Author: Helen Thomas

April 24, 2014

A growing economy, pent-up demand, competitive mortgage rates and affordable home prices will keep housing on an upward trajectory through 2015.  However, several obstacles including tight consumer credit, shortages of lots and labor and rising materials prices are hindering a more robust recovery, according to economists who participated in yesterday’s National Association of Home Builders (NAHB) 2014 Spring Construction Forecast Webinar.

“Housing needs an improved economy,” said NAHB Chief Economist David Crowe, adding that the economy is expected to respond as payroll employment continues to grow and the unemployment rate slowly recedes from 6.7 percent in the first quarter of this year to 6.2 percent by the fourth quarter of 2015.

Consumer confidence is back to pre-recession levels and the purchase of motor vehicles and home furnishings are on the rise, indicating that consumers are increasingly willing to buy big ticket items such as houses.

Reflecting an increase in credit demand and economic growth, mortgage interest rates are projected to rise to 5 percent by the end of 2014 and 6 percent by the end of next year.  Noting that these rates are still low by historical standards, Crowe said this would “not be a significant deterrent to expansion in the housing market.”

With new home sales averaging just 8.8 percent of total home sales, barely half the historical average of 16.1 percent, Crowe observed that “this is another reason to believe that the new home market will have to make up existing ground.”

However, he cautioned that builders continue to face a number of headwinds.

“Supply constraints related to lots and labor and rising lumber, gypsum and OSB (oriented strand board) prices are hurting the ability of builders to meet demand,” he said.  “Moreover, creditworthy borrowers, particularly younger families and first-time home buyers, are having difficulties in getting home loans.”

Remodeling, Sales and Starts on the Rise

The NAHB Remodeling Index, which averages ratings of current remodeling activity with indicators of future activity, stands at 53 in the first quarter of 2014 and has been above 50 for six of the past seven quarters.  A reading above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower.

NAHB is forecasting that residential remodeling will post a 3.8 percent increase in 2014 over last year and rise an additional 2.4 percent in 2015.

New home sales are expected to climb 29 percent from 431,000 in 2013 to 557,000 this year.

Single-family housing production is projected to increase 22 percent from 621,000 last year to 760,000 in 2014 and surge an additional 55 percent to 1.18 million units in 2015.

On the multifamily side, production is expected to rise 8 percent from 308,000 in 2013 to 331,000 this year, reaching what is considered a normal level of production.

Banks Awash in Cash

Agreeing that the economy is on an upward trajectory, Maury Harris, managing director and chief U.S. economist at UBS, said that financial lending institutions are sitting on a mountain of cash.

“Banks have over $2 trillion of excess reserves.  That’s with a ‘t’,” he said.  “Banks would like to put that money to work and increase lending, which will help the economy.”

In the aftermath of the Great Recession, Harris said that normal household formations have fallen short by about 2.5 million as graduating college students were forced to move back in with their parents and young adults were doubling up in apartments.

“As unemployment comes down and credit availability eases, Millennials (the 25-34 age group) will feel better about their economic circumstances,” said Harris.  “I think we will see the shared household rate come down, less doubling up and a pickup in household formations.”

Harris is forecasting 1.15 million housing starts this year (700,000 single-family and 450,000 multifamily) and 1.35 million next year (900,000 single-family and 450,000 multifamily).

A Gradual Climb to Normal

Looking at the state statistics behind the national numbers, Robert Denk, NAHB’s assistant vice president for forecasting and analysis, cited a range of differences among the states in the amount of distress suffered during the recession and the progress that is being made in recovering.

Housing production nationwide bottomed out at an average of 27 percent in early 2009 and reached 45 percent in the first quarter of 2014.

In the worst hit states, housing fell to 10 to 15 percent of normal production while production only fell by half in other states with a better underlying economy.

“The hardest hit states were the bubble states – Arizona, Florida, California and Nevada – along with the industrial Midwest, which struggles with challenges in the auto industry and a declining manufacturing sector,” said Denk.

“Where individual states stand now has a lot to do with how far they fell when the Great Recession hit”, Denk added.

Fueled by a booming energy sector that is producing solid job and economic growth, Texas, Louisiana, Oklahoma, Wyoming, North Dakota and Montana are at the forefront of the housing recovery, with North Dakota now the first state to surpass its normal level of housing production.

“On a national basis, single-family housing starts are projected to get back to 70 percent of normal production by the end of this year and 93 percent of normal by the end of 2015,” Denk said.

In another way of looking at the long road back to normal, by the end of 2015 the top 40 percent of states will be back to normal production levels, compared to the bottom 20 percent, which will still be below 80 percent.

Source: National Association of Home Builders

April 25, 2014

The Bureau of Economic Analysis released today – for the first time – gross domestic product (GDP) by industry for 22 industry sectors on a quarterly basis.  These new statistics fill an important gap in U.S. federal economic statistics by providing timely information on how individual industries contributed to U.S. economic growth in a given quarter.  These new data also provide businesses with a comprehensive and consistent tool for assessing how their industries are faring compared to other industries.  Policymakers, businesses, and academia will be able to use the statistics to quickly identify economic turning points, improving their ability to understand a given sector’s performance.

Quarterly GDP by industry statistics supplement other quarterly and monthly indicators of industries’ performance – such as employment, sales and shipments, profits, and prices – by providing a comprehensive and consistent picture of industries’ overall performance, allowing for a more complete analysis of business cycle dynamics and the sources of U.S. economic growth.  These new statistics, which also include measures of gross output and of intermediate inputs by industry, are prepared within an integrated framework and are consistent with GDP and the final expenditure components published in BEA’s national income and product accounts.  Quarterly GDP by industry statistics will be made available approximately 30 days after the release of the third estimate of GDP.

“Gross Domestic Product (GDP) is one of the U.S. government’s most valuable data resources,” said U.S. Secretary of Commerce Penny Pritzker.  “American businesses will now have access on a quarterly basis to more comprehensive statistics about the impact of different industries on our economy.  Enabling industries in all sectors to better measure their contributions to GDP and helping businesses understand and identify emerging trends more quickly make this new data an important tool for policy-makers at the local, state and national level.  At the Department of Commerce, one of the top priorities of our ‘Open for Business Agenda’ is to provide data to help businesses and governments make the critical decisions that supr economic growth and job creation.”

Fourth Quarter 2013 GDP by Industry

Real GDP increased 2.6 percent in the fourth quarter of 2013, with both the private goods-and-services-producing sectors contributing to the increase.  Overall, 15 out of 22 industry groups contributed to economic growth.  The leading contributors to the increase were nondurable-goods manufacturing; professional, scientific and technical services; and wholesale trade.

• Nondurable-goods manufacturing real value added – a measure of an industry’s contribution to GDP – increased almost 19 percent in the fourth quarter after increasing 2.9 percent in the third quarter.
• Professional, scientific, and technical services increased 5.9 percent after increasing 8.3 percent in the third quarter.
• Wholesale trade increased 6.9 percent after increasing 7.3 percent in the third quarter.

Growth in real GDP in the fourth quarter decelerated from 4.1 percent in the third to 2.6 percent in the fourth.  The deceleration reflected a slowdown in the private services-producing sector and a larger decrease in the government sector that was partly offset by a pickup in growth in the goods-producing sector.  Overall, 17 out of 22 industry groups contributed to the slowdown in real GDP growth; the leading contributors to the slowdown were real estate, rental, and leasing; construction; and retail trade.

2013 GDP by Industry

Real GDP increased 1.9 percent in 2013 (that is, from the 2012 annual level to the 2013 annual level).  Growth was widespread, with 19 of 22 industry groups contributing to the increase.  Nondurable-goods manufacturing; real estate and rental and leasing; agriculture, forestry, fishing, and hunting; and health care and social assistance were the leading contributors to the economic growth.

• Manufacruring real value rose 3.1 percent in 2013, after increasing 1.9 percent in 2012.  Nondurable-goods manufacturing, the largest contributor to overall growth in the economy turned up, increasing 5.3 percent in 2013 after decreasing two consecutive years.
• The real estate and rental and leasing group increased 1.6 percent, marking the fourth consecutive increase for both real value added and real gross output.
• Agriculture, forestry, fishing, and hunting surged in 2013, increasing 16.4 percent after increasing 0.3 percent.  The strong growth in 2013 reflects a weak 2012 that was affected by a severe Midwest drought.

Real GDP growth decelerated 0.9 percentage point in 2013, increasing 1.9 percent after increasing 2.8 percent.  Mining, durable-goods manufacturing, and professional, scientific, and technical services were the leading contriubtors to the deceleration.

During 2013 (that is, measured from the fourth quarter of 2012 to the fourth quarter of 2013), real GDP increased 2.6 percent, after increasing 2.0 percent during 2012.  Changes from fourth quarter to fourth quarter provide a picture of momentum in the economy during the year.  Real value added for the private goods-producing sector increased 6.3 percent, compared with an increase of 0.6 percent during 2012.  The private services-producing sector increased 2.4 percent during both 2012 and 2013.  The government sector decreased 1.5 percent during 2013, compared with a decrease of 0.2 percent during 2012.

Source: Bureau of Economic Analysis

Gross output will correct the fallacy fostered by GDP that consumer spending drives the economy.

April 22, 2014

Starting April 25, the Bureau of Economic Analysis will release a new way to measure the economy each quarter.  It’s called gross output, and it’s the first significant macroeconomic tool to come into regular use since gross domestic product was developed in the 1940s.

Steven Landefeld, director of the BEA, says this new macroeconomic tool offers a “unique perspective” and a “powerful new set of tools of analysis.”  Gross output is an attempt to measure what the BEA calls the “make” economy – the total sales from the production of raw materials through intermediate producers to final wholesale and retail trade.  Valued at more than $30 trillion at the end of 2013, it’s almost twice the size of gross domestic product, and far more volatile.

In many ways, gross output is a supply-side statistic, a measure of the production side of the economy.  GDP, on the other hand, measures the “use” economy, the value of all “final” or finished goods and services used by consumers, business and government.  It reached $17 trillion last year.

The measure of the economy’s gross output has been around since the 1930s.  It was developed by the economist Wassily Leontieff, but he focused on individual industries, not the aggregate data as a measure of total economic activity.  Gross output has largely been ignored by the media and Wall Street because the government issued the number annually, and it was two or three years out of date.  That should change now that it will be released along with GDP every quarter.  Analysts and the media will be able to compare the two.

Why pay attention to gross output?  For starters, research published in 1990 shows it does a better job of measuring total economic  activity.  GDP is a useful measure of a country’s standard of living and economic growth.  But its focus on final output omits intermediate production and as a result creates much mischief in our understanding of how the economy works.

In particular, it has led to the misguided Keynesian notion that consumer and government spending drive the economy rather than saving, business investment, technology and entrepreneurship.  GDP data at the end of 2013 put consumer spending first in importance (68% of GDP), followed by government expenditures (18%), and business investment third (16%).  Net exports (-2%) makes up the difference.

Thus journalists and many economic analysts report that “consumer spending drives the economy.”  And they focus on retail spending or consumer confidence as the critical factors in driving the economy and stock market.  There is an underlying anti-saving mentality in this analysis, as evicenced by statements frequently made during debates on tax cuts or tax rebates, that if consumers save their tax refund instead of spending it, it will do no good for the economy.

Although consumer spending accounts for about 70% of GDP, if you use gross output as a broader measure of total sales or spending, it represents less than 40% of the economy.  The reality is that business outlays – adding capital investment and all business spending in intermediate stages of the supply chain – are substantially larger than consumer spending in the economy.  They make up more than 50% of economic activity.  The 2012 data are gross output $28,693 billion, and GDP $16,420 billion.

The critical importance of business activity is clear when you look at employment statistics and leading economic indicators.  Employees in the consumer side of the economy (retail outlets and leisure businesses) account for about 20% of the labor force, and another 15% work for various levels of government.  Yet the vast majority of employees, 65%, work in mining, manufacturing and the service industries.

Most of the leading economic indicators published by the Conference Board are linked to the earlier stages of production and business activity.  These include manufacturers’ new orders, non-defense capital goods, building permits, unemployment claims and the stock market.  Retail sales aren’t listed among the 10 leading indicators either in the U.S. or other major nations.  Even the highly touted “consumer confidence index” published by the Conference Board and highlighted by the media was changed in January 2012 to the “average consumer expectations for business conditions.”

Gross output also does a better job of gauging the ups and downs of the business cycle.  For example, in 2008-2009, nominal GDP declined only 2% while nominal gross output fell sharply by 8%, far more indicative of the depths of the recession.  Interestingly, since the 2009 trough, gross output has been rising faster than GDP, suggesting a more robust recovery.

Finally, as a broader measure of economic activity, gross output is more consistent with economic-growth theory.  Studies by Robert Solow at MIT and Robert Barro at Harvard have shown that economic growth comes largely from the supply side – increased technology, entrepreneurship, capital formation and productive savings and investment.  Higher consumption is the effect, not the cause, of prosperity.

Gross output complements GDP and can easily be incorporated in standard national-income accounting and macroeconomic analysis.  As Steve Landefeld, Dale Jorgenson and William Nordhaus conclude in their important work, “A New Architecture for the U.S. National Accounts” (2006), “Gross output is the natural measure of the production sector, while net output (GDP) is appropriate as a measure of welfare.  Both are required in a complete system of accounts.”

Gross output measures spending in both the “make”economy (intermediate production) and the “use” economy (final output).  It is a better, more comprehensive measure of the nation’s economic activity than GDP, and a better indication of the economy’s growth prospects.

Source: The Wall Street Journal 

April 24, 2014

Safeway posted sales of $8.3 billion in the first quarter of 2014, representing an increase of 1%.  The slight uptick in sales was primarily attributed to an identical-store sales (excluding fuel) increase of 1.8%, partly offset by lower fuel sales in 2014.

This increase of 1.8% consists of a 1% increase in price per item and a 0.8% increase in volume.  Safeway’s share of sales in all outlet channels increased slightly, and sales to its most loyal households improved during the quarter.

“We are working diligently to close the merger with Albertsons by the fourth quarter,” stated Robert Edwards, Safeway president & CEO.  “While sales met plan in the first quarter, income was slightly below plan, in part as a result of inflation in produce, meat and pharmacy that was not fully passed along for competitive reasons.  In the second quarter of 2014, identical-store sales are currently running well above 2%, and we expect to pass along most of the inflation we ar experiencing.  In addition, the direct and indirect cost initiatives we are implementing are expected to improve profitability in the second half of 2014.”

Safeway continues to drive sales momentum through its center of store remodels, as well as merchandising premium, Hispanic and Asian products to meet local demographic needs, Edwards reported.  “In addition, our sales of organic and natural products continue to grow at a rapid pace, with our private label brands O Organics and Open Nature growing approximately two times faster than the rest of the market.”

Source: Retailing Today 

April 23, 2014

Things are looking good for Supervalu, which reported fourth quarter fiscal 2014 net sales of $4 billion, up 1.4%, and net earnings of $26 million, or $0.10 per diluted share.

“Fiscal 2014 was an important transition year for Supervalu as we stabilized the organization and set the foundation for our future,” stated Sam Duncan, Supervalu president and CEO.  “I am pleased with the direction of our business segments and look forward to the new fiscal year where we can focus our attention on driving sales growth across the organization.”

Identical store sales in the retail food segment were positive 0.2%.  Identical store sales in the Save-A-Lot network were positive 2.1%.  Identical store sales for corporate stores within the Save-A-Lot network were positive 3.5%.

Total sales within the independent business segment decreased 0.6% primarily due to the continued impact of losing two large customers and lower military sales partially offset by net new business.

Source: Retailing Today

April 23, 2014

Sales of newly built, single-family homes fell 14.5 percent to a seasonally adjusted annual rate of 384,000 units in March, according to data released today by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

“We keep hearing from our members that tight credit conditions are preventing many first time buyers and younger families from being able to buy a home,” said Kevin Kelly, chairman of the National Association of Home Builders (NAHB) and a home builder and developer from Wilmington, Delaware.  “Congress must outline a clear policy on housing finance so that qualified buyers can get home loans.  Otherwise, this continued uncertainty could threaten the housing recovery and overall economy.”

“Overly stringent underwriting standards for mortgages have had a detrimental effect on modest priced markets and have hit first time home buyers particularly hard,” said NAHB Chief Economist David Crowe.  “As a result, most of the sales are coming from a smaller pool of buyers who have a more established credit history, are more likely to finance with higher cash downpayments and are purchasing higher priced homes.”

Regionally, sales in March fell 21.5 percent in the Midwest, 14.4 percent in the South and 16.7 percent in the West.  The Northeast was the exception to the rule, with a 12.5 percent increase.

The inventory of new homes for sale edged up to 193,000 units in March, which is a six month supply at the current sales pace.

Source: National Association of Home Builders

April 18, 2014

Those looking to understand how the retail industry will perform in the second quarter and beyond can gain an interesting perspective from the outlook shared by one of the world’s largest diversified packaging companies.

First quarter sales in the display and packaging division at Sonoco increased 6% to $153 million and operating profits grew 53% to $5.4 million, while sales in the consumer packaging segment were essentially flat at $465 million but operating profits grew 14% to more than $48 million.  The performance of both divisions helped the company generate earnings per share of 52 cents that exceeded analysts’ estimates by a penny during the period ended March 30.

The numbers are noteworthy because Sonoco’s performance and second quarter outlook offers an early indication of upcoming retail promotional activity, considering demand for its consumer packaging and display and packaging services are fueled by retail and CPG companies.  This is especially true in the case of the display and packaging group which designs, manufactures, assembles, packs and distributes all manner of temporary, semi-permanent and permanent point-of-purchase displays.  Also included in the performance of the division are supply chain management services such as contract packing, fulfillment centers and retail packaging.

This exposure to the retail industry, coupled with the short lag between the end of Sonoco’s quarter (March 30) and when it reports results (April 16) offers a near real time look at industry demand.

“Much of the negative impact from severe winter weather occurred in January and February.  As weather improved in March, we saw a strong rebound in customer orders across most of our businesses and a sharp improvement in operating performance,” said Sonoco president and CEO Jack Sanders.  “Enterng April, customer orders appear to be running at more normal levels, in line with volume expectations and our second-quarter earnings guidance, which anticipates continued improvement in operations.”

Source: Retailing Today

April 21, 2014

The Conference Board Leading Economic Index for the U.S. increased 0.8 percent in March to 100.9, following a 0.5 percent increase in February, and a 0.2 percent increase in January.

“The LEI rose sharply again, the third consecutive month increase,” said Ataman Ozyildrim, Economist at The Conference Board.  “After a winter pause, the leading indicators are gaining momentum and economic growth is gaining traction.  While the improvements were broad-based, labor market indicators and the interest rate spread largely drove the March increase, offsetting the negative contribution from building permits.  And, for the first time in many months, the consumer outlook is much less negative.”

“The March increase in the LEI suggests accelerated growth for the remainder of the spring and the summer,” said Ken Goldstein, Economist at The Conference Board.  “The economy is rebounding from widespread inclement weather and the strengthening in the labor market is beginning to have a positive impact on growth.  Overall, this is an optimistic report, but the focus will continue to be on whether improvements in the labor market can be sustained, fueling stronger economic performance over the next few months.”

The Conference Board Coincident Economic Index for the U.S. increased 0.2 percent in March to 108.3, following a 0.4 percent increase in February, and a 0.1 percent decline in January.

The Conference Board Lagging Economic Index for the U.S. increased 0.6 percent in March to 123.0, following a 0.3 percent increase in February, and a 0.6 percent increase in January.

Source: The Conference Board

April 21, 2014

Last Week: With winter weather in the rearview mirror, the big question now is how much bounce will demand get – with shoppers finally able to get out and about.  Weather may be the big reason why the economy underperformed in the first quarter.  Good weather may be the reason why the economy overperforms this spring.

The Conference Board Leading Economic Index For The U.S., March

The Coincident Economic Index, which tells us where the economy is right now, continued to rise moderately through February.  The Leading Economic Index for the United States has been consistently much stronger, suggesting there could be more punch going forward.  With the end of inclement winter weather imminent, evidence of better conditions might begin to show in the housing, labor, and retail markets.

Orders For Durable Goods, March (Bureau of the Census)

This is the key economic report of the week.  Relatively weak ordering has been persistent, as both consumer and business demand show something of a wait and see attitude.

Source: The Conference Board

April 17, 2014

Solid growth is expected in the home remodeling market this year but momentum should begin to moderate in the fourth quarter, according to the Leading Indicator of Remodeling Activity (LIRA), released today by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University.  Sluggishness in the housing market and specifically in home sales may result in a deceleration of home improvement spending from double-digit annual growth through the third quarter to a year-over-year gain in the high single digits by the end of the year.

“The housing recovery has at least temporarily lost some of its momentum,” says Eric S. Belsky, managing director of the Joint Center.  “And as a result, remodeling spending is expected to follow suit and see slower growth beginning later this year.”

“Home improvement spending has already recovered a significant share of its losses from the downturn,” says Kermit Baker, director of the Remodeling Futures Program at the Joint Center.  “As spending moves into the next phase, we expect to see recent double-digit growth tail off to its longer-term average in the mid-single-digit range.”

The Leading Indicator of Remodeling Activity (LIRA) is designed to estimate national homeowner spending on improvements for the current quarter and subsequent three quarters.  The indicator, measured as an annual rate-of-change of its components, provides a short-term outlook of homeowner remodeling activity and is intended to help identify future turning points in the business cycle of the home improvement industry.

Note: An important change was made to the LIRA estimation model this quarter.  With the upheaval in financial markets in recent years, the traditional relationship between interest rates and home improvement spending has significantly deteriorated.  As a result, long-term interest rates have been removed from the LIRA estimation model.

Source:  Joint Center for Housing Studios of Harvard University