Wednesday, May 16, 2012

Update on Economic Data ...

Both industrial production and capacity utilization for April came in higher than the market expected, which also means higher than our estimates.  We actually had expected a slight disappointment.  Although, we must note that the 1.1% growth in industrial production, as stated in many headlines, was misleading as growth in March was revised down from flat to -0.6%.  The actual figure of 97.4% was still above the 97.1% consensus.  Capacity utilization came in at 79.2% versus the market's 79.0% estimate and certainly above our 78.6%. We note that the March capacity utilization was also revised down.

Although the data came in above expectations, we must emphasize two things.  One is that the March figures were revised down, which could mean that Q1 GDP may actually come in below the 2.2% initial estimate.  We have stated before that based on certain indicators we believe the final Q1 GDP growth figure will be around 1.9%.  The second point of emphasis is that the higher industrial production and certainly capacity utilization go, the less likely it is for the Fed to continue its aggressive monetary easing policy, which is not necessarily good news for the equity market.

Regarding the housing numbers, as expected, permits were disappointing, but housing starts came in much higher than the estimates.  In addition, March's housing starts were revised up.

Permits for April were 715K, above the 730K expectation.  March's figure was revised to 769K from 747K.  Permits for single-unit homes grew 2% from the previous month, while permits for MDUs declined 21% m/m.  We note that the Y/Y growth rate for MDUs remained significantly above single-unit homes, 36% versus 17%, respectively.  Regionally, only the northeast did not experience negative m/m growth in total building permits (single-units and MDUs).  West had the biggest m/m decline, 14%.  However, Y/Y growth was positive for all regions with the northeast ahead of others at 33%.

Housing starts for April were at 717K, above the 680K estimates.  Starts in MDUs grew faster than single-units m/m and Y/Y.  MDUs were up 4% from March and 75% from April '11.  Single-units grew 2% m/m and 19% Y/Y.  Housing starts (for both single-units and MDUs) in the northeast region were down 21% from the prior month.  The west region was down 8%.  All regions experienced double-digit Y/Y growth in April.

While the latest figures are a bit encouraging, we note that sudden growth in permits and starts will increase inventories which could push prices further down.  In addition, due to lack of strong enough wage growth rental units remain in higher demand, even with rental rates hitting new highs in certain regions.  Lastly, the latest consumer credit figure does indicate that consumers may be abandoning deleveraging a bit too soon, which combined with only modest wage growth, may lower their chances of getting a mortgage for a new home.  It may also force them to again turn to deleveraging later this year. 

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