March 1, 2007 Data as Provided by Ned Davis Research
New Home Sales Plunge
New home sales plunged 16.6% to a 937,000 annual rate in January, the biggest drop in 13 years to its lowest level since February 2003 . Economists expected a drop of 3.6% to a 1.080 million unit annual rate. The seasonally adjusted monthly sales totals for Q4 were revised down by a net of 65,000, although the unadjusted totals for both the quarter and the year were little changed. Led by a 37% swoon in the West, all four regions suffered sharp setbacks. But we wouldn’t get overly concerned by the sales slide, as January and February sales are difficult to seasonally adjust. Furthermore, strong sales in Q4 likely pulled some sales forward at the expense of January’s results (and probably February’s too). Sales were 20% below a year ago, but on a more important trend basis, sales were down 16%, continuing to indicate a moderation in the rate of decline.
Inventories slipped 0.2% but given the sharp fall-off in sales, the available supply jumped to 6.8 months from 5.7 months, which if it stays at this level could put pressure on the homebuilders. The median number of months that completed homes were for sale rose to 4.8, the most since March 2002, as builders complete work under construction but delay starting new ones.
On a trend basis, median prices were unchanged from a year ago, while mean prices were up 2.2%
Regional Activity Mixed
Business activity was mixed across the country in February. Expectations are for the national ISM Index to post a modest rise to 50.0 on Thursday. Our forecasting models indicate a slight risk to the upside.
The Chicago Purchasing Managers Business Barometer remained weak in February, slipping 0.9 points to 47.9, its lowest reading since October 2002, and remaining in negative territory for the second consecutive month. Expectations were for a small increase to an unchanged 50.0 reading. The production index lost 2.0 points to 51.2, indicating activity has slowed to a crawl, while the new orders index rose 2.4 points to 48.7, still indicating a slight contraction in orders. Order backlogs fell 2.1 points to its lowest level since May 2005, while inventories jumped 12.6 points to 54.5, its largest gain in 30 years, reversing the recent inventory drawdown. Employment also returned to positive territory, with that index rebounding 7.8 points to 50.6. Price pressures escalated for the first time in eight months, with the prices paid index rising 8.3 points to 63.2, its highest reading since September, moving our indicator back out of the bullish zone for bonds. Buying policy was little changed.
Milwaukee saw a slight slowdown in activity in February, largely the result of a moderation in the production and employment indexes. Price pressures remained modest, with the prices paid index remaining at 54.
In Cincinnati, business activity picked up, with the PMI rising 4.6 points to 60.2, its highest level since last August. Notably, the production index surged 40 points, the most since January 2004, to 54, its highest level since May 2004. Order backlogs jumped similarly, the third largest increase on record and the most since September 2000, to its highest level since last April. Employment also picked up, with that index increasing 10 points, moving back into positive territory. Other indexes posted more modest changes. Price pressures eased, with the composite price index falling 13 points to 4.9, its lowest reading in over five years.
Business conditions in New York City continued to improve, with the BCI rising 0.9%. The current conditions index rose 2.7 points to 57.6, continuing to slowly regain ground from December’s bottom, as all respondents indicated either little change or improving conditions over the past month. Moreover, the outlook improved. But price pressures escalated, with the prices paid index rising 15 points to 65, its highest reading since last June.
GDP Revised Down on Lower Inventories
Matching the consensus, real GDP was revised down to a 2.2% annual rate in Q4 from the advanced reading of 3.5% Revisions of this magnitude or more have occurred only seven times in the past 30 years. Led by inventories, most of the major components were revised down. Business inventories increased $17.3 billion, down from $35.3 billion in the advance estimate, reducing GDP growth by 1.35 percentage points instead of 0.71 points. As a result, real final sales were revised down to 3.6% from 4.2%. Real final sales to domestic purchasers, the best measure of domestic demand, were revised from 2.4% to 2.0%, the same as for Q3. For the year, GDP was revised down to 3.3% from 3.4%. On a y/y basis, real GDP was revised down to 3.1% from 3.4%. Real final sales to domestic purchasers were 2.7%, a little below trend growth.
PCE was revised down to 4.2% from 4.4%, as durables were revised down to 4.4% from 6.0%.
Nonresidential fixed investment was revised down to -2.4% from -0.4%. Structures fell at a double-digit rate, the biggest drop since at least 1994.
Higher imports reduced the contribution from trade to 1.50 percentage points from 1.64 points. Imports were revised up one percentage point to -2.2%.
Price measures were mixed. The core PCE was revised down to 1.9% from 2.1%, but core purchases were revised up to 2.4% from 2.3%. The overall PCE Price Index was revised down to -0.9% from -0.8%, while the Purchases Index was revised to 0.2% from 0.1%.
Retail Investors Return to Bond Mutual Funds
Investors purchased $14.3 billion of bond mutual funds in January, the most in nearly four years. Led by record inflows to strategic funds, which topped $8 billion, investors also bought munis and corporates. Bond fund managers, however, only purchased $12.7 billion worth of bonds. As a result, liquidity improved, sending the cash/assets ratio up to 4.8%.
Petroleum Product Draws Continue
Refineries operated at 86.0% of capacity last week, up from 85.2% in the prior week, and better than expectations for 85.6%. Crude oil inventories rose 1.4 million barrels, slightly above expectations for a 1.2 million barrel increase, and remain well above average for
this time of year, despite a 220,000 b/d drop in imports to 9.5 million b/d.
Gasoline stocks were drawn down by 1.9 million barrels, more than the 1.6 million barrel draw expected, despite a slight increase in production. Distillate stocks fell by 3.8 million barrels, one and a half times the draw expected, split nearly evenly between diesel fuel and heating oil. Heating oil stocks are now below average for this time of year. Propane posted a more-normal 2.8 million barrel decline. But that left stocks nearly 18% below a year ago, the largest y/y decline since June 2003.
Demand remains strong. Despite a 340,000 b/d decline in total petroleum demand last week, it is up 7.5% from a year ago, on a four-week average basis. Gasoline demand is 3.6% above last year, while jet fuel is up 4.5%. Distillate demand is up nearly 10% from its year-ago level, helped by heating demand. Propane demand is nearly 23% over last year.
Mortgage Purchase Applications Rebound
The MBA Purchase Index rebounded 5.2% moving away from its critical support level of 375. The smoothed y/y change rose to -2.3%, its highest level in a year, indicating continued stabilization in the housing market. Refis rose 1.2% last week.
Consumer Comfort Slips
The Consumer Comfort Index fell two points to -1 last week, led by a six point, or 2 S.D., drop in the state of the economy.