It was a good news/bad news story at the end of March, providing us with cause for optimism and also cause for caution.
Good news came from new home sales. One month does not make a trend, but February new home sales increased by a stronger-than-expected 7.8 percent, to a 539,000 unit annual rate. This is the best monthly sales number since February 2008, and a clear upside breakout from the recent flat trend. Months’ supply of new homes for sale dipped to a tight 4.7 months’ worth, a strong signal for builders, affirming our expectations for increased residential construction activity this year, supporting mid-year GDP. The median sales price of a new home in February was up by 2.6 percent over the last year. The mix of new homes for sale may suppress median prices if more smaller or less-expensive homes are being built.
Existing home sales also increased in February, up by 1.2 percent to a 4,880,000 annual rate. Unlike new homes sales, existing home sales are not as depressed compared to historical norms. The months’ supply of existing homes for sale is also tight, at 4.6 months. The median selling price of an existing home is up 7.5 percent from February 2014.
The Consumer Price Index for February increased by 0.2 percent. With firmer gasoline prices, overall consumer inflation increased, reducing a potential conflict for the Federal Reserve. Weak inflation, disinflation or outright deflation all make it politically more challenging for the Federal Reserve to increase interest rates despite the ample evidence of significant tightening in labor markets. The February CPI report bolsters the Fed’s view on the transient nature of low energy prices. The CPI energy index was up by 1.0 percent for the month, after falling by 9.7 percent in January. Consumer food prices gained 0.2 percent in February. The core CPI (all items less food and energy) also increased by 0.2 percent for the month. Over the previous 12 months headline CPI is unchanged due to the drop in gasoline prices last year, but core CPI is up by 1.7 percent.
A cautionary note was struck by durable goods orders and by corporate profits. New orders for durable goods eased in February by 1.4 percent. The series is subject to volatility from both defense and nondefense aircraft orders. Headwinds are developing in durable goods manufacturing from reduced oil field activity and a strengthening dollar weighing on exports.
The third estimate of 2014Q1 real GDP growth was unrevised at 2.2 percent. Along with the GDP data we see that nominal corporate profits declined by 1.4 percent, weighed down by financial services and utilities.
We can end on an up note. Initial claims for unemployment insurance for the week ending March 21 decreased by 9,000 to hit 282,000, a very healthy number. Continuing claims for the week ending March 14 fell by 6,000 to hit 2,416,000, also a very good number.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 03-27-15.