The GDP report was weaker than expected with 2.2% real GDP growth annualized in Q1 (expectations were for 2.5%). This is disappointing growth, but final demand was a little better than overall GDP. Personal consumption expenditures increased at a 2.9% annual rate in Q1, and residential investment (RI) increased at a 19.1% annual rate. Weather probably boosted PCE and RI - and PCE growth at this rate is not sustainable without more income growth - but this was still decent.
Naturally most of the GDP commentary was pretty negative, but I was a little more sanguine. I expect some of the drag to diminish over the next couple of quarters - as an example, investment in non-residential structures was negative in Q1, however, based on the architecture billing index, I expect the drag from other non-residential categories (offices, malls) to end mid-year. And there was another negative contribution from government spending at all levels. However, it appears the drag from state and local governments will end mid-year (after declining for almost 3 years).
A bright spot - and perhaps the key story - is that residential investment is continuing to increase, and I expect this to continue all year (although the recovery in RI will still be sluggish compared to previous recoveries). Since RI is the best leading indicator for the economy, this suggests no recession this year. Still, overall, this was a weak GDP report.
The new home sales report for March was solid and is further confirmation that the recovery for the housing industry has started. New home sales are up about 17% from the weakest three month period during the housing bust. That is a significant improvement, even if the absolute levels are still very low. The debate is now about the strength of the recovery, not whether there is a recovery. My view is housing will remain sluggish for some time, and I expect 2012 to be another historically weak year, but better than 2011.
Another key report was the Case-Shiller house price index for February. This showed house prices fell to new post-bubble lows (I expect further declines in the March report), but we are starting to see some improvement in the year-over-year change. House prices are important for the economy, and I'm watching closely for signs that prices have stopped falling.
The NMHC Apartment index showed further tightening (suggesting falling vacancy rates and rising rents), and the consumer sentiment index increased. For manufacturing, the Richmond Fed index increased, however the Kansas City Fed manufacturing index showed slower growth.
Here is a summary in graphs:
' Real GDP increased at 2.2% annual rate in Q1
Click on graph for larger image.
The GDP report was weaker than expected, however, on a positive note, final demand was decent. Personal consumption expenditures increased at a 2.9% annual rate in Q1, and residential investment increased at a 19.1% annual rate. Weather probably provided a boost to GDP - and PCE growth at this rate is not sustainable without more income growth - but this was still decent.
Residential Investment as a percent of GDP is still near record lows, but it is increasing. Usually RI bounces back quickly following a recession, but this time there is a wide bottom because of the excess supply of existing vacant housing units.
Last year the increase in RI was mostly from multifamily and home improvement investment. Now the increase is probably from most categories including single family. I'll break down Residential Investment (RI) into components after the GDP details are released this coming week.
' New Home Sales in March at 328,000 Annual Rate
The Census Bureau reports New Home Sales in March were at a seasonally adjusted annual rate (SAAR) of 328 thousand. This was down from a revised 353 thousand SAAR in February (revised up sharply from 313 thousand). December and January were revised up too.
This graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.
Starting in 1973 the Census Bureau broke inventory down into three categories: Not Started, Under Construction, and Completed.
This graph shows the three categories of inventory starting in 1973.
The inventory of completed homes for sale was at a record low 48,000 units in March. The combined total of completed and under construction is at the lowest level since this series started.
Even though sales are still very low, new home sales have clearly bottomed. New home sales have averaged 335 thousand SAAR over the last 5 months, after averaging under 300 thousand for the previous 18 months. All of the recent revisions have been up too. This was a solid report and above the consensus forecast.
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