It was a dull week in financial markets, as the S&P 500 showed a small 0.4% decrease, the U.S. 10-year Treasury bond remained just about flat with a 3% rate, and commodities, especially oil, continued to falter. Europe was a little stronger and emerging markets a little softer this week. Manufacturing data helped Europe while softer results hit China. Political issues in Turkey didn't help the emerging-markets indexes this week, either.
The economic data was a little thin, but both auto sales and pending home, two bulwarks of the recovery, were feebler than I had hoped. However, there were several pieces of good news this week, including still-strong purchasing managers' reports on manufacturing and, finally, a weekly shopping center reading of 3% growth, year over year. Case-Shiller Home Price Indexes showed 13.6% year-over-year growth, edging still higher, unlike some other home prices indexes that have begun to slip.
The auto data was particularly troubling as sales only managed to hit 15.4 million units, a sharp decrease from November's recovery high of 16.3 million units. Averaging the two monthly figures is probably a better representation of reality as Black Friday sales and a compressed holiday sales period this year hurt December sales. Still, it's really hard to untangle the auto story, with a dose of really bad weather complicating the analysis. I was already more than a little worried about the auto sector as inventories, especially of cars (truck data is harder to come by), have been building for some time. Incentives also appear to be on the increase, and consumers are beginning to smell blood.
Next week the employment report will draw a lot of attention. However, corporate earnings, led by Alcoa (AA), will take center stage beginning next week. Overall, FactSet is projecting S&P 500 quarterly earnings growth of just over 6%, which is at least somewhat better than the 3% or so rate of the last several quarters. Still, that is well below the 9.6% growth rate anticipated at the beginning of the quarter. Financials are expected to post the best results with the energy sector pulling up the rear. Looking to 2014, analyst estimates are pointing to about a 10.5% growth rate in S&P 500 earnings.
Bad Weather Takes Its Toll on Auto Sales
December auto sales fell to a seasonally adjusted 15.4 million rate compared with 16.3 million in November and estimates of 16.0 million. Some slippage was expected because of strong Black Friday sales inflating the November data and pulling sales ahead. Consequently, December did get off to a slow start, but activity appeared to be picking up in the second half of the month, especially with some increases in incentives late in the month. However, a strong and widespread storm affected sales in the critical last few days of the month. It's not clear if all those lost sales will be made up in January as advertising and incentives will not be as high as they were in the last few days of December. Some of the easy tax benefits will now be gone in January as well.
Both General Motors (GM) and Toyota both showed outright declines between December 2012 and December 2013. Ford (F) and Chrysler managed gains, which nevertheless fell below expectations. Many company conference calls alluded to increased incentives (always by competitors), which doesn't bode well for sales in the months ahead.
For the full year, auto sales were about 15.6 million units (which was still an 8% increase from 2012. Although healthy, that is slower than 2012's 13% growth rate. Things could slow further in 2014 when sales are expected to grow to around 16.2 million units, or about 4%. This slowing growth rate is why I am less bullish than most observers about overall GDP growth rates in 2014.
Don't Panic About the Auto Numbers--Although Troubling Signs Remain
The auto industry has been the backbone of this recovery and one of the best indicators of consumer confidence. The December auto numbers were a disappointment, any way you cut them. There are a lot of semi-legitimate excuses for the weakness, including bad weather, a compressed holiday season, and November incentives that pulled business ahead. Nevertheless, a lot of this was known going into the month (and the worst of the storm was on the very last day of the month). I'm hoping the auto industry wasn't planning on closing so much business on the last day of the month, or the industry is in worse shape than it is letting on. Furthermore, to get even the sales it did, incentives were higher in December than they were the previous month.
Pending Home Sales: A Bottom at Last?
The pending home sales index had a huge runup in the middle of the year as buyers raced frantically to beat higher mortgage rates, temporarily distorting the market. The raw index moved from 95 in January 2012 all the way up to 111 in June 2013. The index then declined for five straight months, bottoming at 101.5 in October. The November data showed a not-statistically-significant increase to 101.7. (At least it didn't fall again.) Unfortunately, the three-month averaged year-over-year data is still in decline, and a snowy December won't help the last month of the year.
The weak pending home sales data will continue to keep a lid on existing-home sales. Pending home sales generally end up as closed sales within 60 days. The gap between existing-home sales and pending sales growth indicates that existing-home sales still have at least a little more potential to fall in the months ahead.
Based on the pending home sale data, the National Association of Realtors is projecting that existing-home sales will not grow at all in 2014 and remain stalled out at the 5.1 million mark, the same as projected for 2013. That's not good news for those expecting a big bounce from housing in 2014.
I do caution that housing starts and new home sales have a bigger effect on the economy, and those should do better in 2014 than in 2013. Existing-home sales primarily aid the economy via brokerage commissions on homes sold, furniture, remodeling, and moving expenses. Therefore, the slow existing-home sales reports will still provide a significant headwind for 2014, unless the Realtors and the pending sales reports are painting the wrong picture.
The Realtors are also projecting much slower price appreciation with median home prices projected to gain 5.0%-5.5% in 2014 versus a more impressive 12% in 2013. Other data also suggest that home price growth is slowing, but that may not be a bad thing given the recent slippage in affordability.
The Housing Affordability Index has fallen significantly, as shown below:
The good news is that at least the index is no longer going down, as mortgage rates have flattened out and home price increases have slowed. October's reading was just above the September data. A new report on affordability is due out next week.
Case-Shiller Housing Data More Than Holds Its Own
The Case-Shiller 20-City Price Index increased 13.7% year over year and 1.0% month to month in October. That is the biggest annual gain since 2006 and the 17th month in a row of year-over-year improvement. Those numbers are stronger than the CoreLogic (CLGX) and FHFA data released earlier in the month. Even the averaged data still looked relatively strong and even showed some modest improvement.
The averaged data is not accelerating nearly as fast as it was earlier in the year, but does look better than the late spring and early summer numbers, which showed no acceleration at all and growth was stalled at 12%.
The various price reports are showing some modest divergence, with a clear slowing in the FHFA data, a mixed bag for the CoreLogic data, and renewed improvement in the Case-Shiller data. Putting the pieces together, I still believe that home prices continue to rise, but those rates are looking a little toppy right now.
There were a few other interesting data points in the Case-Shiller report. First, some of the really hot markets (San Francisco, San Diego, and Las Vegas) are slowing, while markets in the center of the country are beginning to heat up. The Chicago price index was up 10.9%, its best increase since 1988. Charlotte and Dallas were up 8.8% and 9.7%, their best performances in more than a decade.
According to the report, prices are now up a pretty amazing 23.7% since the low reached in early 2012. Predictably, some of the markets with the biggest outsize price gains are the markets now showing slower unit sales growth (or even outright declines in Western markets, according to the pending homes sales report).
Purchasing Manager Data Points to Continued U.S. Manufacturing Improvement
Purchasing manager data has been improving sharply since midyear, and production data has started improving, though certainly not booming, in recent months.
The November purchasing manager data remained high, although off slightly from November's exceptionally bullish levels. The last time the PMI was over 57 prior to the last two months was 2010. At that time, manufacturing-based industrial production was growing about 7% on a year-over-year, three-month moving average basis compared with just over 3% recently.
The PMI has not been very predictive lately, although more recent data at least partially redeems the broken indicator. My fear has always been that the PMI is a better indicator of the auto industry than much of anything else. The auto supply chain is so long and touches so many industries that it gets a lot more weight than its small size would seem to indicate. And the auto industry has been on a tear recently, with production ramping up even faster than sales. That may already be coming to an end with lackluster December sales and already announced production cutbacks. However, I still think a slowing in auto production will merely keep a lid on manufacturing growth rates and not decimate the manufacturing sector.
The December composite PMI data slipped from 57.3 in November to 57.0. The new orders and employment subcomponents, which are both somewhat forward looking, were up, actual production indexes were down a tiny amount, and inventories were down big (which depresses the PMI as it looks at businesses cutting inventories as a sign of caution). Although not counted in the overall composite, both exports and backlogs were down sharply but still just above the 50 market that generally separates growth from contraction. The anecdotal comments were more bullish than I have seen in some time.
The manufacturing strength appeared to be relatively broad-based, with 13 of 18 industry groups registering growth. The strongest sector was furniture. Four sectors declined, including nonmetallic minerals, chemicals, electrical equipment, and appliances. ISM's correlations suggest that the last year of PMI data could mean GDP growth of 3.7%, which seems more than a little optimistic to me. The stand-alone December number is even more bullish.
U.S. Still Leads the World Manufacturing Pack
Markit data from around the world suggests that the U.S. continues to outperform the rest of the world in terms of purchasing manager data, as it has for many months. The sharply improved auto industry, shale oil/gas opportunities, Boeing's (BA) ramp-up, a better and larger housing industry, and even some re-shoring has turned the U.S. into a star performer.
Still, Europe has really shown some nice improvement, moving from below 50 as recently as June, to now be solidly in the growth camp. On the other hand, China continues to stumble along at mediocre levels as it has for most of the year. Those counting for a big boom in China to pull faltering commodity prices up will have to wait at least a few more months.
Employment and Trade Are Key Releases Next Week
Expectations for next week's employment report are very tempered, with expectations for private-sector job growth of 190,000, just under the average of the last year. It is also below the 224,000 level of a year ago.
I suspect relatively soft holiday sales may have minimized any emergency retail hiring in December, which could explain some of the low expectations. The auto industry may have been a little softer in December as well. Initial unemployment claims were little changed between mid-November and December, which normally points to little change in employment additions. The week following the December measurement period did see a large spike in claims, which hopefully won't show up in the December employment report. Colder weather won't help construction or other outdoor activities, either. Therefore, I am not particularly hopeful that the employment data will exceed the consensus estimate, with the odds of a slightly worse number increasing.
Trade Deficit Expected to Remain Flat
Trade has been modestly less of a detractor from GDP growth than it usually is at this stage of a recovery, as oil-related exports have kept the trade deficit in check. The data for November will be released next week and is expected to be unchanged from October at about $40 billion. That should keep the trade deficit from doing any damage to the fourth-quarter GDP forecast. Hopefully, the consensus is correct, and there wasn't a last-minute surge in holiday-related shipments.
- Automotive Industry