This note was originally published March 26, 2013 at 15:27 in Macro
Our baseline view on domestic growth and consumption remains constructive. Labor market trends have accelerated, home price appreciation should continue to be supported by rising demand and tight supply, and further dollar strength holds the potential to drive ongoing commodity deflation and support real, sustainable consumption growth.
Our outlook is dynamic, particularly at growth inflection points, and remains data and price dependent, but the early data suggest #GrowthAccelerating may, indeed, be taking the hand-off from #GrowthStabilizing. The slope of growth in today’s durable goods and Case-Shiller releases is supportive of an acceleration trend.
Durable and Capital Goods: However you parse the index and its sub-components, the slope on new order demand for durable and capital goods continues to improve. New Durable Goods orders in February came in at +5.7% month-to-month, ahead of expectations for +3.9% while January was revised higher from -5.2% to -3.2%. On both a one-year and two-year basis, growth in the first quarter is registering a positive sequential acceleration. If you exclude Transports, Defense, or Defense & Non-defense Aircraft, the positive growth trends all look the same through the February data.
The takeaway for Business Investment was positive as well with Core Capital Goods growth (Nondefense Capital Goods, excluding Aircraft) accelerating on both a one-year and two-year basis through the first two months of the quarter. Accelerating capital and durable goods demand rhymes with recent PMI trends and agrees with the Fed’s first quarter 2013 senior Loan Officer Survey which showed rising demand for both Auto and Business C&I loans. As a quick math reminder, PCE accounts for approximately 70% of GDP and the durable goods component of PCE represents ~11% of the total.
Housing: The S&P/Case-Shiller HPI continued to accelerate in January, rising 8.1% y/y against expectations for +7.8% and 6.8% prior. Given the continued improvement observed in the more concurrent housing metrics (Mortgage Apps, NAHB HMI, New, Pending, & Existing Home Sales), the upside to the January Case-Shiller numbers isn’t particularly surprising. We continue to like our first quarter #HousingsHammer investment theme and expect further pricing upside in the intermediate term.
In our view of housing as a Giffen good, demand and price interact reflexively as demand chases price higher which, in turn, drives further price appreciation in a virtuous cycle. The dynamics underpinning our bullish view on housing remain in place currently as the positive demand-price feedback loop continues to play out alongside further inventory tightening.
Underneath the positive housing fundamentals, household formation growth remains elevated, Birth Trends are rising, Fed Policy remains explicitly supportive, and further improvement in labor market trends should remain supportive of housing consumption and loan demand growth. We continue to like consumer facing and housing derivative domestic equity exposure.
Source: Hedgeye Financials