No News Is Good News

This week, equity markets continued on their path of least resistance, which is up. There was really no economic news to speak of this week, so the market had nothing spooking it. Earnings season is also largely concluded without a lot of shockers. Europe was quiet as well, with slightly better news here and there. The second week in a row of declining initial unemployment claims and a breakout in home price growth to over 10% in the U.S. were the only data points to get really excited about all week.

Markets seemed to still have at least one eye on China. Stocks were up sharply as China's somewhat sketchy export report showed surprising (and perhaps unwarranted) strength. Markets gave some of that back a day later when inflation rates in China and several other emerging markets ticked up again, raising fears that China might put some of its easy lending policies on hold.

Next week could prove to be a real test for the market as almost every economic metric due is expected to be negative. Comparing May with April, I believe retail sales, industrial production, housing starts, and consumer prices will all be down from the previous month. Some of this is due to weather and other non-recurring events, some due to falling gasoline prices, and some due to a soft China and Europe. I think May data should look a lot better, but I'm not sure markets will look that far ahead.

Finally, in our currently wacky world, bad news could be good news yet again as markets anticipate easy monetary policies throughout the world. That game seems to be getting a little old and wearisome, in my opinion.

A Closer Look at the Employment Data Shows Similarity to 2012--Not an All-Bad Thing
Although a lot of analysts were really excited about last week's employment report and the last two weeks of initial unemployment claims, I believe the job market is on the same pace as a year ago.

That's not necessarily a bad thing. Although there are even more revisions to come, current data shows the economy added 2.2 million jobs in 2012, which represents on overall annual increase of 1.6% (excluding government, employment grew a more impressive 2%). Private-sector growth was above its 1.8% long-term average. About 77% of all private-sector jobs lost during the recession have been recovered. In reality, if the private sector continues to grow at its current rate, the U.S. is less than a year away from recovering every private-sector job lost during the recession. It only took four years. Yikes.

On a brighter note, overlooked in last week's labor report was the fact that non-seasonally adjusted job growth was a stunning 937,000 jobs. Then the largest monthly seasonal adjustment factor of the year removed an amazing 761,000 employees from the count. (That compares with the reported gain of 176,000 private-sector jobs.) The non-seasonally adjusted figure was slightly higher than last year's 894,000, which again points to job growth in 2013 that is little changed from 2012.

Flat Job Openings Report Partially Offsets Exceptionally Bullish Claims Report
The initial unemployment claims report showed that layoffs reached a new low for the recovery and were now at their best level since very early in 2008. The data clearly shows that employers are hanging on to the employees the already have. On the other hand, the job openings showed that the number of openings was basically flat both month to month and year to year, suggesting little acceleration in either hiring intentions (openings) or actual hires. In other words, employers are hiring relatively slowly and at a very consistent pace even as they cling to current employees.

Initial Unemployment Claims Data Falls to Lowest Number Since 2007
The single-week total of new initial unemployment claims fell to 323,000, and even the four-week average fell all the way back to 336,000. The four-week average is now lower than it has been since November 2007, about five and half years ago. That improvement comes in a week when the seasonal adjustment factor was a huge headwind. Non-seasonally adjusted claims came in at 298,497. Claims were also about 10% below year-ago levels.

I also like to look at the claims data as a percentage of the population so I can calibrate the claims level back to a time many fewer people were working. The news here is just as good. Although the improvement in claims this recovery may seem slow and jerky, the full recovery picture is stunning.

Additionally, the long-term picture shows that the U.S. claims data is almost back to its trend line. The secular trend has been down sharply as manufacturing jobs, which involve many more short-term layoffs, have been on the decline for decades. (This also partially explains the boom in the number of long-term unemployed).

The Challenger Gray Lay-Off Survey data mostly confirms the recent improvement in the initial claims data. April layoff totals of 38,000 were now at their lowest level of 2013. However, the year-to-date layoffs are running at very close to year-ago levels. Perhaps weather-related factors raised claims above usual levels in the winter months and lowered them as a late spring finally arrived. Year-to-date layoffs were the most reduced in the construction and transportation sectors and the most increased in finance (as tighter capital requirements kick in) and retail (perhaps the payroll tax increase).

The Jobs Openings Report, which only goes as far as March, also seems to suggest that the employment market is moving at about the same pace as it was a year ago. Job openings were basically unchanged from a year ago with 3.8 million openings. Openings in manufacturing and government were both down meaningfully from a year ago, while hotels and restaurants were big gainers. Job openings represented 2.8% of employment, up from the recession low of 1.6% but still off the highs of around 3.3% just prior to the recession.

Real Estate Prices Still on a Roll
CoreLogic released home price data for March, showing the National Index grew an astounding 10.5% annualized on a non-averaged basis, the 13th consecutive month of increase. That was the biggest annual gain since 2006. Furthermore, pending home sales data for April showed the potential for another month of double-digit increases. Despite recent dramatic improvements, the index is still 25% off of its pre-recession highs, which doesn't seem that much better than the bad old days when the index was down about 33% in total.

The other unfortunate data point is that the price increases are not particularly well spread out geographically. The five best-performing markets were all well west of the Mississippi River, including Nevada (plus 22%), California, and Arizona (both up 17%). Delaware (negative 3.7%), Alabama (negative 3.1%), Illinois (negative 1.8%), and West Virginia (negative 0.3%) were the only states to register an annual decline.

Some of the bigger gains came in states that originally had some of the biggest losses, though not always. Conversely, some of the states with smaller annual gains suffered smaller declines as well. The table below shows the data from the seven most populous states (about 40% of the U.S. population). I think it provides a still-bullish picture, but maybe not quite as bright as the overall 10.5% headline figure suggests.

Tight Lending Continues to Tie Up the Fed's Liquidity Push
This week also saw the release of the Fed's report on bank lending conditions. I have generally ignored this report in the past and instead focused on comments from bankers, homebuyers, and businesses. The report has so many moving parts that it is really hard to analyze. Feel free to check out the full report here.

However, I am beginning to watch this report more closely. Loose monetary policies (including low rates, money supply growth, and security buyback programs) always have the potential to ignite more inflation. Thus far that hasn't happened because the banks won't lend the money that the Fed is creating. This quarterly report could provide some insights into when and if some of that money might make its way back into the economy. 

Business and Commercial Real Estate Standards Ease, Residential Reality Still Tight
This quarter's report indicated that business lending standards had declined modestly and that loan demand was up, though not as much as previous quarters. Competition between banks for decent credits is intense. Commercial real estate lending practices also eased as demand for these types of loans has accelerated. Home mortgage practice remained tight, although some banks indicated a greater willingness to lend to buyers with better credit scores. 

In a piece of bad news, standards tightened for loans with a FICO score of less than 620. Banks continue to hold tightly on to home lending practices even as demand improves. Fear of having a government agency lender "put" a loan back to the lender continues to be a primary factor restraining banks.

And in a fine bit of irony, even more banks are keeping standards exceptionally tight because of poor risk-adjusted returns and very low, Federal Reserve-depressed mortgage rates. With rates so low, banks can ill afford to make even a small lending error. So the Fed's mortgage buying program and low rates may not be nearly as effective as many of us believed.

Federal Government Deficit May Turn Out Even Better Than Expected
The Congressional Budget's Office February Deficit Report had the U.S. Federal Budget Deficit dropping from $1.1 trillion to $0.85 trillion between September 2012 and September 2013. The improvement was a combination of a better economy, tax increases, and the implementation of the sequester.

Based on data released on Friday, the U.S. could improve on that expectation. Data for the first seven months of the year showed a deficit of $488 billion versus $717 billion a year ago, a reduction of $230 billion. That is about equal to the deficit decline projected for all 12 months. Given that the last five months of 2013 will include sequestration cost reductions and higher taxes compared with the same five months of 2012, it looks like there is potential for the deficit to be smaller than originally expected. (However, spending increases in the second half could modestly reduce some of that potential.) A $59 billion payment from Fannie Mae, the government-controlled mortgage agency, may also reduce the deficit below planned levels. As the article alludes, the downside of the improved deficit situation is that Congress might potentially put off debt limit debates until early in the fall. As an aside, California's controller also reported a sharply reduced deficit compared with the prior year and came very close to monthly targets after years of misses.

Retail Sales, Industrial Production, CPI, and Housing Starts All on Tap
Luckily, the expectations for the retail sales report are not high. The general view is that overall retail sales will fall by about 0.7% in April following a 0.4% decline in March. Even these estimates may prove to be overly optimistic. Both bad weather and falling gasoline prices will strongly influence both declines. Given that gasoline prices fell by more than 4% in the month and gasoline is almost 15% of the index, gasoline alone should drive sales down by 0.6%. The shifting Easter holiday could move the data as well, as Easter was in March this year and April last year. Storms and flooding may have also kept consumers out of the stores during April. 

Almost all the leading manufacturing data points, including the ISM and Markit Purchasing Managers' reports, are pointing to another down month for manufacturing. Industrial production is expected to slip from a negative 0.6% level in March to negative 0.7% in April. Again, this really isn't a major concern unless consumer spending on goods slips again in May.

Prices Expected to Fall Again for April
The Consumer Price Index is expected to slip from negative 0.2% in March to negative 0.3% in April. As mentioned above, gasoline is down about 4%, though it is only about 5% of the CPI. However, adding an extra wallop to the downside is that gasoline prices almost always go up a lot in April as the summer driving season approaches and refineries change over to summer blends. These factors will turn the 4% decline into an almost 9% decline, in my opinion. Year-over-year price increases should be well below 2%, maybe as low as 1.5%. This will make workers' recent wage gains go even further, and really goose the inflation-adjusted consumer income report for April.

Housing Starts Likely to Come Off Their Highs
Housing starts are expected to fall from a recovery high of 1.036 million annualized units to 0.968 million units as the volatile apartment sector takes a pause. A shortage of available land, increases in home-oriented commodities, and still-tight lending conditions are all holding back starts. Furthermore, starts growth has exceeded permit growth for two months running, which almost always portends a slowing in housing starts. I suppose a small upside to the slowing is that home prices will have to move upward because of a lack of available homes, both new and used.

Note: This article has been corrected since original publication. The original text referred to the "20 City Index" of home prices from CoreLogic. The correct name is the "National Index."