Once again, last week’s news was mostly positive, with housing starts and sales beating expectations, industrial production and manufacturing up, and the Fed releasing a surprisingly upbeat set of minutes that painted the U.S. economy as well along the road to recovery.
Combined with the positive results from previous weeks, this good data continues to support a recovery in growth for the second quarter.
A look at last week’s numbers
Housing. News from the housing market and industry continued to be strong.
- The National Association of Home Builders survey stayed constant at 58, slightly underperforming expectations for an increase to 59 but remaining at a healthy level.
- Housing starts, on the other hand, surprised to the upside, increasing to 1.172 million from 1.089 million and beating expectations of 1.12 million, despite weak building permit data in March.
- Further strength is quite possible given that building permits also improved, up by 3.6 percent after the previous month’s decline.
- Existing home sales surprised to the upside, at 5.45 million, up from 5.33 million and beating expectations of 5.40 million. This is the fourth increase in the past five months and the highest level since the spring of 2007.
- Market details also improved, with the number of first-time homebuyers rising and distressed sales dropping from a year ago.
Inflation. Consumer prices, as expected, ticked up substantially.
- The headline number rose 0.4 percent for the month and 1.1 percent for the year, in line with expectations and up from last month’s increases of 0.1 percent and 0.9 percent, respectively, illustrating the rising inflation trend.
- For core prices, which exclude food and energy, the rise was more modest, with an increase of 0.2 percent for the month, up from 0.1 percent the previous month, and 2.1 percent for the year, down from 2.2 percent, all in line with expectations.
The differences continue to be driven by gasoline prices, which have risen in recent months. Inflation is now moving toward a sweet spot, from the Fed’s perspective.
Industry and manufacturing. Industrial production data surprised to the upside with a gain of 0.7 percent, rebounding significantly from a revised decline of 0.9 percent and beating expectations for a gain of 0.3 percent. Manufacturing also rebounded, from a loss of 0.3 percent to a gain of 0.3 percent, in line with expectations despite a continued decline in oil drilling and supply problems stemming from the recent earthquake in Japan. Although the gain in industrial production was in large part due to an increase in utility production, the rise in manufacturing is more meaningful for the economy as a whole, suggesting that recovery continues.
The Fed. Finally, the minutes of the last meeting of the Federal Open Market Committee surprised the markets with a substantially positive take on the economy and a clear statement that rate hikes may come earlier than expected—even as soon as June. The economy was considered to be at full employment, fulfilling one of the two components of the Fed’s mandate. Inflation, the second component, was considered to be moving in the right direction, as noted above. The implications of the statement are positive for the economy but mixed for markets, as higher rates might act as a headwind going forward.
The week ahead
This week, we’ll see three key reports: new home sales on Tuesday, durable goods orders on Thursday, and the revised first-quarter GDP report on Friday.
New home sales are expected to increase, from 511,000 to 520,000, based on stronger employment growth and continued low interest rates. There is downside risk here, however, as the current sales survey of the industry has been weak and weather was poor. If the data does disappoint, the weakness should only be short term.
Durable goods orders are expected to slow down from last month, from an increase of 0.8 percent to a gain of 0.3 percent. This headline number is substantially affected by aircraft orders; based on Boeing’s recent orders, it might match the previous month’s strong number, so there is real upside potential. The core orders figure, which excludes transportation and is more meaningful for the economy as a whole, is expected to improve substantially, from a decline of 0.2 percent last month to a gain of 0.3 percent, as manufacturing continues its slow recovery.
First-quarter economic growth is expected to be revised up from the disappointing initial estimate of 0.5 percent, consistent with the better-than-expected numbers we have been seeing,. Although this data point is backward looking, it does provide further support for the continued recovery and expected faster growth in the second quarter.
Have a great week!