Popular Economics Weekly
Even though Q1 2016 GDP growth looks weak for a number of reasons (such as lower exports and slumping oil prices that depress energy sector earnings), there are reasons it can go higher in 2016. Oil prices have stabilized, for starters, and exports are rising again as the dollar has weakened against other currencies when the Fed signaled it wouldn’t raise interest rates further until later, if at all this year, due to the worldwide slowdown in growth.
Firstly, auto sales, a major component of retail sales, should surpass last year’s 17.5 million total, according to industry pundits. Moderate wage growth, declining gasoline prices and continued low interest rates on auto loans will drive new car and light truck sales higher in 2016, said Steven Szakaly, chief economist of the National Automobile Dealers Association, at the Los Angeles Auto Show.
“New light-vehicle sales will rise to 17.71 million units in 2016, a 2.3 percent increase from our forecast of 17.3 million sales in 2015,” Szakaly said. “This would mark the seventh straight year of increasing U.S. new-vehicle sales.”
There is a temporary weakness in motor vehicle production because of a slowdown in current vehicle sales, according to the Fed’s March Industrial Production figures. But production has climbed steadily higher in the last five years and been the strongest component in the Fed’s Manufacturing Index, as the red line in the graph indicates.
And housing sales are picking up, beginning with the just released existing-home sales, up 5.1 percent to a 5.33 million annual rate in March. Existing sales rose in all four major regions last month and are up modestly (1.5 percent) from March 2015. Total housing inventory at the end of March increased 5.9 percent to 1.98 million existing homes available for sale, but is still 1.5 percent lower than a year ago (2.01 million).
The above graph shows that existing sales have been rising steadily since 2008 the end of the Great Recession. Unsold inventory is at a 4.5-month supply at the current sales pace, up from 4.4 months in February, but still far too low to stimulate more buying in the lower price ranges, where inventory is most lacking. In fact, inventory has fallen back to 2000 levels, even before the housing bubble that doubled the housing inventory.
Another window into the housing market is the volume of mortgage applications that depend on interest rates, and rates are back to historic lows with the 30-year conforming fixed rate down to 3.25 percent for a 1 point origination fee in California.
Applications increased 1.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 15, 2016. The Refinance Index increased 3 percent from the previous week. The unadjusted Purchase Index increased 1 percent compared with the previous week and is 17 percent higher than the same week one year ago.
Another sign of future growth is the Conference Board Leading Economic Index® (LEI) for the U.S., which increased for the first time in 3 months, up 0.2 percent in March to 123.4 (2010 = 100), following a 0.1 percent decline in February, and a 0.2 percent decline in January.
“With the March gain, the U.S. LEI’s six-month growth rate improved slightly but still points to slow, although not slowing, growth in the coming quarters,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Rebounding stock prices were offset by a decline in housing permits, but nonetheless there were widespread gains among the leading indicators. Financial conditions, as well as expected improvements in manufacturing, should support a modest growth environment in 2016.”
Manufacturer’s new orders, higher stock prices (now above 2015 indexes), and the fact that weekly jobless claims fell to the lowest level since 1973 were the strongest signs of future growth in the Conference Board’s LEI.
Still, it consumer spending that powers most economic activity these days, and consumers will only spend when there’s more market stability, hence certainty in such things as energy prices, which have been fluctuating wildly of late, and an adequate supply of new housing that keeps housing prices within reach of prospective home buyers.
Harlan Green © 2016
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