The national economy passed some significant tests of strength as spring yielded to summer. Unlike the previous three May’s, the momentum of the early second quarter has not been undone by global fears or stock market meltdowns. Evidence that the economy was growing at a better than expected clip – if not at a robust pace – provided motive for the Federal Reserve Board to discuss scaling back its monthly mortgage-backed securities bond buying program earlier than planned. That program, referred to as Quantitative Easing (QE), was aimed at providing liquidity to the markets during the recession and stimulus to the economy.
News that the Fed was impressed enough to curtail QE was not viewed as good news by the investment markets. Much of the succeeding sell off – especially in the Treasury bond market – was an inaccurate misinterpretation of Fed Chair Ben Bernanke’s announcement as a signal that interest rates were about to rise. Market experts also saw the response as something like a child’s reaction to bad news in an attempt to give the Fed pause in its decision to back off. There was also a lot of fear about whether or not the economy was strong enough to support itself without the stimulus that the QE programs had provided.
It’s worth noting that the stock markets tend to be looking forward six months or more and they have increasingly been disconnected from what is actually happening in the economy. So while the Federal Reserve’s actions (or debate about actions) may have created another economic test, the people and businesses that comprise the underlying markets seem to be moving forward with little regard. Much like with the so-called sequester and the tax hikes at the beginning of the year, Main Street seems to be ignoring what Wall Street fears.
The most positive factor thus far in 2013 has been the accelerating creation of jobs. While the pace of new hiring is not more than keeping up with layoffs and immigration, job growth has remained steady but not exceptional nationwide. Private-sector payrolls grew by nearly 180,000 positions in May, bringing the annual gains to 2.2 million jobs. The net gain was approximately 2.1 million jobs, once the loss of 58,000 government jobs is factored into the total.
Declining unemployment seems to be pushing consumer and business confidence higher and the economy is expanding. Expansion is being led by a substantial comeback in housing, resilient consumer spending, a broad-based rally in private sector employment and ongoing growth in the energy and technology sectors. This is especially evident in two sectors that are traditionally bellwethers of growth: auto sales and home building.
Car and vehicle sales in May jumped higher for all three American manufacturers. Chrysler Group LLC reported U.S. cars sales were up 11% in May. The automaker sold 166,596 cars in May, compared to 150,041 in the same month the year before. The sales were the best for the month for the firm since 2007. Ford sales rose 14 percent for May to 246,585 units, from 216,267 vehicles a year ago. The car company said the total was its best May result since 2006. Likewise, General Motors reported higher sales, with a total of 252,894 vehicles sold in May. The May retail total of 187,658 vehicles were up
8.6 percent, the highest total since September 2008. GM also noted that the Cadillac brand was experiencing 40 percent growth year-over-year.
The more robust sales are resulting in new hiring and price increases, which are a good indicator of industry health. The average U. S. car price rose two percent in May.
Data on home sales indicates an environment that will continue to support higher prices and new construction. The National Association of Realtors (NAR) reported on June 20 that sales of existing homes rose 4.2 percent to a seasonally adjusted annual rate of 5.18 million in May from 4.97 million in April, and is 12.9 percent above the 4.59 million-unit pace in May 2012. Not surprisingly, the median home price rose even faster to $208,000, up 15.4 percent compared to May 2012.
NAR chief economist Lawrence Yun expressed concern that prices were accelerating too fast and estimated that construction of new homes would need to increase by 50 percent from the current levels to allow inventory to grow. As of May, there was a five-month supply of homes in the market.
The coming summer and fall months should prove pivotal to how the housing recovery plays out. Factors affecting affordability of homes – price, interest rate, inventory – have all turned unusually favorable over the past two or three years. If the overall economy continues to support buyer confidence and builders can access credit and labor to meet demand, a housing growth cycle should follow.
Builder confidence in the market for newly-built single-family homes hit a significant milestone in June, surging eight points to a reading of 52 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today. Any reading over 50 indicates that more builders view sales conditions as good rather than poor. The eight-point jump in the index was the biggest one-month gain since August and September of 2002, when the HMI recorded a similar increase of eight points.
Conditions for home ownership have improved dramatically throughout the recession. Source National Association of Realtors (see below).
All three HMI components posted gains in June. The index gauging current sales conditions increased eight points to 56, while the index measuring expectations for future sales rose nine points to 61 – its highest level since March 2006
Construction activity for May showed an increase over April, according to McGraw-Hill Construction. At a seasonally adjusted annual rate of $495.7 billion, new construction starts in May grew five percent from the previous month. The largest gain was in nonresidential building, which registered moderate growth for the second month in a row. Smaller gains in May were reported for housing and public works and electric utilities construction. During the first five months of 2013, total construction starts on an unadjusted basis were at $187.6 billion, down three percent from the same period a year ago; however the 2013 year-to-date total construction is skewed by a steep decline in the dollars for new electric utility projects that started in the first half of 2012. Excluding electric utilities, total construction starts would be up 10 percent year-to-date.
The other national construction report, Reed Construction Data, said on June 19 that nonresidential building starts had climbed 8.4 percent year-to-date, while non-building starts fell 24 percent, for a combined decline of 4.6 percent. Reed also reported a modest increase in starts in May. Differences in methodology often lead to divergent monthly reports from Reed and McGraw-Hill but the year-to-date conclusions of both seem to be pointing to a market that is expanding robustly for housing, modestly for non-residential construction and falling precipitously for heavy/highway and utilities.
Data from the Department of Commerce for May was not available at the time that Reed and McGraw-Hill released their data but the government’s April reports show consistent, if modest, gains in nonresidential spending. As has been the case since 2011, the volume of construction in the private and public sectors are moving in opposite directions.
The gradual increase in private construction is corresponding with a gradual erosion of public spending, which is creating a widening gulf between the activity levels of each sector. After the last of the ARRA stimulus was spent in 2011, private non-residential construction has outstripped public spending. Within the past six months the gap has grown wider, averaging more than $45 billion more private than public spending.
No reversal in the trend is expected in 2013, although the increasing government revenues may reduce the gap in 2014. Even with improving tax receipts, government deficits were steep enough that increased capital spending will be negligible until 2015 or later. With demographics putting additional stresses on K- 12 and higher education in the latter half of the decade, public spending increases should be disproportionately higher in the heavy and highway segment of the market. Given the condition of the infrastructure in the U. S., increased highway spending is in order.
The source of hope in that regard is the legislation coming from Congress and the White House to boost employment through federal infrastructure spending. President Obama’s previous jobs bill focused on enabling small businesses to grow but was criticized for appealing more to Wall Street than to Main Street. Both the administration and Congress are pushing for bills in 2013 that will create jobs quickly (remember that mid-term elections are just over a year off) and highway bills are effective at accomplishing that. A bill that will earmark funding for something between $30 and $50 billion is likely to result, although Republicans will look for acceptable ways to pay for the additional spending and may weigh the legislation down with unrelated concessions.
There still does not seem to be the political appetite for developing any infrastructure spending for jobs into a more permanent expansion of the Federal highway allocation. Until some budget compromise is reached that moves towards the center of both parties’ agendas, Federal capital spending to support educational facilities or to invest in the real estate portfolio of the General Services Administration will be minimal. The solace in the gap between private and public spending is that the variance is growing because private investment is growing. That should continue through 2014.