Making Sense of the Economy this Week

I’m a numbers guy, so I get a real kick out of reviewing the latest economic data and identifying which pockets of the economy are heating up and which are slowing down. However, with breaking economic news coming out nearly every day, I understand that it can be a hassle keeping up with each and every report. So every Friday in this blog I hit the past week’s highlights and provide my take on the latest economic trends. Let’s take a look at this week’s big headlines:

#1—Inflation Remains in Neutral and Gives the Fed the Green Light

In May, the headline CPI rose for the first time in three months, gaining 0.1%, but came in below analyst expectations of a 0.2% gain. Over the past 12 months, CPI inflation is up 1.4%, accelerating from April’s 1.1% reading. In addition, excluding food and energy, the core CPI rose 0.2%, in line with expectations. In the past 12 months, the core CPI has risen just 1.7%, which gives the Fed plenty of room to continue with its 0% interest rate policy.

#2—Lower Housing Inventories Light a Fire Under Homebuilders

In May, housing starts rose 6.8% from April to a seasonally adjusted rate of 914,000. This is 28.6% higher than May 2012.

At the same time, building permits fell 3.1% to an annual rate of 974,000. That’s still close to the five-year high hit in April.

The faster rate of construction was largely due to an increase in multi-family construction as single-family homes ticked up just 0.3%. But on the flip side, building permits for single-family homes hit a five-year high. Ultimately, low inventory is luring homebuilders back into the market and many economists expect housing starts to rise to a 1.6 million annual pace before supply can meet demand, so housing starts will likely continue to steadily rise in the upcoming months.

#3—Jobless Claims Bounce Back, Moving Average Remains Tame

Last week, jobless claims climbed 18,000 to an annual rate of 354,000. This was a more dramatic rise than economists had predicted—the consensus had called for claims to rise to a rate of 340,000. Meanwhile, the four-week moving average rose by 2,500 to 348,250. Despite the unexpected rise, the four-week moving average still remains comfortably below 400,000. Typically, the U.S. economy creates payroll jobs when initial claims fall under 400,000, so we remain in decent shape as long as we remain below that benchmark.

#4—Existing Home Sales Hit Multi-Year High

In May, existing home sales climbed 4.2% to a seasonally adjusted annual rate of 5.18 million. That’s the highest rate since November 2009 when a national homebuyer tax credit helped propel sales and almost 13% above year-ago levels. Meanwhile, the supply of existing homes was up 3.3% to 2.22 million homes for sale—about a 5.1 month supply at the current sales pace. Once again, this was strong improvement in the housing market and beat expectations for just 5.00 million homes sold. Nonetheless, some analysts are wary about the swift price increases that we’ve seen in recent months, as well as the effects of the Fed’s eventual tapping of the brakes with its buying of mortgage-backed securities.

#5—LEI Suggests Slow but Steady Growth

In May, the Leading Economic Indicators (LEI) index edged 0.1% higher, following an upwardly revised 0.8 percent increase in April. This was just under the 0.2% gain forecast by economists. Three of the 10 LEI components contributed to this growth, including the interest rate spread, stock prices and the Leading Credit Index. This was a mixed report. While the report could have been stronger, it points to slow-but-steady growth. In addition, the April revision is a good sign. As it stands, the LEI’s six-month growth rate remains steady.

Have a nice weekend,

Signed Louis Navellier

Louis Navellier

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