Consumer sentiment inches up

Consumer sentiment, as measured by the Reuters/University of Michigan survey was unchanged at 73.6 in March, versus February but did improve by 1.1 points from the mid-March, or the preliminary reading.

“Consumers reported gains in the overall economy and expected the economy to continue to improve during the year ahead.

Despite these expected gains in the economy, consumers’ evaluations of their own financial situation have remained grim due to the widespread expectation that improvement in their job and income prospects will be very small during the year ahead,” according to survey results reported on Friday.

Although we haven’t seen any improvement over the past three months, the overall, upward trend that began a year ago remains in play, as the weak economic recovery is slowly lifting confidence.

New jobs and greater job security would go a long way in improving consumer sentiment, which would likely translate into a rise in discretionary spending and a broader-based economic recovery.

Weekly claims appear to be resuming down trend

Weekly jobless claims may finally be headed downward, albeit very slowly, after a three month interruption in the trend that began a year ago. 

Jobless claims fell 14,000 to 442,000 in the latest week, as the Labor Department released annual revisions to the weekly number (revisions are included in the chart below).  The 4-week moving average slipped by 11,000 to 453,750.

Press reports out today mostly suggest that the dip is signaling that the job market is in a weak recovery.  Unfortunately, I have to take exception with the mild optimism.

Companies may be slowly cutting back on the jobs being eliminated, but the small drop, though good news (any dip is at least modestly favorable), doesn’t necessarily signal that hiring is picking up.

The economy has begun to expand. But so far, the recovery is uneven and companies remain reluctant to ramp up hiring.

Jobless claims remain elevated

For about the past three months, we have seen very little improvement in weekly jobless claims, highlighting the unbalanced and fragile economic recovery for much of the nation.

In the latest week, weekly jobless claims fell 5,000 to 457,000, while the 4-week moving average slipped 4,250 to 475,500.  Progress in continuing claims seen in much of last year has also ended, with claims rising 12,000 in the latest week to 4.6 million.

It is important to note that the over 2 million drop in continuing claims from the peak is mostly due to standard benefits running out, as continuing claims do not include those who are on emergency extensions.

As I’ve mentioned in prior posts, weekly jobless claims are a great gauge of economic activity because the release is current and it is a barometer of business confidence.

Falling claims suggest that companies are seeing a pick up in activity and want to hold on, even add, to staff.  Rising claims would signal the opposite.

In addition to the fact that the elevated level of claims is suggesting a lack of job growth in the economy, the stubbornly-high level of jobless claims is a sign that the economic recovery is still fragile and remains uneven.

A look at wholesale inflation

Led by a 2.9% drop in energy prices in February, the Producer Price Index fell 0.6%, the first drop since September.

Year-over-year, producer prices are up 4.4% amid the steep rise in energy prices over the past 12 months; however, if we remove energy, along with food, prices rose just 0.9% from one year ago (March's rise came in at 0.1%).

The Fed has an implied range for consumer prices of between 1-2%, so there are few pressures building in the pipeline at the present time.

We will probably see another rise in the headline rate when March's numbers are released, as oil prices have trended higher once again. But outside energy (and the price at the pump), there just isn't much inflation in the economy.

Aggregate demand remains constrained, which makes in difficult to push up prices, while wage increases (the biggest cost for most businesses) have been small, alleviating much of the need to boost prices. Moreover, recent outsized increases in productivity will support profit margins and cushion the need for any price hikes in the short term.

Consequently, there is little threat of a return to inflation at the current time, allowing the Fed to keep rates near zero in its attempt to boost economic activity and support the sagging labor market.

Foundation not firm under housing

Piggy-backing on yesterday’s report showing a decline in home builder sentiment, housing starts and building permits continue to show that residential construction has stabilized, but home builders aren’t getting a whole lot of traction from the extension and expansion of the home buyers tax credit.

Housing starts in February fell 5.9% to an annual pace of 575,000 units.  Building permits, which are more forward looking, were down 1.6% to 612,000. Consequently, the second monthly decline in permits suggests that traffic among prospective buyers and the sale of new homes is still sluggish.

Looking at the chart above, the new home market has stabilized, but builders still face plenty of competition from foreclosures and short sales.  And until this problem is resolved, it seems unlikely we will see a noticeable acceleration in new home sales.

New vs. used

New home sales make up less than 10% of overall sales; however, the construction of new homes directly boosts GDP because residential construction is part of the GDP equation.  In addition, new home sales also have an indirect impact on GDP since new models will require lumber, drywall, roofing materials, appliances, etc.

The sale of existing homes, though not included in GDP, has an indirect impact on the economy.  New home owners who buy existing homes are much more likely to replace furniture or take on projects to modernize or add personal touches to the house.

Plus, realtors and mortgage lenders benefit from the purchase and sale of houses via commissions, enabling them to employ a number of processors and assistants.

With interest rates hovering near record lows, a surge in home buying would provide a needed shot in the arm to the economic recovery, adding some depth to what so far has been an uneven, fragile and shallow recovery.

Housing Market Index highlights faltering builder sentiment

Despite a healthy dose of incentives designed to boost the flagging housing market, home builder sentiment remains under pressure amid worried buyers and the numerous opportunities that remain to purchase a late-model home in foreclosure.

The NAHB/Wells Fargo Housing Market Index fell from 17 in February to 15 in March, indicating that home builders still face an uphill climb.  A level of 50 suggests builders are neither optimistic nor pessimistic.

Moreover, the components that make up the index were all in retreat this month, including prospective traffic.

The new home market makes up less than 10% of total housing sales, and existing home sales normally provide a more in-depth look at the housing market.

Still, the extension of the first-time home buyers tax credit and the new credit for existing buyers, coupled with near record low interest rates, should be sparking more interest in new home sales.

The best incentive builders could use would be a much firmer job market. further stabilization in home prices and a solid increase in consumer confidence. 

Until we see a healthy dose of all three ingredients, many potential buyers of new homes may remain on the sidelines or stay focused on bargains offered by abandoned homes still sitting in bank portfolios.

Consumer sentiment flounders in March

Upward trend still intact

The University of Michigan’s survey of consumer sentiment showed the closely-followed index unexpectedly fell from 73.6 in February to 72.5 in mid-March.

Disappointing? Yes.  However, a closer look at the general trend shows that consumer sentiment continues to slowly improve, despite the second-monthly decline.

Moreover, retail sales jumped in February, suggesting that consumers may finally be starting to feel a bit more confident about the prospects for a recovery.