Wentz Weekly Insights
Stronger Economic Data Reprices Expectations, But Will the Strong Data Continue?
Recent Economic Data
- Existing home sales declined for the 12th consecutive month in January, falling 0.7% to a seasonally adjusted annualized pace of 4.00 million. This is the slowest pace of existing home sales since October 2010. Compared to January 2022, sales are down 37% from the 6.34 million annualized pace. The NAR chief economist said lower priced regions experienced modest growth in sales while more expensive regions experienced declining sales. The median sales price was $359,000, the increase in prices slowing to just 1.3% from a year earlier. Inventory has steadily improved, up 2% in the month and 15.3% from a year ago with 980,000 units on the market making up 2.9 month supply at the current sales pace. It is however, taking longer to sell homes – the average property was on the market for 33 days, up from 26 days in December and up from 19 days a year ago.
- Sales of newly constructed homes rose more than expected in January, rising 7.2% above December’s sales pace but 19.4% below the pace from January a year ago, according to the U.S. Census Bureau. A seasonally adjusted annualized rate of 670,000 new homes were sold in the month, helped by interest rates that fell further in January and the median home price that was down 8.2% in the month (and relatively unchanged from a year earlier). Inventory of new homes was at 439,000, down about 3% from December with supply that would last about 7.4 months at January’s sales pace, worsening from 9.6 month and 11.4 months in December and November, respectively. Also, the supply of completed homes has increased quickly over the past couple months with builders finishing more homes as cancellation rates increase with affordability declining.
- The second revision of GDP for the fourth quarter 2022, based on more complete source data than the first estimate, showed growth was slower than the first estimate, rising at an annualized pace of 2.7% versus 2.9% in the first estimate. The update reflects a downward revision to consumer spending (likely from a weaker December than what was initially thought) and partially offset by an upward revision to nonresidential fixed investment. The worse news was GDP inflation was revised higher to a 3.9% annual rate in the fourth quarter, up from 3.5% in the prior estimate, while prices are 6.3% higher than the fourth quarter a year earlier.
- The number of unemployment claims for the week ended February 18 was 192,000, a decrease of 3k from the prior week and below 200k for the sixth consecutive week. The four-week average was 191,250, relatively unchanged from the week prior. The number of continuing claims declined 37k to 1.654 million with the four-week average relatively unchanged at 1.669 million.
- The Bureau of Economic Analysis report on personal income and outlays showed income rose less than expected, consumers spent more than expected, while the Fed’s preferred measure of inflation was higher than expected in January – additional data that confirmed January was an unusually and unexpectedly strong month.
- Personal income rose 0.6% whereas economists were expecting a 1.0% increase. Importantly, wages and salaries rose a solid 0.9% and are 6.6% higher than a year ago. This is still significantly above trend but now is just keeping with the pace of inflation. Social security payments, which make of 6% of Americans’ income rose 9.0% as cost of living adjustments kicked in for 2023.
- Consumer spending increased 1.8% (versus the 1.2% increase expected), matching the strong retail sales report, with spending up 9.4% from a year ago. Not all the spending growth is due to inflation, subtracting the pace of inflation real spending was up around 3% over the past year. Spending on goods picked up, rising 2.8% in the month but up just 4.7% from last year. Spending on services remains strong, rising 1.3% in the month and now 11.1% higher than a year earlier.
- Income and spending levels caused the personal savings rate to increase slightly, from 4.5% last month to 4.7% in January. This is above the all-time low of 2.7% set in June, but still below the 20-year average (excluding the past three covid years) of 6.0%.
- And most importantly, the PCE price index (which has been the Fed’s preferred measure of inflation), increased 0.6% in January and was up 5.4% from a year ago, both higher than expected. Core prices were higher than expected as well, the January increase was 0.6%, versus 0.4% expected, while the increase over the past 12 months was 4.7%, above 4.3% expected, and returning to the highest annual rate since October.
- The FOMC meeting minutes show a few Fed officials would support raising rates 50 basis points instead of the 25 bps increase that took effect, with those officials noting a larger increase would bring the target range closer to levels that would be “sufficiently restrictive.” All agreed on further increases in rates, but there was a bigger focus from some officials over the fact financial conditions have eased over the past several months, cautioning that an unwarranted easing could complicate their efforts. The uncertainty on the outlook was high, but a variety of factors could lead to price pressures that are more persistent than anticipated.
Company News
- Earnings reports from Home Depot and Walmart last Tuesday morning caused stocks to open the week lower after cautious guidance for 2023. Home Depot results for last quarter were mixed but said it expects 2023 growth to be flat compared with 2022 and earnings to decline mid-single digits over higher costs including the company saying it will spend an extra $1 billion to increase compensation for its frontline workers. Walmart beat expectations for last quarter, noting gains in its U.S. grocery market, with a lower forecast for 2023 than analysts’ estimates. But the worst came from management commentary. The company said consumers are very pressured and are pulling back spending as consumer balance sheets are “running thinner and savings rates are declining.”
- The CEO of McCormick, the maker of spices, seasonings, and condiments, said major retailers like Walmart and Kroger are giving pushback on the latest round of price hikes on products from sauces to spices/seasonings as the retailers are more concerned about margins and the consumer’s ability to bear more price increase.
- After several disappointing quarters and losing market share to competitors like AMD, Intel said last week it will cut its quarterly dividend by 66% to $0.125 per share, for a yield of 2.0% as of Friday’s close. The company said the reduced dividend “reflects the board’s deliberate approach to capital allocation.”
- Boeing said it halted deliveries of its 787 Dreamliner planes to perform more tests of a fuselage component after a review of certification records discovered an analysis error by a supplier. The production pause will take place while it completes the required analysis and documentation.
Other News
- Tensions with China are heating up again as the U.S. believes China is deepening its relationship with Russia and as the U.S. said it will send more troops to Taiwan to bolster its military training program. The WSJ reported the U.S. is increasing the number of troops in Taiwan to bolster its training program for its military amid a rising threat from China. The plan calls for an addition 100 to 200 troops which will include Marines and special-operations forces. Also, there appears to be increasing evidence of China deepening its ties with Russia, with WSJ reporting the White House is considering releasing intelligence it says shows China is weighing supplying weapons to support Russia in its war in Ukraine. The article says China hasn’t made a final decision yet, and its previous stance has been cautious on its support of Russia through financial assistance and oil purchases, but the stance appears to be shifting, according to the latest intelligence.
- The Conference Board said it expects the U.S. economy to fall into a recession and it may already be in one currently. They added that the leading economic indicators show if we have a recession, it’s probably starting around now, although it is “probably going to be short and shallow.”
- Federal Reserve latest:
- The FOMC February meeting minutes were released last week. See the recap under the economic data commentary above.
- St Louis Fed president Bullard said the markets have been overpricing the risk of a recession in the second half of 2023, the economy is stronger than the Fed had initially thought, and his target range for the Fed Funds rate is now 5.375% (equals 3 more increases). Last time he gave a number, in November, he mentioned he was targeting 5.125%.
- New Fed Governor Jefferson said high inflation may come down slowly and that worker shortages is an important part of the inflation picture and wage pressure remains high with recent data showing wages have started to decelerate, but only somewhat. Bringing service inflation under control, which is the focus right now and where most inflation pressure is coming from, will depend more on a better balance between labor supply and demand.
Did You Know…?
2022 Retirement Analysis
WFG News
Updates on 2022 Tax Documents
The Week Ahead
This week’s earnings calendar will remain centered on retailers and several other tech companies. Notable reports will come from Zoom Video on Monday, Target, JM Smucker, HP, AutoZone on Tuesday, Lowe’s, Dollar Tree, Kohl’s, Salesforce, Snowflake on Wednesday, and Best Buy, Costco, Kroger, and Broadcom on Thursday. On the corporate calendar there will also be several company events, including from Tesla, Chevron, and Goldman Sachs. The economic calendar is busy this week and notable data releases include durable goods orders and pending home sales on Monday, Case-Shiller home price index and consumer confidence on Tuesday, the PMI, ISM manufacturing survey indexes and construction spending on Wednesday, weekly unemployment claims and worker productivity and costs on Thursday and wrapping the week with the ISM services survey index on Friday. There are no notable events on the Fed calendar, but there will be several public appearances by policymakers. Also on the calendar is the Supreme Court hearing two cases on Biden’s student loan forgiveness plan that could determine if his plan is legal or not.