Photograph by Victor J. Blue/Bloomberg

A woman looks at bags inside a Prada SpA store in the SOHO neighborhood of New York, on May 10, 2013.

Data issued last week confirmed the economy grew from January through March at around the 2.5 percent annualized pace calculated by the Commerce Department in its advance estimate released April 26.

What the figures also confirmed is that the pickup from the fourth quarter’s 0.4 percent pace was driven more by consumer spending and less by an accumulation of inventories. That, in turn, is brightening the outlook for the second-quarter, which ends June 30 .

The April retail sales report on May 13 included revisions to March and February data that showed household spending climbed at a faster pace in the first quarter than initially calculated. It increased at about a 3.5 percent pace rather than the 3.2 percent now on the books, according to estimates by economists at JPMorgan Chase & Co. in New York.

Combined with stronger-than-forecast sales figures for April, the JPMorgan economists raised their second-quarter growth forecast that day to 2 percent from 1.5 percent.

Less than two hours after the retail sales report came news that inventories grew at a slower pace in the first quarter than initially estimated. From a growth-accounting perspective, that wiped away most of the benefit of the pickup in consumer spending since gains in stockpiling boost gross domestic product.

Revisions to factory orders on May 16 showed inventories grew at an even slower pace than thought just days earlier, chipping a bit more from first-quarter GDP.

After also taking into account what looks to be a bigger drop in commercial construction than the government first estimated, a smaller gain in business investment on equipment and software and less widening in the trade deficit, that left JPMorgan’s tracking estimate of first-quarter growth at 2.4 percent.

While it may seem little changed from the advance numbers, it’s really a world apart in terms of what constitutes a better foundation for future growth: more spending and smaller stockpiles. It also means the so-called “Spring Swoon” is looking less dramatic.

Original post is Consumer Spending Undercuts ‘Spring Swoon’ Economic Concerns by Political Capital.

Photograph by David Paul Morris/Bloomberg

Construction crews work on new homes being built in San Ramon, California, on April 12, 2013.

Applications to build homes climbed in April to the highest level since June 2008, helping alleviate concern that a slump the same month in construction starts on new houses would mean less support for the economy in the second half of the year.

Building permits surged 14.3 percent to a 1.02 million annualized rate, while housing starts plummeted 16.5 percent to an 853,000 pace, Commerce Department data released today showed. The annualized rate of permit applications filed by builders exceeded the pace of actual ground-breaking by the most since March 2005.

When permits outpace the rate at which foundation crews are preparing home sites with backhoes and bulldozers, it’s a signal that builders will likely stay busy in the ensuing months. And demand shows few signs of stumbling as Americans take advantage of near record-low mortgage rates.

Details of today’s report show that building permits for apartments and other multifamily homes, which are volatile month to month, surged to the highest level since June 2008. The difference between April’s annualized rates of permits and multifamily starts was also the biggest since that time.

The increase in multifamily permitting is a sign that builders have enough faith in the market to take on bigger construction projects.

Permits for single-family dwellings exceeded starts for the first time since July. While the difference is less than that of multifamily units, economists at Credit Suisse point out that some builders may be limiting construction of single-family homes in order to maximize price. Builders are after all paying plenty more for construction materials than a year ago.

Original post is Building Permits Dwarf Ground-Breaking by Political Capital.

Photograph by Andrew Harrer/Bloomberg

An employee grabs sheets of five dollar to be loaded into a machine at the Bureau of Engraving and Printing in Washington, D.C., on April 23, 2013.

Arguably, the most important news from today’s Commerce Department report on consumer spending and incomes had little to do with either. The data also showed inflation is getting uncomfortably low.

Prices tied to consumer spending patterns, or the unfortunately named personal consumption expenditures price index, dropped 0.1 percent in March from the prior month and was up just 1 percent over the past 12 months. That’s the smallest year-over-year gain since October 2009, when the economy was just emerging from the recession.

This is the gauge tracked by Federal Reserve policy makers who say their goal is to keep it around 2 percent.

If you exclude food and fuel, prices were up 1.1 percent from March 2012. On a rounded basis, that matches the record lows reached during two months in 2011, December 2010, September 2001, March 1963 and November 1961 — records go back to 1960.

The numbers come as the Federal Open Market Committee, the group within the Fed that determines when to add or remove economic stimulus, starts a two-day meeting tomorrow.

In their last meeting on March 20, policy makers described inflation as “running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices.” At that time, the inflation gauges were running a couple tenths of a percentage point higher.

Minutes of that meeting indicated several members of the FOMC advocated slowing bond purchases and stopping them all together by year end.

The latest inflation readings can be used to make a case for extending record stimulus rather than this so-called tapering of purchases.

While the Fed is losing ground on its inflation mandate, it is slowly edging closer to meeting its other objective of reducing unemployment.

Unfortunately, one reason for the drop joblessness is also concerning. Hundreds of thousands of workers are leaving the work force, which means they can’t be considered as unemployed. The reasons are varied, anything from the retirement of older workers to younger Americans staying in school longer to acquire more skills, and disillusionment with job prospects.

All this is to say that the lack of inflation may start playing a more prominent role in future Fed pronouncements.

Original post is Inflation Concern Misplaced, Prices Cool by Political Capital.

Photograph by John Moore/Getty Images

U.S. Office of Air and Marine (OAM) pilot Rob Smith performs a pre-flight check on an Astar B-2 helicopter before flying a patrol along the U.S.-Mexico border on April 11, 2013 in McAllen, Texas. The OAM, which assists U.S. Border Patrol agents from the air in locating undocumented immigrants and drug smugglers, has cut back flights drastically due to federal sequestration budget cuts.

Today’s Commerce Department report on orders for durable goods may be providing the first hint that sequestration — or the automatic across-the-board federal spending cuts that took effect in March 1 — is starting to filter into the economy.

Bookings for military gear designed to last at least three years, from fighter jets to computers, dropped by 29 percent in March from the prior month to $6.55 billion, the weakest level since January 2006. These data are not adjusted for inflation, so the comparison is probably even more compelling.

Shipments of those goods averaged $10.6 billion a month in the first quarter, the lowest over a similar period since the last three months of 2011. That quarter, defense spending dropped at a 10.6 percent annualized rate, subtracting 0.6 percentage point from gross domestic product.

The Congressional Budget Office has estimated the effect of the $85 billion in planned federal spending cuts will be similar this year, reducing GDP by 0.6 percentage point. The cutbacks, which began because Congress couldn’t compromise on a debt-reduction strategy, trim 5 percent from domestic agencies and 8 percent for the Defense Department this fiscal year.

Most economists believe the Defense Department got a jump on the cuts in the fourth quarter of 2012, when outlays dropped at a 22.1 percent annualized rate, the most since the tail end of the Vietnam War era, according to figures from the Commerce Department. Should it have dropped another 10 percent in the first quarter, it would mark the biggest back-to-back decreases since 1954, during the demobilization following the Korean War.

Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities LLC in New York, was among economists saying the data indicated sequestration started to take effect almost immediately. Others, including Paul Edelstein, director of financial economics at IHS Global Insight in Lexington, Massachusetts, were more circumspect.

“The sequester, if it lasts, will appear slowly in the durable goods orders numbers, and mostly impact the medium-term trend not month-to-month gyrations,” Edelstein said in a note.

We’ll know who’s right soon. The Commerce Department initial first-quarter GDP estimate comes out in two days.

Original post is Sequestration Not Coming Out in Wash by Political Capital.

Photograph by David Paul Morris/Bloomberg

Construction crews work on new homes being built in San Ramon, California, on April 12, 2013.

The U.S. housing market looked even healthier today on growing demand for rental properties.

Data released by the Commerce Department showed builders broke ground on 1.04 million new homes in March at an annualized rate, the most since June 2008. All the gains in activity, however, occurred in multifamily construction last month.

Builders began work on dwellings suited for two or more families at a faster rate in March than the prior month, whereas they slowed production of single-family homes.

The report provides more evidence that the rental market is the main driver, with the construction of multifamily homes now proceeding at the fastest pace in more than seven years. Other figures only underscore this trend.

The vacancy rate on rentals averaged 8.7 percent last year, the lowest since 2001, according to Census Bureau figures. Homeownership has moved inversely, with the share of Americans’ owning their residence falling in 2012 to a 16-year low of just over 65 percent.

Other data today showed the cost of living in an apartment is outstripping total inflation. The Labor Department’s rent measure rose 2.8 percent over the past 12 months, while consumer prices climbed 1.5 percent.

Economists at Barclays PLC offer one explanation for the surge in rental demand, and it centers on the fallout from the housing crisis that started the recession in the first place.

Foreclosures are forcing more former owners to become renters, “which accounts for the relative strength of multifamily starts over single-family,” Barclay’s Michael Gapen wrote today in a note to clients.

Original post is Rentals on Fire — Construction, That Is: Driving Housing by Political Capital.

Photograph by Mike Ehrmann/Getty Images

The 2013 Masters Tournament at Augusta National Golf Club in Georgia.

The Masters, golf’s first major tournament of the year that is currently under way in Georgia, helps usher in spring.

Also emerging at the start of the spring season is tepid economic data. And figures today showed the economy is barely getting so much as a golf clap from the American consumer.

A preliminary April measure of consumer sentiment slumped to the lowest level in nine months, according to data today from Thomson Reuters/University of Michigan. A Commerce Department report showed retail sales last month fell by the most since June.

The consumer spending numbers removed some of the luster from what had been shaping up as very bright first quarter for the economy. Economists at Barclays Plc and JPMorgan Chase & Co. lowered their first-quarter gross domestic product tracking estimates to 3 percent. They forecast second-quarter growth at half that pace as spending cools amid higher payroll taxes.

It all circles back to the labor market. The Michigan sentiment survey showed Americans are now more inclined to see stagnant after-tax incomes as permanent, rather than temporary as in past economic cycles. Not a very good recipe for a sustained acceleration in consumer spending.

Some 32 percent expect the unemployment rate, currently at 7.6 percent, to head higher in the coming year compared with 24 percent who see it falling.

Perhaps more surprising given that the stock market is trading close to record highs, 22 percent of all consumers in the latest survey expect their financial situation to improve in the year ahead, just above the all-time low of 20 percent who said so in 2011.

Original post is Economy: Trouble Mustering Golf Clap by Political Capital.

Photograph by David Duprey/AP Photo

Consumer spending in New York.

That’s the percentage increase in consumer spending in February, the biggest jump in five months.

Consumer spending rose by $77.2 billion in February, compared with an increase of $40.8 billion and 0.4 percent in January that was larger than previously estimated, according to the Commerce Department’s Bureau of Economic Analysis.

Consumer purchases account for about 70 percent of the economy.

Bloomberg’s Shobhana Chandra and Jeanna Smialek have more here.

Original post is Bloomberg by the Numbers: 0.7 by Political Capital.

Photograph by Joshua Roberts/Bloomberg

V-22 Osprey aircraft sit on the deck of the USS Kearsargeat docked at the Norfolk Naval Shipyard in Norfolk, Virginia, Feb. 28, 2013.

Income gains are showing the world’s biggest economy was in much better shape at the end of 2012 than the growth numbers indicated.

Gross domestic income, or the money earned by the people, businesses and government agencies whose purchases go into calculating growth, rose at a 2.6 percent annualized rate in the fourth quarter after adjusting for inflation, the Commerce Department reported today. GDP expanded at a revised 0.4 percent pace in the final three months of 2012, the data also showed.

Federal Reserve researchers including Jeremy J. Nalewaik have shown the earnings data may provide a more accurate picture of the economy. After multiple revisions over time, the government’s growth estimates tend to align more closely with the income figures, rather than the other way around, Nalewaik said in a 2010 paper.

Justin Wolfers, professor of public policy and economics at the University of Michigan and a columnist for Bloomberg View, highlighted the differences today and came down in favor of paying more attention to the income side.

It’s remarkable how many false signals US GDP has given. And it’s equally remarkable how much more accurate of a picture GDI has given.

— Justin Wolfers (@justinwolfers) March 28, 2013

While the income and GDP figures should theoretically match, the different methods used in calculating the numbers cause them to sometimes diverge.

Comparing the figures over a longer time-frame puts them more in sync. Over the last four quarters, real GDP rose 1.7 percent, compared with a 1.8 percent gain in gross domestic income, the Commerce Department said.

Growth as measured by GDP last quarter was hurt by the biggest slump in federal military spending since 1972 and a slowdown in inventory gains. Those two categories alone subtracted 2.8 percentage points from GDP.

The income data included the first look at corporate profits. Earnings increased 2.3 percent in the fourth quarter after rising 2.4 percent in the previous three months. They climbed 3.1 percent from the same time in 2011.

Original post is Incomes Signal U.S. Economic Gains by Political Capital.

Photograph by Daniel Acker/Bloomberg

Penny Pritzker, chairman and chief executive officer of PSP Capital Partners LLC, in Chicago.

Written with John McCormick

President Barack Obama is close to choosing Chicago businesswoman Penny Pritzker, who led fundraising for his 2008 campaign, as his next commerce secretary, according to three people familiar with the matter.

Pritzker, whose family built the Hyatt Hotels Corp. chain, would replace acting commerce secretary Rebecca Blank, an economist who took over for John Bryson after he resigned last June for health reasons, as Bloomberg’s Hans Nichols and John McCormick reported today.

Selecting Pritzker, 53, would ensure that one of Obama’s original Chicago supporters would have a voice in shaping his second term, said two of the people, who requested anonymity to discuss personnel decisions. The president hasn’t made a final decision, said a third person, who also requested anonymity.

A White House spokesman, Eric Schultz, declined to comment on Pritzker’s potential nomination. Pritzker’s spokeswoman didn’t respond to an e-mail seeking comment.

After facing criticism for picking men to lead the State, Treasury and Defense Departments, Obama has announced the appointment of two women for key positions. Yesterday, he selected Sally Jewell, chief executive officer of Recreational Equipment Inc., to be secretary of the Interior Department. Last month, he named Mary Jo White, a former U.S. attorney for Manhattan, as his choice to lead the Securities and Exchange Commission.

Obama is also considering Wal-Mart Foundation President Sylvia Mathews Burwell for budget director and Ruth Porat, chief financial officer at Morgan Stanley, for deputy Treasury secretary. Jeffrey Zients, the acting White House budget director, is a leading candidate for U.S. trade representative during Obama’s second term, according to one of the people.

Like Jewell, Pritzker would bring a business background to the administration, helping Obama fulfill what he has said is a goal to add private sector experience in his Cabinet.

The Chicago businesswoman has developed a skyscraper in her hometown, worked as president of a commercial real estate and luxury senior housing company, and served as chairwoman for a credit-reporting company. Priztker’s net worth as of September was estimated at $1.8 billion, according to Forbes magazine’s list of the 400 richest Americans.

See the full report on Pritzker at Bloomberg.com. 

Original post is Pritzker’s Prize: Commerce Candidate by Political Capital.

Photograph by Scott Eells/Bloomberg

Ben S. Bernanke, chairman of the U.S. Federal Reserve, speaks to the Economic Club of New York on Nov. 20, 2012.

The latest inflation reports tied to consumer spending give Federal Reserve Chairman Ben Bernanke a green light to consider stepping up asset purchases, or quantitative easing.

Today’s Commerce Department report showed that a measure of prices tied to spending advanced 1.7 percent in October from the same month last year, less than the Fed’s long-run goal of 2 percent. Excluding food and energy costs, the price gauge increased 1.6 percent from a year earlier.

“Some Fed members think they should keep easing one way or another unless the” measure of inflation tied to expenditures “rises above 2.5 percent,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

“One thing for certain is that inflation is dead,” Rupkey said. “The slower growth picture right now makes the case for the Fed replacing the expiring $45 billion purchases side of QE Twist with outright purchases of Treasuries, across the curve, when it meets” Dec. 11-12.

The central bank each month is swapping $45 billion in short-term Treasuries for longer-term debt in a program called Operation Twist scheduled to end in December. A number of Fed officials have said monthly purchases of bonds may be expanded next year after Twist ends, according to minutes of their Oct. 23-24 meeting.

Jim O’Sullivan, chief U.S. economist with High Frequency Economics, Ltd. in Valhalla, New York, said today’s benign inflation report may help on that front.

“The tameness in inflation, combined with contained inflation expectations, increases the likelihood that Fed officials will expand QE3 to include Treasuries when Operation Twist concludes at year-end,” he said.

Original post is Bernanke’s Green Light for Easing by Political Capital.