The economic news flow last week was light but generally positive. As I warned last Monday, corporate earnings were not as strong as some had hoped; reports from tech giant Oracle (ORCL) and Micron Technology (MU) proved to be disappointing. But more importantly, the European debt situation remained unsettled and weighed on markets all week long. Moody's pending review of bank debt issued by Italian banks seemed to be the latest catalyst for decline.
On the positive side, strong durable goods orders seemed to suggest that the worst of the manufacturing slowdown may be over. Housing prices also appeared to perk up for the first time in almost a year according the Federal Housing Finance Administration. However, I am braced for this week's data, as personal income and spending data are likely to look weak and the prognosis for auto sales and the purchasing managers' report is not so wonderful, either. While I think a lot of these reports reflect Japanese supply chain disruptions coursing through the system, the market's potential reaction to bad news may be less forgiving.
Durable Goods Orders: Some Light at the End of the Tunnel
Durable goods orders rebounded from a large decline of 2.7% in April to an increase of 1.9% for May. April orders were also revised up from the originally reported decline of 3.6% to a more modest decline of 2.7%. Excluding the volatile airline and auto sectors, core orders still managed to improve by 0.6% compared to a decline of 0.4% in April (revised from negative 1.5%).
Durable goods orders are an important measure of business confidence, much as shopping centre spending and auto sales are for consumer confidence. The overall series has been exceptionally volatile lately with two of the last four months up in a big way while the other two registered a meaningful decline. Also, the measure of longer-term business confidence, orders for nondefense capital goods, jumped up a sharp 1.6% following a decline of 0.8% the prior month. The reason that both the overall report and the capital goods portion are so important is that these orders will have to be filled and shipped in the months ahead, providing fuel for economic growth later in the year. The shipment data for capital goods seemed consistent with the theme that business investment will continue to be an important factor in GDP growth for at least another quarter or two.
The durable goods orders report is the first piece of positive forward-looking news that we've had from the manufacturing sector over the past six to eight weeks (although the industrial production report two weeks ago wasn't all that bad). Major regional purchasing managers' reports have been anaemic for a couple of months; two actually showed a decline compared to the prior month's metrics (New York and Pennsylvania moved into negative territory). The national report showed one of the larger dips in history for May, and based on the regional reports, a quick trip below 50 is certainly a possibility for the June report due this week. Keep in mind that weather and interruptions at Japanese auto plants both in the US and Japan are likely to have distorted this metric beyond recognition in the short run. As these plants come back online, the numbers will begin to look unbelievably good as early as July.
Toyota Makes Big Strides in US Production for the Week Ending June 18
Of the big three Japanese manufacturers in America, Nissan (NSANY) is almost back to normal in the US Toyota (TM) continued to bounce along the bottom through the second week of June at less than a third of normal production. Finally, for the week ending June 18, production at Toyota jumped to 80% of normal. Honda (HMC) is still limping along at 60% of normal, though they have promised to be close to full strength by August.
Gross Domestic Product for the First Quarter Gets a Tiny Boost
Real GDP was revised upward to 1.9% from 1.8%. Lower imports (a subtraction from GDP) and higher inventory adjustments weren't quite offset by lower exports and less construction and government spending. This is the third and final read on the first quarter. About 1.2% of the GDP increase was due to autos, which troubles me more than a little. Autos will subtract at least 0.5% in the second quarter based on my calculations, which could bring us a lot closer to flat line growth than I'd like to see. Fewer Japanese imports may make up some of the huge loss from autos, but nobody is exactly sure how much. The average estimate for the second quarter is now 2.3%, which seems a tad optimistic to me. A range of 0%-2% would not surprise me at all. But the worse the second-quarter numbers are, the better potential third-quarter numbers, which could surpass 4%.
Housing Industry Still Singing the Blues
New and existing home sales remain stuck in the mud, as noted by our lead housing analyst Eric Landry:
Last week's home sale data didn't give investors much to cheer about, as existing sales for May were 3.8% below April on a seasonally adjusted annual basis and 15% below the year-ago period, at 4.8 million units. Single-family was down 3.2% sequentially, while condo sales sunk 8%. Inventories, at 3.7 million units, were little changed from April, and months of supply sat at 9.3 months. Sales of new homes at 319,000 annualised units in May were 2% lower than April's SAAR but 13.5% above the tax credit hangover-induced year-ago period. Last summer marked a several-year low in new-home sales, so the annual gain shouldn't be looked at as any kind of an accomplishment. New-home inventory, at a total of 166,000 units, set another near 50-year low in May, as there hasn't been less inventory of new homes in the history of the data set going back to 1963. The only good news is that when demand does return, the industry will benefit from that demand as well as significant restocking of the new-home inventory. Even so, the residential real estate market remains in paralysis today; we think this is due to an extreme lack of confidence on behalf of buyers and lenders. There are very few buyers in a hurry to buy, and buyers brave enough to venture into the market are finding it hard to get financing without a large down payment. Without a change in this dynamic, the market will find it hard to get back on its feet.
