Q1 Expected to Show Moderate to Strong Expansion, False Positives, False Negatives

• University of Michigan Consumer Sentiment sank in April to 72.3 after three months of gains.
• March Retail Sales decreased by 0.4 percent as gasoline prices dropped and other sales were soft.
• Ex-auto Retail Sales also decreased by 0.4 percent with housing-related up, most other categories down.
• The Producer Price Index for Finished Goods dipped by 0.6 percent in March as energy prices fell.
• Excluding food and energy, Core PPI gained 0.2 percent in March, as expected.
• Business Inventories increased by 0.1 percent in February, after a strong 0.9 percent gain in January.

The combination of a weaker-than-expected retail sales report for March and a weaker-than-expected consumer sentiment report for April highlights the concern about consumers’ vulnerability to fiscal tightening. On a quarterly basis, real consumer spending in the first quarter of 2013 is expected to be solid, supported by gains in auto sales. Auto sales, in turn, were strong in the first quarter compared to the fourth quarter of last year because Hurricane Sandy washed out sales last October.  Within the first quarter, auto sales were flat at about a 15.2 million unit annual rate. Real GDP growth for the first quarter of 2013 now looks set for an upside surprise north of 3.0 percent.  The solid headline GDP number will be supported by quarter-to-quarter gains in consumer spending and by inventory restocking in the aftermath of Hurricane Sandy. As with auto sales within the first quarter, real non-auto consumer spending is also looking flat. Retail sales for March decreased by 0.4 percent as gasoline prices fell. Gasoline station sales dropped 2.2 percent for the month, leading all other categories down. Retail sales of autos and parts dipped by 0.5 percent in March. Housing-related sales increased as furniture sales gained 0.9 percent for the month and building materials increased by 0.1 percent.  Other sales categories generally saw small to moderate declines in March. Consumer sentiment fell in April according to the University of Michigan, down a sharp 6.3 to 72.3. However, other measures of consumer sentiment look more stable.

Producer prices rolled back in March with the headline PPI for finished goods declining by 0.6 percent as energy prices eased. The energy index fell by 3.5 percent in March after gaining 3.0 percent in February. Core producer prices (excluding food and energy) gained 0.2 percent for the month, as they did in the previous two months. Business inventories increased 0.1 percent in February after a strong 0.9 percent gain in January. The total business inventory/sales ratio ticked down in February to 1.26 and remains within the bounds of recent expansion cycles. 

Market Reaction: Equity markets opened with losses. Treasury yields are down at both ends of the yield curve. NYMEX crude oil is down to $90.97/barrel. The dollar is down against the yen and up versus the euro.

Click here for a PDF version of the Comerica Economic Alert: Retail Sales

                                     Income Still Distorted by Tax Changes, Spending Solid

• U.S. Personal Income increased by 1.1 percent in February after declining by 3.7 percent in January.
• Real Disposable Personal Income gained 0.7 percent after declining by 4.0 percent in January.
• Real Personal Consumption Expenditures were up by 0.3 percent in February, matching the January gain.
• The PCE Price Index increased by 0.4 percent in February as gasoline prices climbed.

U.S. economic data from the first quarter shows sustained momentum in the early stages of fiscal tightening. It is important to note that fiscal tightening is not a one and done event, but rather a process that will continue through this summer as Congress turns to longer term budget issues. We are likely to see more tax increases at the federal level, beyond the January increases in payroll, income, dividends and capital gains taxes. Also, we are still in the very early days of the federal budget sequester. Tighter spending at the federal level will show up as a drag on GDP and also weigh on government and private-sector employment. It will put more pressure on some states to increase tax collections. An interesting example is the reduction in federal payments to states for minerals extracted from federal lands, likely to leave gaps in some state budgets this year. California has taken the lead in raising state income and sales taxes, and may be followed by New York and other states. Squeezed state budgets may in turn put more pressure on local governments to raise revenues. Increasing property prices will support increased real estate tax collections.

Personal income increased by 1.1 percent in February, bouncing back from a 3.7 percent drop in January. The January drop in income came on the heels of a bounce in December as dividend payments were front-loaded ahead of tax hikes. The income data will clean up next month, responding more to economic fundamentals rather than to tax avoidance strategies. Real disposable income (after inflation and taxes) was up 0.7 percent in February. Spending has held up through the first two months of 2013, despite concern that lower and middle-income households were feeling the drag from higher payroll taxes. Real consumer spending increased by 0.3 percent in February, just as it did in January. The positive feedback loop between firming house prices and auto sales is helping there. There is still reason to be cautious about consumer spending due to conflicting consumer confidence readings for March. The Conference Board’s Consumer Confidence Index fell sharply in March after rebounding in February. However, the University of Michigan’s Consumer Sentiment index showed a slight improvement in March. Inflation was boosted by higher gasoline prices in February. The personal consumption expenditures price index for February gained 0.4 percent after flatlining for the previous two months. Excluding food and energy, the core PCE price index was up just 0.1 percent in February.

Market Reaction: U.S. financial markets are closed today in observance of Good Friday.

Click here for a PDF version of the Comerica Economic Alert: Personal Income 032913.

 Mixed Data Suggests Ongoing Momentum, but Also Ongoing Uncertainty

• March New Orders for Durable Goods gained 5.7 percent as aircraft orders rebounded.
• The Conference Board’s Consumer Confidence Index fell sharply in March to 59.7.
• New Home Sales for February fell by 4.6 percent to a 411,000 unit annual rate after a January surge.
• The Case-Shiller 20-City Composite House Price Index for January gained 0.1 percent.
• The Dallas Fed’s Texas Manufacturing Index showed that business activity improved in March.
• The Richmond Fed’s Manufacturing Index also showed improving conditions in March.

U.S. economic data at the close of the first quarter was mixed, consistent with the view that economic momentum continued through the quarter but conditions remain far from normal in part due to ongoing uncertainty about fiscal tightening and other regulatory issues. New orders for durable goods gained 5.7 percent in March. This is a deceptively positive number, boosted by a rebound in both defense and nondefense aircraft orders. Non-transportation sectors were mixed. Core orders, nondefense capital goods excluding aircraft, fell by 2.7 percent in March after gaining 6.7 percent in February. Consumer confidence fell sharply in March according to the Conference Board. Their Consumer Confidence Index fell to 59.7 after increasing in February to 68.0. Concern over fiscal tightening was mentioned as a possible contributing factor in the loss of confidence.

Housing-related data has been a bright spot for the U.S. economy. Both new and existing home sales have been on an upward trend. However, in February new home sales gave back some of their January gains. After surging to a 431,000 unit annual rate in January, new home sales relaxed by 4.6 percent to a 411,000 unit rate in February. The February sales rate was still well above the 2012Q4 average. Home prices continue to firm up. The Case-Shiller 20-City Composite House Price Index increased by 0.1 percent for the month. Over the previous 12 months the index was up 8.1 percent.  All 20 city indexes are now in positive territory in year ago comparisons. Phoenix leads the way with a 23.2 percent increase over 12 months. Dallas is up 7.0 percent, Detroit 13.8 percent, Los Angeles 12.1 percent, Miami 10.8 percent, San Diego 9.8 percent and San Francisco 17.5 percent.

The Dallas Federal Reserve’s Texas Manufacturing Outlook Survey was positive in March. Comments were generally favorable. However, regulatory uncertainty was cited as a factor in two industries. The Richmond Fed’s Survey of Manufacturing Activity expanded in March, but at a slower pace than it did in February.

Market Reaction: U.S. equity indexes opened with gains. Treasury yields are up slightly. NYMEX crude oil is up to $95.54/barrel. The dollar is up against the yen and down versus the euro.

Click here for a PDF version of the Comerica Economic Alert: Durable Goods 032613.