Seven Things You Need to Know about the Economy

It’s Friday and that means it’s time to review the latest economic data and identify which pockets of the economy are heating up and which are slowing down. Don’t worry about catching every headline and every report throughout the week—I recap all of the most important news impacting your wealth right here every Friday. Let’s take a look at this week’s big headlines:

1. Existing Home Sales Top Expectations…

In May, sales of existing homes rose 4.9% to an annual rate of 4.89 million, up from a revised 4.66 million in April. Economists had expected existing home sales to tick up to a 4.7 million annual rate so this beat expectations. Meanwhile, the median sale price for an existing home in May was $213,400. This represents a 5.1% increase over May 2013, representing the slowest year-on-year gain since March 2012. At the current sales pace there are enough homes on the market for a 5.6 month supply, indicating slightly tighter-than-normal inventories. This represents the biggest jump in existing home sales since August 2011. Existing homes are also selling at the fastest pace since October, when they topped the five-million mark. This was a strong report, but it was the May new home sales report that truly blew economists away this week.

2. …But New Home Sales Blow Them Out of the Water

In May, sales of new homes skyrocketed 18.6% to an annual pace of 504,000. Economists were calling for just a 425,000 annual rate. Breaking it down by region, sales in the Northeast surged 54.5%. New home sales in the West, South and Midwest rose 34%, 14.2% and 1.4%, respectively. Meanwhile, the median price of a new home rose to $282,000, and the supply of new homes fell to just a 4.5 month inventory. May’s report marked the highest level of new home sales in six years and the strongest monthly gain in three years. It is clear that persistently low mortgage rates and a tighter supply of new homes encouraged a 6.9% annual increase in median new home prices. With prices on the rise, this may lead to new home sales moderating in the coming months.

3. Consumers Are Now Living In the Now

In June, the Conference Board’s index of consumer confidence jumped three points to 85.2. This surpassed economists’ expectations of a reading of 83.5. Meanwhile, May’s reading was revised lower from 83.0 to 82.2. Breaking it down, consumers reported that they were more optimistic about current business conditions. So the present situation index surged from 80.3 in May to 85.1 in June. The future expectations index also rose from 83.5 to 85.2. The important thing about this report is that consumers are now more confident about current conditions than any time in the past six years. This was reinforced by Friday’s release of the University of Michigan’s consumer sentiment index, which also rose from 81.9 in May to 82.5 in June, in line with expectations.

4. Durable Goods Orders Dragged Down By Defense Spending

In May, durable goods orders fell at a 1% annual pace. This came as a surprise to economists, who were calling for a 0.5% increase. The culprit was a hefty 31.4% decline in defense spending. This was somewhat expected, as the U.S. Navy had previously placed a $17.6 billion order for ten new submarines in April. Excluding defense spending, orders for durable goods actually rose 0.6% in May. There is no doubt that the headline results surprised economists; after all, this was the first decline in durable goods orders in four months. Despite the lukewarm headline figure, the details more than made up for it. I’m especially encouraged by the stronger vehicle orders (up 2.1%) and business spending (up 0.7%), both of which indicate a stronger Q2 GDP report.

5. The Economy Fared Worse than Expected in Q1

In the first quarter, Gross Domestic Product fell at a revised 2.9% rate, down from the previously reported 1.0% annual contraction. This was also substantially lower than economists’ consensus estimate of a 1.8% annual decline. As previously stated, the main reason for this massive downward revision was the consumer spending component. Earlier, the Commerce Department had anticipated a 3.1% rise consumer spending. However, with healthcare spending now expected to surge due to ObamaCare, this figure has been revised down to reflect just 1% growth. Lower exports, higher imports and lower inventory growth also contributed to the significant downward GDP revision. At first glance, this was a pretty ugly report. However, things are looking up from here. Economists are currently calling for 3.6% annual GDP growth in the second quarter. So the first-quarter GDP report was largely dismissed by Wall Street as being hindered by severe winter weather and a statistical fluke from the implementation of ObamaCare.

6. Jobless Claims Continue Steady Descent

For the week ending on June 21, initial claims for unemployment ticked down by 2,000 to an annual rate of 312,000. Economists had expected jobless claims to rise to 315,000 so this was a slightly better-than-expected report. Meanwhile, the four-week moving average rose by 2,000 to a 314,250 annual rate. To put things into perspective for jobless claims, 400,000 is usually the cutoff rate, where any lower reading signals job creation and a higher reading signals job loss. Any reading lower than 350,000 typically indicates moderate job creation. Jobless claims have been trending below 350,000 for the past year now so I consider this a modest victory for the labor market.

7. Consumer Spending Climbs on Brewing Inflation

In May, personal income increased $58.8 billion, or 0.4%. This met economists’ expectations. Personal spending increased 0.2%, missing the 0.3% consensus estimate by a hair. Meanwhile, personal consumption expenditures (a popular inflation indicator) also rose 0.2%. The fact that headline personal spending and PCE moved in lockstep last month suggests that higher prices, not increased consumer activity, is behind higher spending. PCE is now running at an annual pace of 1.8%, so it is drawing closer to the Fed’s official inflation target of 2%. This is significant because as the PCE gets closer to 2%, interest rates, in theory, will likely rise.

Have a great weekend,

Sincerely,

signed: Louis Navellier

Louis Navellier

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