster, as shoppers were able to get to the stores.  April, in turn, will show even more of that.  The bigger issue is whether job growth and a rise in wages will be enough to move income growth above the 0.2 to 0.3 range.

Employment Situation, April (Bureau of Labor Statistics)

The economy opened up a little more than 180,000 new jobs in March.  The figure for April could be just over 200,000, reflecting an economy that is gaining strength and catching up from this past winter.  That much job growth is likely to feed household sentiment and boost shopping.  The big question is whether all this will be enough to generate more capital investment in equipment.  In other words, business clearly is investing in more workers, but do they have enough equipment for the staff to get the job done?  Money for investment is not the issue.  Indeed, neither is sentiment as surveys of attitudes of business executives through the first quarter reflect an uptick in optimism.

An uptick in consumer spending and business investment is a recipe for continued job growth of more than 200,000 per month for at least the next few months.  In other words, the economic cycle could start spinning a little faster, just as The Conference Board Leading Economic Index has been signaling.  Look for more construction jobs, service sector jobs, perhaps even some manufacturing jobs.

Regionally, hiring has been the weakest in the service-dominated big population centers in the Northeast and Midwest.  If the labor market is turning more robust, it is likely that service-sector employment in those states is about to pick up.

April 25, 2014

Weather Trends International expects May to trend the coldest in three years and drier than last year.  On the West Coast, it will be cooler than last year, but still above normal, while the South trends warmer than last year and normal.  There is a good chance that a large portion of the North will trend cooler than last year and normal.  There will be a band of severe weather potential extending from the lower Mississippi Valley northeast to eastern Ohio which will set the stage for increased demand for clean-up categories.  The nation’s mid-section should see a warmer start to the month, while much colder year-on-year trends consume the Pacific Northwest and New England.  Favorable weather in the run-up to Mother’s Day weekend will be a positive for apparel and gift categories.  Cooler trends after Mother’s Day will be a challenge for many retailers to maintain sales momentum.  Memorial Day is setting up to be much stronger across the Northeast and Northwest as conditions trend much warmer and drier than last year, which should benefit products like charcoal, sun care, beverages and outdoor leisure items.

Source: Retailing Today, Weather Trends International

April 24, 2014

Against the backdrop of unusually severe winter weather, the Remodeling Market Index (RMI) declined to 53 in the first quarter of 2014, according to the National Association of Home Builders (NAHB).  This reading is down from the historically high level of 57 in the two most recent quarters, but remains above the key break-even point of 50.

An RMI above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower.  The overall RMI averages ratings of current remodeling activity with indicators of future remodeling activity.

“Remodelers remain confident in the continued growth of the home improvement market,” said NAHB Remodelers Chair Paul Sullivan, CAPS, CGR, CGP, of Waterville Valley, New Hampshire.  “As we head into spring, the gradual rise in home equity levels will continue to help clients better afford to remodel their homes.”

Smaller renovation jobs continue to show strength.  The home maintenance and repair component of the RMI increased two points to 59 in the first quarter, a historically high reading.  Overall, the current market conditions of the RMI declined three points to 53 this quarter.

While the RMI’s future market conditions index fell from 58 in the previous quarter to 52, all of the four major components of the RMI’s future market conditions index remained at or above 50 in the first quarter of 2014.  Calls for bids was 52, the amount of work committed for the next three months was 50, the backlog of remodeling jobs was 55 and appointments for proposals was 52.

“An uncommonly harsh winter and continued labor shortage created a drag on many parts of the housing market, including remodeling, in the first months of 2014,” said NAHB Chief Economist David Crowe.  “The two components of the RMI that declined the most in the first quarter, calls for bids and appointments for proposals, are the ones most likely to respond to weather conditions.  Going forward, we expect gradual, but steady growth in the market for remodeling as there is still some pent-up demand from the housing downturn waiting to be released.”

Source: National Association of Home Builders 

April 24, 2014

A growing economy, pent-up demand, competitive mortgage rates and affordable home prices will keep housing on an upward trajectory through 2015.  However, several obstacles including tight consumer credit, shortages of lots and labor and rising materials prices are hindering a more robust recovery, according to economists who participated in yesterday’s National Association of Home Builders (NAHB) 2014 Spring Construction Forecast Webinar.

“Housing needs an improved economy,” said NAHB Chief Economist David Crowe, adding that the economy is expected to respond as payroll employment continues to grow and the unemployment rate slowly recedes from 6.7 percent in the first quarter of this year to 6.2 percent by the fourth quarter of 2015.

Consumer confidence is back to pre-recession levels and the purchase of motor vehicles and home furnishings are on the rise, indicating that consumers are increasingly willing to buy big ticket items such as houses.

Reflecting an increase in credit demand and economic growth, mortgage interest rates are projected to rise to 5 percent by the end of 2014 and 6 percent by the end of next year.  Noting that these rates are still low by historical standards, Crowe said this would “not be a significant deterrent to expansion in the housing market.”

With new home sales averaging just 8.8 percent of total home sales, barely half the historical average of 16.1 percent, Crowe observed that “this is another reason to believe that the new home market will have to make up existing ground.”

However, he cautioned that builders continue to face a number of headwinds.

“Supply constraints related to lots and labor and rising lumber, gypsum and OSB (oriented strand board) prices are hurting the ability of builders to meet demand,” he said.  “Moreover, creditworthy borrowers, particularly younger families and first-time home buyers, are having difficulties in getting home loans.”

Remodeling, Sales and Starts on the Rise

The NAHB Remodeling Index, which averages ratings of current remodeling activity with indicators of future activity, stands at 53 in the first quarter of 2014 and has been above 50 for six of the past seven quarters.  A reading above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower.

NAHB is forecasting that residential remodeling will post a 3.8 percent increase in 2014 over last year and rise an additional 2.4 percent in 2015.

New home sales are expected to climb 29 percent from 431,000 in 2013 to 557,000 this year.

Single-family housing production is projected to increase 22 percent from 621,000 last year to 760,000 in 2014 and surge an additional 55 percent to 1.18 million units in 2015.

On the multifamily side, production is expected to rise 8 percent from 308,000 in 2013 to 331,000 this year, reaching what is considered a normal level of production.

Banks Awash in Cash

Agreeing that the economy is on an upward trajectory, Maury Harris, managing director and chief U.S. economist at UBS, said that financial lending institutions are sitting on a mountain of cash.

“Banks have over $2 trillion of excess reserves.  That’s with a ‘t’,” he said.  “Banks would like to put that money to work and increase lending, which will help the economy.”

In the aftermath of the Great Recession, Harris said that normal household formations have fallen short by about 2.5 million as graduating college students were forced to move back in with their parents and young adults were doubling up in apartments.

“As unemployment comes down and credit availability eases, Millennials (the 25-34 age group) will feel better about their economic circumstances,” said Harris.  “I think we will see the shared household rate come down, less doubling up and a pickup in household formations.”

Harris is forecasting 1.15 million housing starts this year (700,000 single-family and 450,000 multifamily) and 1.35 million next year (900,000 single-family and 450,000 multifamily).

A Gradual Climb to Normal

Looking at the state statistics behind the national numbers, Robert Denk, NAHB’s assistant vice president for forecasting and analysis, cited a range of differences among the states in the amount of distress suffered during the recession and the progress that is being made in recovering.

Housing production nationwide bottomed out at an average of 27 percent in early 2009 and reached 45 percent in the first quarter of 2014.

In the worst hit states, housing fell to 10 to 15 percent of normal production while production only fell by half in other states with a better underlying economy.

“The hardest hit states were the bubble states – Arizona, Florida, California and Nevada – along with the industrial Midwest, which struggles with challenges in the auto industry and a declining manufacturing sector,” said Denk.

“Where individual states stand now has a lot to do with how far they fell when the Great Recession hit”, Denk added.

Fueled by a booming energy sector that is producing solid job and economic growth, Texas, Louisiana, Oklahoma, Wyoming, North Dakota and Montana are at the forefront of the housing recovery, with North Dakota now the first state to surpass its normal level of housing production.

“On a national basis, single-family housing starts are projected to get back to 70 percent of normal production by the end of this year and 93 percent of normal by the end of 2015,” Denk said.

In another way of looking at the long road back to normal, by the end of 2015 the top 40 percent of states will be back to normal production levels, compared to the bottom 20 percent, which will still be below 80 percent.

Source: National Association of Home Builders

April 25, 2014

The Bureau of Economic Analysis released today – for the first time – gross domestic product (GDP) by industry for 22 industry sectors on a quarterly basis.  These new statistics fill an important gap in U.S. federal economic statistics by providing timely information on how individual industries contributed to U.S. economic growth in a given quarter.  These new data also provide businesses with a comprehensive and consistent tool for assessing how their industries are faring compared to other industries.  Policymakers, businesses, and academia will be able to use the statistics to quickly identify economic turning points, improving their ability to understand a given sector’s performance.

Quarterly GDP by industry statistics supplement other quarterly and monthly indicators of industries’ performance – such as employment, sales and shipments, profits, and prices – by providing a comprehensive and consistent picture of industries’ overall performance, allowing for a more complete analysis of business cycle dynamics and the sources of U.S. economic growth.  These new statistics, which also include measures of gross output and of intermediate inputs by industry, are prepared within an integrated framework and are consistent with GDP and the final expenditure components published in BEA’s national income and product accounts.  Quarterly GDP by industry statistics will be made available approximately 30 days after the release of the third estimate of GDP.

“Gross Domestic Product (GDP) is one of the U.S. government’s most valuable data resources,” said U.S. Secretary of Commerce Penny Pritzker.  “American businesses will now have access on a quarterly basis to more comprehensive statistics about the impact of different industries on our economy.  Enabling industries in all sectors to better measure their contributions to GDP and helping businesses understand and identify emerging trends more quickly make this new data an important tool for policy-makers at the local, state and national level.  At the Department of Commerce, one of the top priorities of our ‘Open for Business Agenda’ is to provide data to help businesses and governments make the critical decisions that supr economic growth and job creation.”

Fourth Quarter 2013 GDP by Industry

Real GDP increased 2.6 percent in the fourth quarter of 2013, with both the private goods-and-services-producing sectors contributing to the increase.  Overall, 15 out of 22 industry groups contributed to economic growth.  The leading contributors to the increase were nondurable-goods manufacturing; professional, scientific and technical services; and wholesale trade.

• Nondurable-goods manufacturing real value added – a measure of an industry’s contribution to GDP – increased almost 19 percent in the fourth quarter after increasing 2.9 percent in the third quarter.
• Professional, scientific, and technical services increased 5.9 percent after increasing 8.3 percent in the third quarter.
• Wholesale trade increased 6.9 percent after increasing 7.3 percent in the third quarter.

Growth in real GDP in the fourth quarter decelerated from 4.1 percent in the third to 2.6 percent in the fourth.  The deceleration reflected a slowdown in the private services-producing sector and a larger decrease in the government sector that was partly offset by a pickup in growth in the goods-producing sector.  Overall, 17 out of 22 industry groups contributed to the slowdown in real GDP growth; the leading contributors to the slowdown were real estate, rental, and leasing; construction; and retail trade.

2013 GDP by Industry

Real GDP increased 1.9 percent in 2013 (that is, from the 2012 annual level to the 2013 annual level).  Growth was widespread, with 19 of 22 industry groups contributing to the increase.  Nondurable-goods manufacturing; real estate and rental and leasing; agriculture, forestry, fishing, and hunting; and health care and social assistance were the leading contributors to the economic growth.

• Manufacruring real value rose 3.1 percent in 2013, after increasing 1.9 percent in 2012.  Nondurable-goods manufacturing, the largest contributor to overall growth in the economy turned up, increasing 5.3 percent in 2013 after decreasing two consecutive years.
• The real estate and rental and leasing group increased 1.6 percent, marking the fourth consecutive increase for both real value added and real gross output.
• Agriculture, forestry, fishing, and hunting surged in 2013, increasing 16.4 percent after increasing 0.3 percent.  The strong growth in 2013 reflects a weak 2012 that was affected by a severe Midwest drought.

Real GDP growth decelerated 0.9 percentage point in 2013, increasing 1.9 percent after increasing 2.8 percent.  Mining, durable-goods manufacturing, and professional, scientific, and technical services were the leading contriubtors to the deceleration.

During 2013 (that is, measured from the fourth quarter of 2012 to the fourth quarter of 2013), real GDP increased 2.6 percent, after increasing 2.0 percent during 2012.  Changes from fourth quarter to fourth quarter provide a picture of momentum in the economy during the year.  Real value added for the private goods-producing sector increased 6.3 percent, compared with an increase of 0.6 percent during 2012.  The private services-producing sector increased 2.4 percent during both 2012 and 2013.  The government sector decreased 1.5 percent during 2013, compared with a decrease of 0.2 percent during 2012.

Source: Bureau of Economic Analysis

Gross output will correct the fallacy fostered by GDP that consumer spending drives the economy.

April 22, 2014

Starting April 25, the Bureau of Economic Analysis will release a new way to measure the economy each quarter.  It’s called gross output, and it’s the first significant macroeconomic tool to come into regular use since gross domestic product was developed in the 1940s.

Steven Landefeld, director of the BEA, says this new macroeconomic tool offers a “unique perspective” and a “powerful new set of tools of analysis.”  Gross output is an attempt to measure what the BEA calls the “make” economy – the total sales from the production of raw materials through intermediate producers to final wholesale and retail trade.  Valued at more than $30 trillion at the end of 2013, it’s almost twice the size of gross domestic product, and far more volatile.

In many ways, gross output is a supply-side statistic, a measure of the production side of the economy.  GDP, on the other hand, measures the “use” economy, the value of all “final” or finished goods and services used by consumers, business and government.  It reached $17 trillion last year.

The measure of the economy’s gross output has been around since the 1930s.  It was developed by the economist Wassily Leontieff, but he focused on individual industries, not the aggregate data as a measure of total economic activity.  Gross output has largely been ignored by the media and Wall Street because the government issued the number annually, and it was two or three years out of date.  That should change now that it will be released along with GDP every quarter.  Analysts and the media will be able to compare the two.

Why pay attention to gross output?  For starters, research published in 1990 shows it does a better job of measuring total economic  activity.  GDP is a useful measure of a country’s standard of living and economic growth.  But its focus on final output omits intermediate production and as a result creates much mischief in our understanding of how the economy works.

In particular, it has led to the misguided Keynesian notion that consumer and government spending drive the economy rather than saving, business investment, technology and entrepreneurship.  GDP data at the end of 2013 put consumer spending first in importance (68% of GDP), followed by government expenditures (18%), and business investment third (16%).  Net exports (-2%) makes up the difference.

Thus journalists and many economic analysts report that “consumer spending drives the economy.”  And they focus on retail spending or consumer confidence as the critical factors in driving the economy and stock market.  There is an underlying anti-saving mentality in this analysis, as evicenced by statements frequently made during debates on tax cuts or tax rebates, that if consumers save their tax refund instead of spending it, it will do no good for the economy.

Although consumer spending accounts for about 70% of GDP, if you use gross output as a broader measure of total sales or spending, it represents less than 40% of the economy.  The reality is that business outlays – adding capital investment and all business spending in intermediate stages of the supply chain – are substantially larger than consumer spending in the economy.  They make up more than 50% of economic activity.  The 2012 data are gross output $28,693 billion, and GDP $16,420 billion.

The critical importance of business activity is clear when you look at employment statistics and leading economic indicators.  Employees in the consumer side of the economy (retail outlets and leisure businesses) account for about 20% of the labor force, and another 15% work for various levels of government.  Yet the vast majority of employees, 65%, work in mining, manufacturing and the service industries.

Most of the leading economic indicators published by the Conference Board are linked to the earlier stages of production and business activity.  These include manufacturers’ new orders, non-defense capital goods, building permits, unemployment claims and the stock market.  Retail sales aren’t listed among the 10 leading indicators either in the U.S. or other major nations.  Even the highly touted “consumer confidence index” published by the Conference Board and highlighted by the media was changed in January 2012 to the “average consumer expectations for business conditions.”

Gross output also does a better job of gauging the ups and downs of the business cycle.  For example, in 2008-2009, nominal GDP declined only 2% while nominal gross output fell sharply by 8%, far more indicative of the depths of the recession.  Interestingly, since the 2009 trough, gross output has been rising faster than GDP, suggesting a more robust recovery.

Finally, as a broader measure of economic activity, gross output is more consistent with economic-growth theory.  Studies by Robert Solow at MIT and Robert Barro at Harvard have shown that economic growth comes largely from the supply side – increased technology, entrepreneurship, capital formation and productive savings and investment.  Higher consumption is the effect, not the cause, of prosperity.

Gross output complements GDP and can easily be incorporated in standard national-income accounting and macroeconomic analysis.  As Steve Landefeld, Dale Jorgenson and William Nordhaus conclude in their important work, “A New Architecture for the U.S. National Accounts” (2006), “Gross output is the natural measure of the production sector, while net output (GDP) is appropriate as a measure of welfare.  Both are required in a complete system of accounts.”

Gross output measures spending in both the “make”economy (intermediate production) and the “use” economy (final output).  It is a better, more comprehensive measure of the nation’s economic activity than GDP, and a better indication of the economy’s growth prospects.

Source: The Wall Street Journal 

April 24, 2014

Safeway posted sales of $8.3 billion in the first quarter of 2014, representing an increase of 1%.  The slight uptick in sales was primarily attributed to an identical-store sales (excluding fuel) increase of 1.8%, partly offset by lower fuel sales in 2014.

This increase of 1.8% consists of a 1% increase in price per item and a 0.8% increase in volume.  Safeway’s share of sales in all outlet channels increased slightly, and sales to its most loyal households improved during the quarter.

“We are working diligently to close the merger with Albertsons by the fourth quarter,” stated Robert Edwards, Safeway president & CEO.  “While sales met plan in the first quarter, income was slightly below plan, in part as a result of inflation in produce, meat and pharmacy that was not fully passed along for competitive reasons.  In the second quarter of 2014, identical-store sales are currently running well above 2%, and we expect to pass along most of the inflation we ar experiencing.  In addition, the direct and indirect cost initiatives we are implementing are expected to improve profitability in the second half of 2014.”

Safeway continues to drive sales momentum through its center of store remodels, as well as merchandising premium, Hispanic and Asian products to meet local demographic needs, Edwards reported.  “In addition, our sales of organic and natural products continue to grow at a rapid pace, with our private label brands O Organics and Open Nature growing approximately two times faster than the rest of the market.”

Source: Retailing Today