Manufacturing Shifts to Lower Gear

Submitted by Ronald Tennant with Metrocities Mortgage:

MBA (5/19/2008 ) Velz, Orawin
Last week’s economic reports painted a picture of subdued activity. Total housing starts unexpectedly jumped in April as volatile multifamily starts surged 36 percent after plunging 35 percent in March. Single-family home building saw the 13th consecutive monthly drop, reaching the lowest level since January 1991.
Continued moderate declines in single-family starts are necessary, however, to bring about a more balanced housing market. Builders’ confidence continued to slide in May, sitting just above the record low reached in December, according to the National Association of Home Builders/Wells Fargo Housing Market Index. The present sales component of the index set a fresh record low. The excess supply is evident in the continued rising months’ supply of new home sales to 11.0 months in April, the third highest reading in the history of the series that began in 1963. Home prices continued to deteriorate, according to the National Association of Realtors regional home prices; two-thirds of metropolitan areas experienced year-over-year price drops in the first quarter, and the year-over-year change in the nation’s median price set a record decline.

Industrial production fell in April, as manufacturing production saw the biggest drop since September 2005, in the aftermath of hurricane Katrina. The biggest drag on manufacturing production was motor vehicle and parts output. Industrial production is one of the five monthly indicators (including monthly gross domestic product) that the National Bureau of Economic Research tracks to date recessions and expansions. It has dropped 1.2 percent since peaking in January. Two regional Federal Reserve Banks’ manufacturing surveys released last week indicated reduced activity in May.

Record high gasoline prices, declining home prices and tighter lending standards for mortgages and other consumer loans have combined to depress consumer confidence, which reached the lowest reading since June 1980, according to the preliminary University of Michigan Consumer Sentiment Index for May. Despite sliding confidence, retail sales held up well in April. While the overall retail sales dropped, auto sales were responsible for half of the decline. Excluding auto, sales posted a strong 0.5 percent increase for the month. While the tax rebates have failed to lift confidence levels, they will likely boost consumption spending over the next few months. The bottom line: the economy is sliding gently downhill but the decline is not gathering momentum.

Long-term interest rates rose through Wednesday but declined on Thursday and Friday. The yield on 10-year Treasury notes stayed around 3.80 percent by mid-Friday afternoon, three basis points lower than the rate on the previous Friday.

Housing and Mortgage Indicators:
Total housing starts rose 8.2 percent in April to a seasonally adjusted annualized rate of 1.03 million. Single-family starts dropped 1.7 percent. Multifamily starts were up 36.0 percent, offsetting the 35.1 percent decrease in March. Starts of 2-4 units fell 22.2 percent while starts of 5 units and over surged 40.5 percent.

Total starts increased in three of four regions, led by a 24.4 percent jump in the Midwest. Construction was up 18.5 percent in the West and 3.6 percent in the South. Starts dropped 12.7 percent in the Northeast.

Through the first four months of this year, single-family starts were 39.4 percent lower than those in the first four months of 2007. By contrast, year-to-date multifamily starts were 11.3 percent higher than those last year.

Total permits increased 4.9 percent in April to 978,000 units. Single-family permits rose 4.0 percent, the first monthly increase in 13 months.

The National Association of Home Builders/Wells Fargo Housing Market Index declined to 19 from 20 in April after holding steady for the previous three months. (Readings below 50 indicate that more respondents view conditions as poor.) The index was one point above the record low of 18, reached in December 2007, and has hovered within two points of the historical low over the past nine months.

The survey asks builders for their sentiments on current sales, traffic of potential buyers and projected sales over the next six months. Fewer builders expected market conditions to improve in the near term: the index gauging sales expectations for the next six months fell three points to 27. The index gauging current sales conditions declined one point to 17. The index gauging traffic of prospective buyers declined two points to 17.

The National Association of Realtors Single-Family Median Home Prices for Selected Metropolitan Statistical Areas (MSAs) showed that price declines broadened in the first quarter of this year. Of 149 MSAs, 48 showed higher median prices from a year earlier, 100 showed price declines and one showed a flat median price. The median price for single-family homes for the nation fell 7.7 percent in the first quarter from a year ago, the biggest decline since the inception of the series in 1979.

Economic Indicators:
Retail sales decreased 0.2 percent in April following a 0.2 percent gain in March. A sharp drop in auto sales was largely responsible for the decline. Sales at auto dealerships and parts stores fell 2.8 percent, the biggest drop since June 2007. Over the past year, retail sales advanced 2.0 percent. While sales have remained weak, they are not collapsing. Over the next several months, retail sales will benefit from tax rebate checks, which started arriving to taxpayers earlier this month.

Sales at gasoline stations declined despite an increase in gasoline prices, indicating that consumers adjusted to the rising prices by cutting back their gasoline consumption. Housing-related sales, including those at building supply, appliances and furniture stores, surprisingly increased. Rising food prices helped boost sales at grocery stores and restaurants.

Retail sales excluding autos, gasoline and building materials—the portions used to calculate the consumer spending component of gross domestic product (GDP)—rose 0.4 percent, matching the gain in March. Retail sales account for about 40 percent of total consumer spending, with spending on services accounting for the rest.

Import prices rose 1.8 percent in April, following a 2.9 percent surge in March. On a year-over-year basis, import prices were up 15.4 percent, the largest on the record.

Imported petroleum prices increased 4.8 percent, while non-petroleum import prices were up 1.1 percent for the second consecutive month. From a year ago, non-petroleum prices were up 6.2 percent, the largest increase on record that began in 1989.

Business inventories edged up 0.1 percent in March, and February’s increase was revised downward from 0.6 percent to 0.2 percent. The revisions pointed to a downward revision of contribution to economic growth from inventory investment. However, the smaller increase than expected in stockpiles boded well for economic growth in the current quarter.

The Consumer Price Index (CPI) rose 0.2 percent in April after a 0.3 percent gain in March. Energy prices were unchanged as a drop in gasoline prices offset rising fuel oil and natural gas prices. While actual retail prices for gasoline increased during April, the drop reflected the seasonal adjustment factor used to correct seasonal variations as gasoline prices generally increase in April from March. Food prices jumped 0.9 percent, the biggest increase since January 1990.

Excluding the volatile food and energy items, the core CPI rose 0.1 percent. Over the past year, the core CPI was up 2.3 percent, decelerating from 2.4 percent in March and remaining within the Fed’s comfort zone of 1.5 to 2.5 percent.

Industrial production was down 0.7 percent in April, following a 0.2 percent increase in March. Manufacturing output, which accounts for about four-fifths of industrial production, dropped 0.8 percent. Auto production was responsible for half of the decline. Mining output also fell 0.8 percent, while utility output gained 0.3 percent.

A protracted strike at American Axle may have contributed to the decline in manufacturing output. However, automakers such as General Motors are also cutting production to respond to declining demand. Sales of cars and light trucks fell to an annualized rate of 14.4 million in April, the slowest pace since August 1998.

The industrial production report showed that capacity utilization, which measures a portion of plants in use and is a gauge for inflationary pressures, fell to 79.7 percent, the first reading below 80 percent since October 2005.

The University of Michigan Consumer Sentiment Index dropped 3.1 points in May according to preliminary data. The index came in at 59.5, the lowest reading since June 1980. The current conditions component fell 5.3 points from April, while the expectations component dropped 1.6 points.

Near-term expected inflation continued to rise. One-year expectations increased to 5.2 percent, the fastest pace since 1982. Five-year expectations rose more modestly to 3.3 percent, the highest since 1996.

The New York Fed’s Empire State manufacturing survey showed that the general business conditions index fell to negative 3.2 from 0.6 in April. This was the third negative reading, which indicates contracting activity, in the past four months. The Philadelphia Fed manufacturing survey continued to show reduced activity in May but the pace of contraction moderated. The general business conditions index improved to negative 15.6 from negative 24.9. Despite the improvement, the index has been negative for six consecutive months.