US housing stats led the economic data parade last week with a triptych of good news: housing prices, new home sales and pending home sales.
The US economy has had a very hard time moving housing metrics up across different reports, so last week's good news was particularly welcome. The housing data were finally good enough to make the second positive contribution in a row to real quarterly GDP growth.
Overall inflation-adjusted GDP growth, at 2.2%, was a lot better than most people dreamed possible a couple of months ago, but as analysts raced to up their forecasts (and stay ahead of competitors), expectations got a little ahead of themselves. (Just a week prior the consensus was 2.3% but by Friday's actual report expectations had crept up to 2.7%.) That forecast would have proved very close to correct if government defence spending hadn't fallen by 12%. And while residential construction was a nice plus to the GDP, business-related construction spending nearly offset that highly positive report, hurting the GDP report by a lot more than expected. On the other hand, the consumer came through yet again with an astounding 2.9% increase in spending, far greater than expectations.
So while doomsters highlighted the fact that overall GDP real growth slowed between the fourth quarter (3.0%) and the first quarter (2.2%) (typical headline: Recovery Stalls Again), the reality is that consumption was up a lot, and the inventory contribution was much smaller than in the fourth quarter. In other words, the quality of the report was high. I have continually warned that the fourth quarter was helped by inventory rebuilding, especially in the tsunami-plagued auto industry, and favourable weather. The report did nothing to persuade me that the US economy is booming or that it is falling apart. The economy seems to be on track for 2.0%-2.5% growth in 2012 and 2013.
The Fed open market statement turned out to be a non-event this time around, with renewed commitment to low rates through 2014. There was nothing in the report to suggest that the Fed was taking any more easing off the table (that is, QE3) but no immediate indications of easing, either. Luckily, the market was happy with the somewhat ambivalent report.
Unfortunately, not everything came up roses last week. Durable goods orders were weaker than anticipated. Volatile aircraft and auto orders have led to booms and busts in this index over the last six months, rendering the report virtually useless. But even I would be hard pressed to say that manufacturing is driving the recovery at this point. Given that the auto industry is likely to stall out a little this summer (due to some unusually large and early model changeovers), manufacturing reports of all stripes are likely to remain under pressure. Manufacturing data out of Europe and China was even worse. Unfortunately, there was more bad news: initial unemployment claims, on the surface, looked a little elevated again, largely because of seasonal factors. Year-to-year, claims are still down in the 8%-10% range. No need to panic just yet.
Goldilocks' GDP Growth: Not Too Hot and Not Too Cold
Although the market wasn't thrilled with the 2.2% real GDP growth rate, there was a lot to like in the first-quarter report. The strongest part of the report was consumers, who somehow managed to increase their spending at a 2.9% annual rate in the first quarter. While autos and other durable goods drove a large portion of the improvement, the larger service sector managed a bigger contribution and a higher growth rate than in the previous quarter.
The other large positive surprise was that exports had their best quarter in more than four quarters despite a general slowing in most world economies. While I have always been in the camp that said a slowing world economy might not make a big difference to the US GDP growth rate, I didn't expect its contribution to GDP growth to actually increase.
While my readers won't be surprised, it was reassuring to see housing making its second quarterly contribution to the GDP in a row. Housing contributed 0.4% to GDP growth, following a 0.3% increase in the fourth quarter.
The last piece of good news in the report is also a potential seed for worry. Autos (including consumer, business, government, and inventory) contributed an almost unprecedented 1.1% to GDP growth, or almost half of net growth. The bad news is that a large number will prove nearly impossible to sustain in the months ahead. That is especially true as one large manufacturer is building inventory in front of a long model changeover process this summer. But our auto analyst Dave Whiston points out that most luxury manufacturers can't keep up with demand and Honda has yet to be able to match supply and demand in the aftermath of the tsunami.
On the negative side of the report, spending on business structures showed a sharp decline and all but wiped out the gains in the residential building market. The number doesn't seem to match up with the architectural building index (an important leading indicator of the construction industry), which has been at or above the 50% level over the past five months. Also, while construction employment overall hasn't been robust, it certainly seems to indicate that the construction industry is growing and not shrinking, as the GDP report seems to suggest.
Business spending on equipment and software was soft as well, coming perilously close to puncturing the zero line. Even though the European crisis hasn't managed to scare North American consumers, it appears that businesses have pulled in their horns, at least for now. Government spending was a larger outright detractor, reducing GDP by a shocking 0.6%. Though the source of weakness keeps shifting, government spending registered its sixth straight decline (well, one quarter was flat). This time the proximate cause was a drop in federal government defence spending. State and local government spending almost made it back to the zero mark.
This week, a lot of eyes will be on Friday's employment report to see if the sharp slowdown in March was a fluke or the start of a major decline. So far, the market is betting on the fluke angle and expecting private payroll growth to move from a measly 120,000 in March to 165,000 in April. That's still below the couple of 200,000-plus numbers that we saw at the beginning of the year. For the full year I am still expecting growth to average 195,000 new private-sector jobs per month.
