American consumers are increasingly choosing to shop on the internet as opposed to going to the mall. That’s good news for shipping companies like UPS and FedEx where shipments could be up 10 percent over 2015, submits Andrew Soergel at USNews.com on December 20, 2016. We’ll take a closer look as soon as there is more data. Again, according to me, a big factor to keep your eyes on is the buying habits of ordinary purchasers, based on age.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on December 23, 2016. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
Durable Goods Orders Down 4.6% in November, Down 1.9% Over Last Year… Excluding transportation, orders increased 0.5% last month and rose 1.8% over last year.
What it means – Digging a little deeper, excluding aircraft and defense items leaves core capital goods (a proxy for business spending), durable goods orders expanded 0.9% last month, but are still 3.2% lower than last year. This is one of those times when you say, “Hmm.”
If companies bring their foreign profits home at a lower tax rate, what will they do with them? U.S. companies have $1.9 trillion here at home, and the latest core capital goods numbers show that they aren’t spending more on equipment, etc. The problem isn’t a lack of cash, but a lack of clients.
New Home Sales Rise 5.2% in November, Up 16.5% Over Last Year… Americans sold 592,000 (annualized) homes in November, beating expectations.
What it means – As I mention below, this month’s reports on the housing market won’t include the impact of the Fed’s rate hike, but there were some notable figures in this report.
The median sales price inched up 0.9% to $305,400, but is off 3.7% for the year. Inventories also rose by 250,000, or 1.6%. Last week, I noted that housing completions popped last month, so we can expect inventory to climb higher. Increased stock and rising borrowing costs for buyers will put more pressure on prices.
Existing Home Sales Increased 0.7% in November to 5.61 million Units, the Highest Since 2007… Sales jumped 15.4% over last November, but that’s because a change in mortgage applications in 2015 dramatically cut the number of sales at the end of last year.
What it means – November and December sales should mark the last transactions based on mortgage rates secured before the election. By January, which we’ll get reports on in February, higher mortgage rates will be in full force. It will be interesting to see if the 1% bounce affects the industry.
The National Association of Realtors released its profile of real estate transactions for the year. The group said first-time home buyers account for 35% of sales, which is higher than recent years, but still well below the 40% long-run average. These buyers still have trouble qualifying for financing, and affordability remains a problem. This might go a long way in explaining the next topic…
Almost 40% of 18 to 34-Year Olds Live With Parents or Relatives… This is the highest percentage since 1940.
What it means – I like my parents, but I still wanted to find my own space as soon as possible. I never considered moving home after college, but then again, I wasn’t facing today’s job and housing market. With home prices and rents moving higher while wages lag, it’s no wonder that more people opt for their parents’ basement.
It’s hard to see how this can end quickly. We need higher pay, lower housing costs, or a combination of the two.
Atlanta Fed’s GDPNow Model Estimates Fourth-Quarter GDP to Grow 2.6%... This is down from right after the election, when the bank estimated GDP growth of 3.6%.
What it means – Another yawner in terms of economic growth. If the 2.6% holds, then the U.S. economy will have expanded by a whopping 2.0% over the full year. It’s not horrific. In fact, it’s better than most of the developed world, but it’s not exciting.
There’s a nagging detail about the current market euphoria that worries me. Yes, taxes might drop a bit, and yes, regulation might ease, but those things simply make the current situation a bit more tolerable. Neither issue is holding back the U.S. economy from reaching escape velocity. That would be a lack of demand, which is impossible to create out of thin air without causing other problems (like exploding debt).
When the markets catch down to the actual pace of economic growth… look out! So pay attention here.
U.S. Population Grew 0.7% in 2016, the Slowest Rate of Growth Since 1936-1937… More deaths, fewer births, and a slight drop in immigration all contributed to the low figure.
What it means – We’re not at risk of turning Japanese anytime soon, but falling population growth is a problem. For years we’ve warned of deflation based on a shrinking workforce as the boomers age and retire. Without an influx of babies or young immigrants, the problem could last many more years.
The issue is obvious – young people require funding from their parents, and then become consumers and workers themselves. Without that fuel, the economic fires dim, and can eventually go out. Just ask Japan.
U.S. Dollar Strengthens, Causing Pain in China… As the dollar gained ground on the euro and the yen, the Chinese renminbi hit 6.94 per U.S. dollar, touching lows not seen since 2008.
What it means – The Chinese peg their currency to the U.S. dollar… sort of.
The Chinese government sets the exchange rate every day and then allows the currency to float in a 2% band around that level. If the renminbi gets too strong, the Chinese government sells new currency to push the rate lower. If the renminbi weakens, they must use some of their foreign reserves to buy up the unwanted currency.
With the dollar on a tear while the Chinese economy slows down, the renminbi has been under intense pressure, pushing the Chinese to spend billions of dollars to shore it up.
The move has kept the renminbi from free falling, but it’s been expensive, and the selling pressure hasn’t let up.
At the same time, the Chinese are having trouble selling government bonds without raising interest rates. The government recently reduced the amount of 3-year and 7-year bonds it would auction from 28 billion yuan to 16 billion because of lack of bids.
Meanwhile the euro moves closer to parity with U.S. dollar, recently dipping below $1.04, and the Japanese yen is closing in on 120.
Italian Government Approves a 20-billion-euro Bank Bailout Package, Far Short of the 54 billion that is Needed… With several banks on the brink of bankruptcy, the government is trying to keep them afloat with fresh cash, but doesn’t have enough to do the job.
What it means – Eurozone banking rules and government budget regulations don’t allow the Italians, or any Eurozone nation, to commit any amount necessary to prop up banks. Failing institutions are supposed to go through the process of a bail-in and then sell their bad assets to reach equilibrium.
But what happens when the problem is so big that it overwhelms the system? It looks like we’re about to find out! The most pressing issue is Banca Monte dei Paschi di Siena S.p.A, the oldest bank in the world. Monte dei Paschi has tried to raise equity for months, but no one wants to buy shares of a failing bank with no path to solvency. Not far behind is Unicredit, a much bigger institution with bigger problems.
As these two banks go under, which could happen in the next 45 days, the ECB and the Italian government will have to find a way to stop the damage from spreading. It’s hard to see how they’ll do that. Negative interest rates have already driven depositors to remove funds from Eurozone banks. If depositors get spooked by failing banks, they might take out even more money, leaving financial institutions with smaller capital bases. The problem would then begin to feed on itself.
All of this stems from the Eurozone banks failure to deal with their bad loans. As we pointed out many times, the issue never went away, it was just put off for another day.
GM and Chrysler Fiat to Idle Several Plants, Affecting 10,000 Workers... Following in the recent footsteps of Ford, the other two large automakers are slowing production in the face of rising inventory.
What it means – Disappointing auto sales last week served as a warning sign that car companies would slow down production lines. Typically, they want 60 days of inventory. Today, they have 177 days of inventory of some models. In addition to making fewer units, car companies are also increasing their incentives and allowances. Higher interest rates will drive up car loan payments and make problems worse. Expect even better deals on new cars in 2017.
Next Week – The week between Christmas and New Year’s is exceptionally light on economic releases. The only one of note is the CoreLogic Case-Shiller 20-City Home Price Index.
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