NEW$ & VIEW$ (24 JANUARY 2013)

Trying to monitor the U.S. economic beat as the first effects of the fiscal tightening are being felt as 75% of households are taking a 2%+ pay cut.

More specifically, growth in the informal eating out industry has been relatively flat to declining around the world and we expect that to continue. (…) McDonald’s said it expects January same-store sales to be down as global economic uncertainty continues.

  • ISI’s weekly company surveys remain good, so far. Their leading indicator of retail sales continues to project an acceleration in retail sales to 6% by May 2013, an uptrend driven by falling unemployment and rising asset prices. 

Jobs improvement, falling fuel costs, and home price appreciation are important offsets to other pressures in the economy.   As a reminder, our RSLI is a combination of five variables that historically have led U.S. retail sales by six months. Bad News:  The largest tax hike in 20 years is just hitting 75% of U.S. households.  2013 tax hikes pose an ISI est ~$160B headwind to DPI, and 125bp headwind to retail sales before any dynamic multiplier effects.  The bulk of Americans will see the impact with their first paycheck, typically around January 15th.

  • Weekly chain store sales are pretty weak, having dropped each week since Dec. 29 (seasonally adjusted). The 4-week moving average remains +3.2% YoY on weak 2012 comps.
  • ISI’s homebuilders survey has surged +7.8 over the past three weeks, the biggest increase in almost two years, and to a 7-year high.  This remarkable Jan surge suggests housing starts for the month could be very strong, particularly with seasonal adjustment, and significantly increases the odds of a 1Q real GDP upside surprise.
  • Fifth Consecutive Month of Gains in Architecture Billings Index

Business conditions at architecture firms continue to improve.  The American Institute of Architects (AIA) reported the December ABI score was 52.0, down from the mark of 53.2 in November.  This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings).  The new projects inquiry index was 59.4, down slightly from the 59.6 mark of the previous month.

“While it’s not an across the board recovery, we are hearing a much more positive outlook in terms of demand for design services,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA.

    • Regional averages: Midwest (55.7), Northeast (53.1),  South (51.2), West (49.6)
    • Sector index breakdown: commercial / industrial (53.4), mixed practice (53.0), institutional (50.9), multi-family residential (50.5)
    • Project inquiries index: 59.4 Smile

image(Chart from CalculatedRisk)

U.S. HOUSING

A few charts from Gary Shilling:

  • Real prices are back in the normal range:

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  • Your 33 year-old is about to leave you alone…Fingers crossed

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  • …forming his own household:

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  • This is what keeps Shilling bearish on housing:

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Another house price-depressing problem is the excess inventories of vacant houses. As we’ve noted in past reports, excess inventories are the mortal enemy of prices. Sure, listed inventories of new and existing houses are falling, and realtors in some areas complain of inadequate supplies of listings. But many foreclosed vacant houses aren’t yet listed—hidden inventories. Then there are vacant houses that were listed but withdrawn because sellers couldn’t stomach the bids they received. They
still probably want to sell and will do so at higher prices or when their patience runs out.

These two categories and related vacancies are contained in the Census Bureau’s “Vacant units held off the market for other reasons”—a
very descriptive title! This category has jumped by about a million units since the housing bubble burst in 2006. (…) The ratio jumped with the house collapse and has been declining. Still, it will take another 1.9 million
reduction in inventory to return to the long-run flat trend that we use as a measure of the normal working level for inventories. That decline is big, considering that in the long run, the U.S. builds about 1.5 million houses per year and now about half that.

Remember that housing is a local market and that the bulk of the phantom inventory is concentrated in only a few states. Banks control most of the excess hidden inventory and they are feeding markets at their own pace. Meanwhile, existing homes available for sale has collapsed.

Finally, the shadow inventory could evaporate faster than expected if house prices keep rising. CoreLogic estimates that 1.3 million properties regained positive equity during the first half of 2012 as prices rose. Another 2 million would if prices appreciated another 5%, out of a total 11 million underwater mortgages.

Goldman Still Sees Potential Growth Risks From Washington  The U.S. looks to have averted another debt-ceiling debacle, but Goldman Sachs economists warn two more fiscal drags looming in March could hurt growth: sequestration cuts and a failure to extend the government-agency spending authority.

Goldman says the sequester — if totally implemented — could reduce its gross-domestic-product growth estimate by 0.5-1.0 percentage points in the first and second quarters, and a government shutdown lasting a week might only reduce annualized growth by 0.1-0.2 percentage point in the quarter it occurs, “but it could have a more meaningful effect if it lasted longer.”

Storm cloud  Bank of Canada, IMF Lower Growth Forecasts

Canada’s central bank and the IMF cut their growth forecasts for the country, underscoring the deteriorating prospects for what was once seen as one of the developed world’s healthiest economies.

The Bank of Canada cut its growth forecast for 2013 to 2%, from the 2.3% forecast in October, citing a sharper-than-expected slowdown in the second half of last year, stemming from weaker business investment and exports. The growth projection for the fourth quarter of 2012 was slashed to 1% from 2.5%, and the central bank said it now expects the economy to have expanded 1.9% last year instead of 2.2%.

The IMF, meanwhile, said it now expects Canada’s economy to grow just 1.8% this year, down from its previously forecast 2% rate.

Reflecting the new economic headwinds, the Bank of Canada held its key overnight rate steady at 1.00% Wednesday, and softened language on the possibility of future rate increases. After hinting in recent rate-setting meetings that it was leaning toward eventual rate increases, the bank said Wednesday that while it still sees an eventual tightening, the timing is “less imminent.”

Confused smile  Shippers Tell Different Story on Chinese Exports

Many in the shipping industry see a sluggish year ahead for Chinese exports, a cornerstone of the world’s No. 2 economy, despite other indications of growing demand for China’s products.

imageSome executives from shipping companies that carry containers full of Chinese-made products mainly to Europe and North America say they see little evidence of a strong rebound in seaborne exports. Stephen Ng, director of trades for Orient Overseas Container Line Ltd., said the company wasn’t seeing “any particular upsurge” in container volumes on its Asia-to-Europe or trans-Pacific services.

OOCL is the container-shipping unit of Hong Kong-listed Orient Overseas International Ltd.  The parent said on Tuesday its container-shipping trans-Pacific services volume fell 6.8% in the fourth quarter compared with a year earlier. Volume on Asia-to-Europe services grew 2.8% compared with the year-earlier quarter.

Chinese exports in December grew a surprising 14% year-on-year compared with modest growth of 2.9% in November. (…) But many analysts believe the export numbers overstate the gain, and say the latest figures are influenced by exceptional factors such as backlogs caused by port strikes in the U.S.

South Korean growth hits three-year low
GDP 1.5% higher in fourth quarter than a year earlier

Gross domestic product in the last three months of the year was just 1.5 per cent higher than a year earlier, the Bank of Korea said on Thursday. That pace pulled full-year growth down to 2 per cent, the weakest figure since 2009. The central bank had forecast annual growth of 3 per cent as recently as July.

Exports account for more than 50 per cent of the manufacturing-driven economy but have been hurt by weaker demand from Europe and elsewhere. Recently, they have been threatened by steady gains in the South Korean won. Pointing up

South Korea’s exports rose 4 per cent year on year but declined 1.2 per cent from the previous quarter. Falling foreign sales of ships and general machinery cancelled out stronger performance from technology exporters such as Samsung Electronics.

Japan Posts Record Trade Deficit

Japan’s trade deficit nearly tripled to a record $78.3 billion last year, as a strong yen, territorial tensions with China and surging energy imports took their toll.

Figures for December alone showed the combination of weak exports and strong imports tipped the balance of trade in goods into a deficit for the sixth straight month that month—the longest run of such deficits since 1980. (…)

December exports were down 5.8% YoY, while imports rose 1.9%. Exports to China fell 15.8%.

Japanese manufacturers couldn’t immediately enjoy the full benefit of the yen’s 10% drop versus the dollar since November, which was fueled by expectations of the aggressive credit easing advocated by Mr. Abe, analysts said.

Despite the weakening yen, Japan logged a ¥641.5 billion deficit for the month of December alone, worse than economists’ forecasts.

Japan Lifts Economic View

A day after the Japanese government forged an unprecedented agreement with the central bank to pursue indefinite monetary easing, a report pointed to some signs of how the policies advocated by Prime Minister Shinzo Abe’s administration could be paying off.

The government on Wednesday raised its assessment of the economy in January, the first upgrade in eight months, citing improvements in export conditions and the positive impact from the weak yen.

Lightning  Spanish jobless rate hits record high
Almost 6m, including 60 per cent of under 25s, are unemployed

According to the latest labour market survey, there are now 5.97m jobless Spaniards, a rise of 363,000 compared with the third quarter of 2012. The unemployment rate now stands at 26.02 per cent from 25 per cent, the second-highest in the European Union behind Greece. The latest rise was once again largely due to staff cuts in the public sector and in the service sector.

High five  Beware of headlines:

Eurozone business activity improves January PMI jumps to 48.2, beating expectations

Even the FT can mislead. At 48.2, biz activity is still declining, just at a slower rate. See this a.m. post for the real stuff.

Light bulb  High yield has never looked more expensive when compared to equities (Niels Jansen)

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