Existing Home Sales for March rose to 6.89M versus estimates of 6.79M and an upwardly revised 6.82M in February. US sales of previously owned homes unexpectedly rose in March to the third-fastest pace ever as low interest rates and job gains encouraged buyers, Bloomberg said. The average 30-year mortgage rate is now 5.78%, down from 6.04% at the end of March and substantially below the two-decade average of 8%. The median price of an existing home rose 3.2% to $195,000, Bloomberg reported. "With wages rising, overall compensation rising, the job situation quite steady and maybe improving, the demand for housing is going to stay there," said Roger Kubarych, a senior adviser at HVB America and a former economist at the Fed. The supply of homes available for sale, another gauge of housing demand, fell to 4 months' worth in March from 4.1 months' worth the previous month.
Consumer Confidence for April fell to 97.7 versus estimates of 98.0 and an upwardly revised 103.0 in March. Consumers were discouraged after gas rose to $2.32/gallon during the month. A slowdown in hiring and falling stock prices probably curbed optimism and spending as well, Bloomberg said. The present situation component of the index dropped to 113.6, the second straight decline, from 117. However, this component "remains at levels indicative of a healthy economy," said Lynn Franco, director of the Conference Board's Consumer Research Center. Moreover, consumers planning to buy a home in the next six months rose to 3.9% from 3.8%. That figure averaged 3.7% in 2004, when home sales were a record. Finally, consumers planning to buy a major-appliance rose to 31.5% from 30.8%, Bloomberg reported. "To be sure, the rise in energy prices seems to have taken a toll on consumer confidence and spending most recently," Fed Governor Kohn said. "But with financial conditions still accommodative, profits and cash flow still healthy, and incomes continuing to increase, most forecasters expect growth to remain solid."
New Home Sales for March rose 12.2% to 1431K, the highest level ever, versus estimates of 1190K and an upwardly revised 1275K in February. Sales so far this year have averaged a 1.295M rate, compared with last year's record 1.2M, Bloomberg reported. Mortgage rates within a percentage point of a four-decade low and job and income gains are encouraging buyers, helping power the economy, Bloomberg said. "Of course we all expect it to slow from the record of 2004, but to call it the end of the housing boom would be wrong," said Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi. American home ownership and net worth are near all-time record levels, Bloomberg reported. Finally, the supply of new homes available for sale fell to 3.6 months' worth in March, the lowest level since August 2003, from 4.3 months' worth the previous month.
Durable Goods Orders for March fell 2.8% versus estimates of a .3% increase and a downwardly revised .2% decline in February. Durables Ex Transportation for March fell 1.0% versus estimates of a .5% increase and a .2% decline in February. "You are starting to see some evidence that the economy is losing momentum," said Steven Ricchiuto, chief US economist at ABN Amro. "We need to start taking some growth out of the second-quarter forecasts." Orders for transportation equipment fell 7.8%, spurred by a 23% decline in the volatile aircraft category, after falling .2% in February, Bloomberg reported. Ian Shepherdson, chief US economist at High Frequency Economics, said the report was probably skewed by the working days around Easter, which was in March rather than April. "These data are unreliable," said Shepherdson, the only economist who correctly forecast the decline. "Expect a hefty April rebound."
Advance 1Q GDP rose 3.1% versus estimates of 3.5% and a 3.8% increase in 4Q. Advance 1Q Personal Consumption rose 3.5% versus estimates of a 3.2% increase and a 2.3% gain in 4Q. Advance 1Q GDP Price Deflator rose 3.2% versus estimates of a 2.1% increase and a 2.3% gain in 4Q. The higher fuel costs that stung consumers may have made companies less inclined to invest as much in new equipment as orders slowed, economists said. The US trade deficit subtracted 1.49 percentage points from first-quarter growth, the most since the fourth quarter of 2002, Bloomberg said. The surge in oil prices led to a jump in the value of imports. Even though GDP growth failed to meet estimates, it is just below the 3.3% average of the expansion from 1991-2001, Bloomberg reported.
Initial Jobless Claims rose to 320K versus estimates of 320K and 299K the prior week. Continuing Claims fell to 2555K versus estimates of 2644K and 2631K prior. The Help Wanted Index for March fell to 39 versus estimates of 41 and a reading of 41 in February. The figures point to a "stable job market," said David Sloan, senior economist at 4Cast. Claims so far this year are averaging 325,529, compared with 353,300 at this point last year, the best year for hiring since the height of the bubble in 1999, Bloomberg said. The insured unemployment rate, which tends to track movements in the US employment rate, dropped to a four-year-low of 2%, after lingering at 2.1% since mid-January, Bloomberg reported.
Personal Income for March rose .5% versus estimates of a .4% gain and an upwardly revised .7% increase in February. Personal Spending for March rose .6% versus estimates of a .4% gain and a .4% increase in February. The PCE Deflator for March(YoY) rose 2.4% versus estimates of a 2.5% increase and a 2.2% gain in February. PCE Core for March(YoY) rose 1.7% versus estimates of a 1.7% increase and a 1.6% gain in February. "Solid income growth is keeping consumer spending steady," said Bruce Kasman, head of economic research at JP Morgan. Disposable incomes, when adjusted for inflation, were up 3.3% last month from March 2004. "Growth in real disposable income will be one of the key factors keeping consumer spending from retrenching more sharply," said Joseph Abate, a senior economist at Lehman Brothers. The PCE core, the Fed's favorite inflation gauge, is within the stated optimal range of 1.5-1.75%, Bloomberg said.
Employment Cost Index for 1Q rose .7% versus estimates of a 1.0% gain and a .7% increase in 4Q. US labor expenses unexpectedly increased at a slower pace in the first quarter, reflecting the smallest rise in benefit costs in three years, Bloomberg reported. "There's no clear evidence of rising wage inflation at this point," said Dean Maki, chief economist at Barclays Capital.
Final Univ. of Mich. Consumer Confidence for April fell to 87.7 versus estimates of 88.8 and a prior estimate of 88.7. Waning sentiment threatens to erode consumer spending, which accounts for more than two-thirds of the US economy. So far, the effects have been limited as evidenced by the strong personal spending report, Bloomberg said.
Chicago Purchasing Manager for April fell to 65.6 versus estimates of 62.5 and a reading of 69.2 in March, which was the highest reading in 16 years. "Despite the slowdown, manufacturing activity in the Chicago region is still expanding robustly," said Steven Wood, chief economist at Insight Economics. The index of prices paid by companies for materials and supplies fell to 66.1 from 68.2 the prior month, Bloomberg reported.
BOTTOM LINE: Overall, last week's economic data were mixed. Home sales are still booming and should remain healthy throughout the year. The recent decline in mortgage rates should offset some of the negative effects from unseasonably mild/wet weather in April. A home is the largest purchase most consumers make in their lives. The recent downturn in consumer sentiment is likely not as bad as perceived considering record home sales. Negative political rhetoric, declining stocks and high gas prices have been weighing on confidence. However, I expect rising stock prices, lower energy prices, a modestly improving labor market and low interest rates to boost the psyche of the consumer in the second half of the year. The sharp decline in Durable Goods Orders was likely a result of mostly temporary factors. GDP growth is slowing from high levels to more sustainable less inflationary rates. As I have stated before, GDP growth may temporarily slow to around 2% before bouncing back to over 3% in the second half of the year. The labor market continues to improve modestly. The pace of improvement will allow unemployment to gradually decline without spurring a substantial increase in unit labor costs, which are the main component of inflation. As well, the smallest increase in labor benefit costs in three years is a positive. The decline in the index of prices paid by the Chicago Purchasing Managers is remarkable considering the steep rise in commodity prices in the first quarter. Inflation remains only at average rates and will decelerate in the second half of the year. I continue to believe the fact that oil inventories are 6% above historical averages is likely a result of companies expecting even higher prices in the future, which has temporarily resulted in an artificial boost in demand. As perceptions change regarding the future direction of oil prices, this demand will evaporate and likely cause an even greater decline in the price of crude than would otherwise be the case. This appears to be happening sooner than I had anticipated. I expect crude prices will decline to $35/bbl. at some point in the second half of the year. Finally, the ECRI Weekly Leading Index fell .30% to 134.80 and is still forecasting healthy levels of economic activity.
