Economic Reports Insight

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Economic Reports Insight

Yesterday was heavy on significant economic reports, including Housing Starts, Productivity, the Treasury Budget, FOMC Meeting Minutes, Import/Export Prices, Mortgage Activity and Same-Store Sales data. While the day's trade opportunity is long gone now, we view this economic report data, and our insight, important additions to your memory banks for the days and weeks ahead.

Housing Starts

Kicking off the economic report schedule, Housing Starts were noted for the month of January. Starts ran at an annual pace of 591K, coming in above the economists' consensus for 580K. December's Starts were also revised higher to 575K, from 557K. Compared to the prior year level of activity, Housing Starts were 21.1% higher.

However, all the news was not good, as Building Permit authorizations fell to 621K, down 4.9% from December's revised rate of 653K. That's still 16.9% above January 2009 though. Still, permitting activity precedes housing starts, and if the pace is slowing, it could lead to a slowing Starts pace. Given that Permits are higher than Starts on an absolute basis, that is not necessarily the case.

Multi-family Starts drove the month, as Starts of properties of five units or more increased by 17.6%. Single-family units only increased by 1.5%, as homebuilders remain emotionally scarred by the past few years (or is it sensibility, or better yet foreclosure inventory). Regionally speaking, the Northeast (+10%) and West (+8.9%) were responsible for overall growth, with the South (+1.0%) and Midwest (-3.2%) lagging behind. The good news is that the size of structures played no role in regional trends, with growth in multi-family and single-family both found in the Northeast and West.

We wonder if this is symptomatic of renewed speculation or just the deeper pockets of larger real estate developers. It would seem that smaller properties (assuming lower pricing) might find greater demand as the market recovers, but in metropolitan rich regions found in the Northeast and West, this may not be the driver of construction now. Since prices continue to decline, we suspect developers are not finding the kind of profits they had forecast when the blueprints were drawn up.

"...much of the gain came in manufacturing, where I believe market share shift toward the US automakers (away from Toyota) played a role in skewing results."

Productivity & Capacity Utilization

We received more good news on the surface from the Industrial Production & Capacity Utilization Report for January. Productivity gained by 0.9% (+0.8% in Dec.), versus economists' expectations for an improvement of 0.8%. However, much of the gain came in manufacturing, where I believe market share shift toward the US automakers (away from Toyota) played a role in skewing results.

As Toyota Motors (NYSE: TM) found itself consumed by scandal and faulty recalled vehicles, sales gains ensued at Ford (NYSE: F) and General Motors. This, therefore, does not reflect growth of the economic pie, which is what we are looking for. It, rather, reflected US firms garnering a larger share of the pie. It's a good thing, but it's not reflective of the economic recovery we want to see in this data.

Automotive products gained 5.1%, by far the greatest driver of the overall gain. Also, non-energy non-durable goods acted to boost the overall figure, aided by price increase in foods we expect. My favorite positive point in the data is the 1.7% increase in information processing equipment productivity. That's indicative of real economic expansion post trough.

Capacity Utilization of course improved on this productivity gain, since nobody is expanding production now, which would act as an offset in a more normal environment. Capacity utilization improved 0.7 percentage points, to 72.6%. We have a ways to go yet though, as capacity utilization was still a full 8 percentage points off its 1972-2009 average.

FOMC Meeting Minutes

Much is being made of Thomas Hoenig's dissent regarding the wording on the Fed guided future of interest rates. There was not much difference though Hoenig's suggestion and Fed policy, and it still looks like rates will be kept at zero for the foreseeable future. Great debate also erupted in January with regard to the eventual shrinking of the Fed's fat balance sheet, now above $2 trillion. However, the FOMC members are concerned about the potential perception of such an action, that it might prematurely worry the investment community about rate hikes that may not actually be planned. This is the first time the FOMC took up the prospect of trimming the fat, and so it seems natural that furious debate might fire. The Fed continues to see modest growth and high unemployment for 2010, as well as relatively contained prices. Debate will continue, and the market will seek to understand and predict the timing of Fed rate action. Fed rate hikes act to tame stock prices, as the cost of capital increases.

"...the odds of Standard & Poor's downgrading the US sovereign debt rating are slim to none, because S&P is a biased for profit organization, whose future depends on the economic stability of the United States."

Treasury Budget Deficit January

January usually brings a monthly budget surplus, but this January was special... January's deficit amounted to $42.634 billion, versus economists' expectations for an even larger shortfall of $46 billion.

Comparing America to Greece

There's been much said about the American economy, its budget deficit and how it compares with Greece. As a Greek/American, I think I offer an important voice in saying such comparisons are simply ridiculous. The complexity of the American economy is worlds apart and ahead of Greece, first and foremost. It represents the world's largest active consumer group; its population is the world's most productive; its citizenry are significantly less burdensome than most socialist countries are, and yet far better off than the neglected citizens of communist perversions in North Korea, Russia and China.

Finally, and most critically, the odds of Standard & Poor's downgrading the US sovereign debt rating are slim to none, because S&P is a biased for-profit organization, whose future depends on the economic stability of the United States. In any event, by now, after the Congressional testimonies and discoveries about rating agency operations with regard to mortgage-backed securities, can anyone say there's integrity or impartiality at the inspectors of the House of Cards?

Mortgage Activity

Mortgage activity decreased in the week ended February 12. While the decline was not rate related, it was just as well explained by weather. While rates stuck unchanged, the Market Composite Index decreased 2.1%. Purchase Activity eased by 4.0%, while the Refinance Index slipped 1.2%.

Weekly Same-Store Sales

Weekly same-store sales were likewise weather impacted in the week ending February 13. Week-to-week, sales fell by 1.6%, while the year-to-year change was minus 0.7%.

Import & Export Prices

January's Import and Export Prices data showed greater increases than economists had foreseen. Import prices rose 1.4%, versus expectations for a 1.0% increase (Barron's), 75% definable by energy price increase. However, non-fuel import prices increased 0.4%, and are up 1.3% over the last year.

Export prices jumped 0.8%, versus expectations for a 0.6% increase. Prices are up a big 3.4% over the last twelve months. Agricultural export prices rose 1.4% in January. Still, non-ag prices rose 0.7% in January.

Finished goods prices are not increasing, while input prices are. It's hard to raise prices on finished goods in an economic environment like our current situation. However, increasing demand on stagnant capacity offers an offset for businesses to keep profit margins intact for now. All you have to do is work your previously idle staff, and productivity gains and leverage allow you to absorb rising input costs.

Still, eventually, capacity is going to fill, and capital expenditures will be required to meet demand. Thus, profit margins will be squeezed. Furthermore, at the same time margins are squeezed, potential currency devaluation (across currencies, not relatively speaking) could very well drive prices significantly higher, in my opinion. Thus, we may find ourselves heading for biblical price standards, and an environment that threatens to inspire war for resources. Oh and by the way, that would not be a healthy environment for stocks. What I'm describing is worthy of its own full article, and a subject that deserves greater exploration no matter. I'll explore it further at a later date. That's quite a way to finish though isn't it... or is it finish us all off.

Corporate News Drivers

Darden Restaurants (NYSE: DRI) has its analysts' day. The EPS schedule includes Acergy (Nasdaq: ACGY), Advance Auto Parts (NYSE: AAP), Agnico-Eagle Mines (NYSE: AEM), Analog Devices (NYSE: ADI), BNP Paribus (Paris: BNP.PA), Brushed Engineered Materials (NYSE: BW), Calumet Specialty (Nasdaq: CLMT), Career Education (Nasdaq: CECO), Chesapeake Energy (NYSE: CHK), Cimarex Energy (NYSE: XEC), Commercial Vehicle Group (Nasdaq: CVGI), Community Health Systems (NYSE: CYH), Deere & Co. (NYSE: DE), Devon Energy (NYSE: DVN), Donegal Group (Nasdaq: DGICA), Endurance Specialty Holding (NYSE: ENH), ExpressJet Holdings (NYSE: XJT), Federal Realty Investment Trust (NYSE: FRT), Fundtech Corp. (Nasdaq: FNDT), Genzyme (Nasdaq: GENZ), Glimcher Realty Trust (NYSE: GRT), Guidance Software (Nasdaq: GUID), Health Grades (Nasdaq: HGRD), Hewlett-Packard (NYSE: HPQ), Host Hotels & Resorts (NYSE: HST), IAMGOLD (NYSE: IAM), ING Groep (NYSE: ING), Investors Title (Nasdaq: ITIC), iRobot (Nasdaq: IRBT), Itron (Nasdaq: ITRI), Ituran Location & Control (Nasdaq: ITRN), Kinross Gold (NYSE: KGC), Kite Realty Group (NYSE: KRG), Koppers Holdings (NYSE: KOP), Martha Stewart Living (NYSE: MSO), NCI, Inc. (Nasdaq: NCIT), NetApp (Nasdaq: NTAP), Newfield Exploration (NYSE: NFX), NICE Systems (Nasdaq: NICE), O’Reilly Automotive (Nasdaq: ORLY), Oceaneering International (NYSE: OII), OfficeMax (NYSE: OMX), Otelco (Nasdaq: OTT), Owens Corning (NYSE: OC), Platinum Underwriters Holdings (NYSE: PTP), Priceline.com (Nasdaq: PCLN), Rimage Corp. (Nasdaq: RIMG), Rockwood Holdings (NYSE: ROC), Rogers Communications (NYSE: RCI), Sinclair Broadcast Group (Nasdaq: SBGI), Skechers (NYSE: SKX), Sovran Self Storage (NYSE: SSS) and Vital Images (Nasdaq: VTAL).


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