As summer begins to wane (judged by the number of “back-to-school” sales I’m seeing), a couple of items remain wedged in my thoughts. First, the poor showing of GDP in the first quarter will certainly dampen the full year results, and secondly, some writers sense a hint of inflation in the late summer air.
How can GDP accelerate when consumer spending remains in a somewhat spasmodic state? Looking at the first six months of consumer spending is quite telling. Consumers spent 3.6% more on retail and food services in the first half of 2014 versus the same period in 2013. While that’s a reasonable showing, the spending was quite diverse, with strong showings in auto sales, health and personal care stores, and non-store retailers. Faring well were building materials, furniture, and restaurants. No other categories surpassed the average, with actual six month declines in gasoline, sporting goods, and department stores. However, in the past month, sales of autos, building materials, furniture and restaurants actually declined, while past losers like sporting goods and department stores had a good month. The point here is that consumer spending habits have remained cautious, and change on an almost month-to-month basis… and that won’t bring about a 3% GDP rate.
The consumer caution is also evident in home sales. There is an ongoing problem in new homes. The hangover from the Great Recession is evident when viewing building permits and housing starts. Building permits issued in June remain below the one million annualized level, are down 4.2% from May 2014 levels, but slightly (2.7%) higher than June 2013. Housing starts are down 9.3% from May levels, but up 7.5% from June 2013 levels. However, the real story is in the makeup. In the past year, permits for multi-family housing rose 6.8%, while single family permits rose only .6%. Housing starts for the one year period were up 39% for multi-family and down 4.3% for single family housing. That’s a clear indication that builders are putting their money into apartments and condos rather than traditional single family housing.
The statistics for new single family home sales support this trend. June 2014’s annualized sales volume of 406,000 was poor, at best. That level is 8.1% below May 2014, and a big 11.5% below June 2013 levels. There remains some support, however, as prices are firmer than year ago levels. The median price of a new home in June was $273,500, up 5.3% from year ago levels, and the average price of $331,400 rose 8.3% over the same period. Inventory remains stable at about a 6 month supply. So builders are aiming new single family sales at higher income brackets.
Meanwhile, existing home sales tell a slightly different story. Sales in June were up 2.6% from May 2014 levels, and are over five million units (annualized) again. The sales level is the best since October 2013, and only 2.3% below June 2013 levels. Sales were weak everywhere but in the South, where sales rose 1% over the past year. Inventories of 2.3 million units are up a robust 6.5% from year ago levels, but with sales increasing, this inventory of about 5½ months is very similar to 2012 and 2013 levels. So why are existing home sales somewhat stronger than new home sales? Price sensitivity and availability. While the median price of existing homes is $223,300 (up 4.3% in the past year), and the average price of $269,100 is up 3.1% for the same period, both median and average prices of existing homes are substantially (22-23%) below new home pricing. Tighter credit standards make existing home seem more affordable. Add in a bigger inventory and it’s easy to see why existing home sales are faring better than new. However, neither category is signaling an all-out expansion.
A final tidbit on housing comes from the National Association of Realtors. Tracking sales this year, the NAR notes that “all cash” sales are up, short sales are down, and investor type purchasing is falling. So some of this purchasing seems to be coming from “boomers” who are downsizing, or buying vacation property, or other buyers who may be cashing in on stock market gains… so it may be that more older buyers than younger family buyers are supporting both new and existing home prices.
The whispers of impending inflation problems are out in the public again. St. Louis Federal Reserve President James Bullard recently suggested interest rates should rise by the end of the first quarter of 2015. While he is a non-voting FOMC member, his comments rattled the stock and bond markets for a couple of days. Looking at the latest Producer Price Index (PPI) and Consumer Price Index (CPI) data, I’m not sold on the idea that inflationary problems are just around the corner. June PPI rose a hardy .4%, due to a huge jump (2.1%) in energy prices. This increase can be blamed on a number of factors, including a run-up in oil costs in the spring that has not yet abated as it has in past years. Fortunately, food costs dropped .2% in June, thus limiting the “core” PPI to a very reasonable increase of .1%. Total PPI is up 1.9% over the twelve months, a level that is not troubling to me for two reason: first, both food and energy are subject to volatile swings that usually smooth out and secondly, there doesn’t appear to be any serious inflation developing in the intermediate stages of goods and services, just the normal summer run-up. CPI numbers are similar, with June’s level at +.3% over May and up 2.1% from year ago levels. Energy, again, is the culprit, with all energy up 1.6% for the month due to a huge (+3.3%) jump in gasoline prices, (which have since declined). Similar to PPI, food costs at the consumer level rose a scant .1%, so that “core” inflation at the consumer level rose a mere .1% in June and is up only 1.9% from for the past twelve months. Without some ongoing geo-political or weather issues, food and energy costs should settle, and inflation worries can be pushed to the back burner.
Stock prices continue to track higher, with the S&P 500 hitting a new high this week. The Dow Jones Industrial Average slid, as VISA reported less than expected earnings. At 1 p.m., for the week and year:
Ten year Treasury prices continue to rally in response to the various global geo-political problems and renewed buying interest from China. Supply remains the primary reason for higher muni prices.