April Retail Sales

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: April Retail Sales
KEY DATA: Sales: +0.5%; Excluding Gasoline: +0.2%; Excluding Gasoline and Food: 0.0%

IN A NUTSHELL: “Money is flowing out of consumers’ pockets but an awful lot is being pumped into gasoline tanks.”

WHAT IT MEANS: The economy continues to grow but the overriding question is: “How will the surge in gasoline prices affect the sales of other goods?” We got some insight into that with the April retail sales numbers and the initial returns are not great. While overall demand rose solidly, over sixty percent of the rise came from the increase in gasoline purchases. The other source of pain for consumers, food costs, also played a role with purchases increasing sharply as well. Indeed, when you exclude food and gasoline sales, where the rise was largely price driven, total retail sales were largely flat. People did buy more vehicles, which we knew from the unit sales numbers. Clothing and general merchandise stores did okay but the only winner was online companies. In contrast, furniture, electronics and appliances, sporting goods, restaurants and health care products were all off. The best news was an upward revision to the March numbers which could offset some of the negative from the wider trade deficit.

MARKETS AND FED POLICY IMPLICATIONS: This was a disappointing but not surprising report. Wage and salary income is not growing strongly so for most people, the higher gas prices are a constraint on their budget. But the commodity bubble (yes traders, it was a bubble and there was speculation) has at least started to deflate if not burst so going forward, we should see lower gasoline prices. The issues being created by the Mississippi flooding should only be short term. Look for the negative effects of the oil price spike to be unwound as we move through June (prices go up quickly but for some strange reason they fall more slowly). Thus, second quarter consumption should be soft but it could rebound sharply in the summer. If that sounds like a rationalization for my robust second half of the year forecast, so be it. But I am sticking to that forecast. This report has so much noise due to gasoline that I doubt the Fed will think much about it. But traders may get a bit concerned. What troubles me is that while gasoline prices may fall, food costs continue to rise as we saw in today’s wholesale price data. That could keep spending from really breaking loose. Nevertheless, retail sales should improve during the second half of the year.

RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

March Housing Starts and Permits

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: March Housing Starts and Permits
KEY DATA: Starts: +7.2%; Permits: +11.2%

IN A NUTSHELL: “When the weather outside wasn’t frightful, housing became a touch more delightful.”

WHAT IT MEANS: Now that the weather is warming up, we shouldn’t forget that there were a couple of months when conditions were truly brutal. It was not a major surprise that housing activity cratered in the first two months of the year so we should not be shocked that once it was actually possible to put the shovels into the ground, home construction improved. In March, housing starts rose solidly. There were huge increases in the Midwest and West and a solid improvement in the Northeast. The only region which posted a decline was the South. In addition, January and February’s start numbers were revised upward. It looks like housing will actually add to growth during the first quarter and that could ease the fears that growth could come in quite low. Looking forward, construction is likely to rise as we move through the spring given the strong rise in permit requests. Except for the Northeast, which was flat, builders took out a lot more permits in March and they are not doing that because of any regulatory change, as they did in December. Instead, the rise is likely the result of growing demand and expectations. Builders are doing a good job of keeping inventories under control as the number of houses under construction fell to another historic low.

MARKETS AND FED POLICY IMPLICATIONS: Home construction picked up solidly in March and activity should rise going forward. That is the good news. The bad news is that we are at record lows for homes under construction and completions while the number of housing starts remains not that far from the record low set in 2009 during the depths of the recession. But when it comes to GDP growth, it is all about changes not levels so housing should be a positive for growth this year. Of course, housing has become a much smaller part of the economy, constituting less than 2.5% of GDP at the end of last year. It was over 6% in 2005 and has average about 4.3% over the past thirty years. Thus, it takes a lot larger growth rate to have any major impact on the overall economy. Still, up is an awful lot better than down. That is good news for the markets which have been dealing with the reality that higher energy costs are not the tonic for a weak economy. But the Saudis announced they were cutting production because of the oversupply of oil, a point noted by OPEC. The members remember that when speculation gets carried away and prices surge above sustainable levels, the downside can be painful. It is impossible to forecast changes in speculative attitudes but I suspect that the upward momentum in oil is slowing and that could turn things around quite quickly. At least let’s hope so. As for S&P putting U.S. Treasuries on the watch list, remember, this is an organization that didn’t understand housing debt or European debt. It is incomprehensible that the debt limit will not be lifted so maybe we should just relax. The U.S. is not going to default.
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

February Supply Managers’ Manufacturing Index

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: February Supply Managers’ Manufacturing Index
KEY DATA: ISM (Manufacturing): 61.4 (up 0.6 point)
IN A NUTSHELL: “”Manufacturing continues to soar and that is the best indication that the economy was improving before the oil price spike.”
WHAT IT MEANS: There is still a lot of uncertainty about the state of the economy and that has gotten worse now that oil is hovering around the $100 per barrel level. But at least we can say that conditions were pretty decent before the chaos in North Africa led to the sharp increase in energy. The manufacturing sector continues to expand at a robust pace, according to the National Institute for Supply Management. The February survey of purchasing managers rose a little in February. While the improvement was small, it is the level that is awesome. You have to go back to 1983 when the economy was bouncing back sharply from the back-to-back recessions to see an overall activity index this high. New orders, including exports and imports, are not only strong but they are growing faster. Production is accelerating and backlogs are building as well. As a consequence, firms are hiring new workers to meet the expanding demand. Indeed, the employment index is one of the highest in the sixty three years this index has been compile. On the other hand, cost pressures are building and while a whole variety of commodities were up, there were none that were reported to be down.
MARKETS AND FED POLICY IMPLICATIONS: This is a strong report that under most circumstances would make everyone smile. But the skyrocketing cost of energy is overhanging the economy. Mr. Bernanke chimed in on that issue today indicating he was not that worried about the higher costs unless they were sustained. That makes sense since he is looking well down the road. But in the short run, there is likely to be some easing in consumption but not enough to kill the recovery, only restrain it. The health of the manufacturing sector supports the view that without a long period of very high energy prices, we should get through this crisis. For now, though, it is likely that the first half of this year will be another period of modest recovery. Hopefully, things shake out over the next few months and we can pick up where we left off, that is, with an economy that is poised to change gears.
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisiors, and are not providing any financial advise, you should consult with a licensed financial advisior prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com