Comerica Economic Weekly

U.S. economic data was mixed this week with a solid Leading Indicators report for December and another good read on January unemployment insurance claims, but mildly disappointing December home sales. Equity markets rallied with the Leading Indicators report highlighting the potential for more positive feedback between good economic data and improving household wealth. Home sales data was softer in December after a post-Sandy rebound in November. Existing home sales eased 1.0 percent, to a 4.94 million unit annual rate.  Supply in the existing home market continues to tighten, now down to 4.4 months’ worth. Prices are rising. The median sales price of an existing home was up 11.5 percent from a year earlier in December. The new home sales data continues to balk at providing strong evidence of gains. Hurricane Sandy washed out sales in October, they came roaring back in November, and then corrected from the correction in December. Underlying the zigs and zags through the second half of 2012 we can make out  an upward trend that needs to be extended if it is to be believed. December new home sales fell by 7.3 percent from an upwardly revised strong November reading of 398,000, down to a 369,000 unit annual rate. December new home sales were up 8.8 percent from a year earlier. Completions of new single-family housing units were up 16.3 percent in December from a year ago, so it is fair to say that construction is still ahead of sales, unless the sales data get revised up. The months’ supply of new homes for sale has crept back up to 4.9 months’ worth, where it was last April. This is a significantly tighter supply than we saw during the depths of the recession when the supply of new homes for sale peaked at 12.2 months’ worth in January 2009, but it is not tight by historical standards. From 2001 through 2004 the supply of new homes for sale hovered close to 4.0 months’ worth. The median sales price of a new home in December was up 13.9 percent from a year earlier. The most likely trend for housing markets is to continue to improve through 2013. However, there is a disconnect between construction data and sales data that suggests that builders may be getting a little ahead of themselves at a time when households are feeling a headwind from fiscal tightening. Recently strong labor market indicators may be the counterweight to fiscal tightening, but that remains to be seen in the Q1 payroll data. The Leading Economic Index for December gained 0.5 percent, driven by the post-Sandy improvement in initial claims for unemployment insurance. Financial indicators, equity prices and building permits were also positive contributors to the index. In addition to the gain in the Leading Index, the Coincident Index increased by 0.2 percent in December, and the Lagging Index gained 0.7 percent. Gains in equity prices in January and declines in UI claims are favorable leading indicators of the Leading Index. Initial claims for unemployment insurance fell by 5,000 for the week ending January 19, hitting 330,000. The post-Sandy improvement in claims is holding up. Stronger than expected job growth in the first quarter would go a long way toward reducing the concern about fiscal tightening. The Kansas City Federal Reserve Manufacturing Index contracted modestly in January, indicating deteriorating manufacturing conditions in the plains states. The KC index has declined for four consecutive months. The Richmond Fed Manufacturing Index also showed softening manufacturing conditions in January.

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