U.S stock markets were basically unchanged for the week, with a quick runup based on the Federal Reserve's promise to keep rates low through 2014 and a quick trip back down on Thursday and Friday on modestly disappointing economic news and mixed earnings reports.
Housing proved yet again that the industry isn't firing on all cylinders just yet. Every positive housing data point seems to be followed by one that is less than robust. I truly think that the housing market has bottomed out, but it is a two steps forward, one step back process--just like the overall economic recovery in 2009. This month, home pricing looked better, but both pending home sales and new home sales weren't as robust as I had hoped. No disaster, but the industry lost momentum instead of building on the previous month's strength.
Based on the government's new orders report, it looks like better days are in store for manufacturing, especially for autos and airliners. Inflation-adjusted GDP growth in the fourth quarter came in at 2.8%, a number that would have been considered shockingly good just a few months ago, but managed to disappoint investors that had hoped for even more. The fact that a good deal of the GDP improvement came from higher inventories didn't do wonders for investment sentiment, either. The report proved even more difficult to interpret than I had expected. I take some solace in that the all-important consumer sector did better than expected and actually accelerated between the third and fourth quarters.
Earnings Season a Mixed Bag
Instead of being uniformly good, earnings this time around have been a real mixed bag. Apple(AAPL) had a blowout quarter on the upside, while Ford(F) disappointed. While manufacturers generally reported strong results, most noted at least some slowing in China. Surprisingly, comments about Europe seemed to suggest fewer problems there. Financials were definitely mixed, depending on products and markets served. Housing reports were also mixed. After strong housing news last week, NVR(NVR) disappointed while DR Horton(DHI) appeared to do well. Overall, I suspect even as the U.S. economy continues to do well, corporate earnings could continue to slow due to exposure to Europe and China as well as corporations' inability to pass along any price increases.
Fed Promises to Keep Rates Low Through Late 2014
The big news of the week was the Federal Reserve's report that it intended to keep rates low all the way through late 2014. The boldness of the new extended time frame managed to shock the Street, which had expected a ho-hum, more-of-the-same type of report.
Personally, I don't agree with the policy, and I don't see how it helps, except by maybe helping speculators finance their commodity purchases. And the low rate policy is really beginning to pinch savers and hurt the personal income report in a meaningful way--not to mention the damage it may be doing to cash-strapped pension funds. Furthermore, the dramatic length of time certainly destroys any sense of urgency for either homebuyers or corporations considering large capital budget expenditures. Why buy today when rates are going to stay low forever, especially with all the European uncertainty? Well at least it made the Street happy for now.
GDP Sets the Right Trend, But There Are Lots of Moving Pieces
As I had speculated in this week's video, real GDP jumped 2.8% in the fourth quarter. However, the consensus was a 3.1% increase, so investors were disappointed in the overall result, especially with inventory investment being a major source of growth. However, the consumer did better than I had hoped and I would certainly rate the overall GDP report as a positive.
Certainly one of the more positive aspects of the GDP report was the overall trend, which remains up--at least for now. Supply-chain issues related to the Japanese tsunami, a spike in gasoline prices related to the Arab Spring movement, and horrid weather stalled growth in the first half, which reversed itself in the second half.
As much as I liked the report, the 2.8% growth does not represent a new baseline. One would be hard-pressed to find an economist, including me, who believes that the economy will grow much faster than 2% in the first half--and even that might be a stretch in the first quarter. Perfect weather, the return of more normal auto production, the rebuilding of some inventory, and a shift in retail employment all served to artificially boost fourth-quarter results.
Instead, I think the 1.6% growth from fourth-quarter 2010 to fourth-quarter 2011 might be more representative of the economy's current growth rate. I don't think it will take a big leap to get that rate up to 2.0%-2.5% in 2012.
Although the overall report was as I outlined in my video, there were a few surprises: Consumption accelerated in the fourth quarter, and that is the biggest category of the GDP report. The goods portion of the economy was particularly strong even as services stumbled yet again (warm weather and low utility bills didn't help).
Government was the real shocker, subtracting 0.9% from GDP. That is the second-worst performance of the recovery. Most of that decline was related to cuts in defense spending. Most of the other categories of government spending were also down but more in line with recent trends. Despite all of the screaming about government spending, it is now down in inflation-adjusted terms during this 10-quarter recovery.
Consumers and Inventories Lead Fourth-Quarter Growth
Yes, Inventory Building Was a Big Help After Two Quarters of Pain
Building inventories were an even bigger contributor to GDP than I had anticipated, and I suspect that this is what really bugged investors about the report (recall that GDP measures production, whether it is sold or sits on a shelf somewhere). However, these same observers weren't eager to add the large inventory shrinkage back to the GDP number in the second quarter. Inventories contributed 1.9% of the reported 2.8% GDP number. I surmise that the ups and downs of auto inventories are largely responsible for the unusual gyrations in the numbers. Also, it seems that every time there is a big runup in imports, higher inventory levels can't be far behind. It would seem like imports come in large clumps that sit as they are worked down over several months. This time, a rebooting of Japanese auto inventories might be responsible.
Housing News Mixed: Prices Up, Sales Down
The Federal Housing Finance Agency provided the only good news on the housing market this week. According the agency, prices increased 1.1% in November, breaking a string of declines. We shall see if the more comprehensive Case-Shiller House Price Index produces similar results next week.
Reports for both new home sales and pending sales of existing homes were modestly disappointing. There is nothing here to derail my expectations for meaningful improvement in 2012, but it's not a slam dunk, and it might be a second-half story. Eric Landry, our lead housing analyst, parsed this week's news as follows:
December new home sales were a disappointment, but we wouldn't be surprised to see a revision. Sales of new homes fell 7.3% from last year's levels to 307,000 seasonally adjusted annual units last month. The rate was roughly in line with the previous three months' levels in the very low-300,000 range. The regions with the most year-over-year movement were the Midwest, with a 37% increase, and the West, with a 29% decrease. The South was down slightly, while the Northeast was unchanged. The modestly disappointing result was in contrast to some of the comments from a couple of builders that indicated their communities enjoyed steady traffic in December when seasonality would have suggested the opposite. It's possible that these comments came from builders that were just better positioned than their competitors, and thus their encouraging traffic was at the expense of others and not indicative of a strengthening market overall. On the other hand, we wouldn't be surprised to see the census numbers revised in the coming months either. More positively, inventories continue to be very low in the new home space, with December’s level falling modestly to 157,000 units throughout the U.S., another record low. If and when new home sales pick up, these transactions won't be able to be satiated from existing inventory for long, as there isn't much of it around. As a result, we wouldn't be surprised that once a turnaround does appear, it does so with a more impressive volume increase than many expect.
December's pending home sales were not overly impressive, indicating January's existing home sales won't be overwhelming. The National Association of Realtors' monthly index stood at 96.6 in December, down 3.5% from November but up 5.6% from the year-ago period. The annual increase was the smallest gain since last April's decline, indicating decelerating momentum as the sector enters the crucial spring selling season. Much like new home sales, the Midwest was the strongest with a 13% annual gain while the Northeast was the weakest with a 1% decrease.
Lots of Smoke and Not Much Fire in Next Week's Numbers
Next week brings data on employment, home prices, consumer spending, and manufacturing. Unfortunately large holiday-related swings, warm weather, normal January slowing, and Thai-related flooding issues all will weigh on the numbers. The week starts with the personal income and expenditures report. Unlike recent reports, I think income is likely to grow faster than spending as employment accelerated in December just as spending appeared to soften a bit. The consensus is for a 0.3% increase in income after inflation. Meanwhile, consumption is expected to be flat. Spending had gotten a little ahead of income during most of the last year, so it would not surprise if spending slowed some. My thesis has been that while 2012 is likely to look a little better than 2011, the first few months could be a little rough. Consumer-related stuff could be quite weak, but some of that just might be offset by what is going on in manufacturing.
Manufacturing Likely to Power Ahead
I (and the rest of the world) suspect that the ISM Purchasing Managers' report will show an improvement in the manufacturing sector in January as the industry continued to come out of its mini-slump. The government's new orders report looked good, as inventories were just a bit higher (according to the ISM, higher inventories mean more confidence in the future). Most of the regional reports seemed to suggest improvement, which points to a higher PMI. Even the preliminary PMI reports for Europe looked more promising. The consensus is for an improvement from 53.9 to 54.7 for the U.S. Autos and airliners will count for a decent part of that improvement. Remember to watch Chicago's PMI reading on Tuesday for the best indications for the national reading on Wednesday.
Auto Forecast for January Is All Over the Map
Based on different sampling techniques, two usually reliable sources have widely divergent views of January auto sales. Edmunds believes sales slumped badly in January to 12.1 million units on a seasonally adjusted annual rate basis while TrueCar is holding a forecast for 13.6 million units, almost unchanged from December's results. Given the expiration of some tax credits and the end of some major incentives, it wouldn't shock me if Edmunds' lower number proved to be correct. The Wall Street consensus is 13.5 million units for January. More important than one month's worth of data is the fact that on this week's earnings call, Ford reaffirmed its full-year forecast of 13.5 million-14.5 million total units for 2012 (Ford missed its quarterly earnings forecast because of higher costs and a foreign-exchange issue, not U.S. weak demand).
Case-Shiller Housing Index Could Show a Smaller Decline
The Federal Financial Housing data showed an increase in home prices for November, and I suspect that next week's Case-Shiller numbers will be nearly as bullish.
Based on normal seasonality (weak prices in the winter) and the fact that Case-Shiller numbers are a three-month moving average, I suspect the Case-Shiller index will probably show a small dip, less than the 1.2% decline registered for October. On a seasonally adjusted basis (not the way most people look at the number, you can't sell a house at a seasonally adjusted price), I think the index just might creep into positive territory.
Employment Growth Could Look a Lot Slower in January
The employment numbers will be particularly hard to interpret as unusually heavy retail hiring (to support longer store hours) and large jump in the number of package delivery people boosted December results. So if the normal trend line is for 160,000 or so new jobs, I suspect that December's number of 200,000 was inflated by 40,000 or so, and that January should be the same 40,000 below trend, or about 120,000 jobs. That 120,000 number also happens to be the consensus estimate. Then, all things equal, February should look closer to the 160,000 trend-line number. Besides retail and couriers, my guess is finance also will look weaker, as will industries that depend on snow and cold weather, but manufacturing and construction will look a little better.
Job growth of 120,000 is still consistent with year-over-year employment growth of 1.77%, slightly ahead of December's 1.75% rate. In fact, job growth could come in well under 100,000 and still improve on December's rate. So don't let those headlines trumpeting, "Job Growth Almost Cut in Half," scare you.
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