Last week the major indices gapped down in response to soft operating results from market bellwethers Microsoft (NASDAQ:MSFT), General Electric (NYSE:GE), McDonald’s (NYSE:MCD) and Advanced Micro Devices (NYSE:AMD). I’m not tremendously surprised, considering that each of these companies has had trouble firming up their balance sheets for some time.
But some investors didn’t pay attention to analyst warnings that this would be an unusually slow earnings season so they’re scrambling to bail out of these companies now. The way I see it, this shakeup is going to cause a flight to quality in more fundamentally sound stocks, which make my newsletter subscribers very happy as those are exactly the kinds of stocks we invest in.
But while many investors are freaking out over the latest earnings announcements, I don’t want last week’s economic reports to go unnoticed. Because we had no fewer than eight big economic reports come out this week and they provided valuable information on several pockets of the U.S. economic recovery. So let’s take a break from earnings for just a moment and run down what happened over the past week:
Retail sales rose 1.1% in September, topping economists’ estimates of a 0.9% gain. Sales were led by a 4.5% surge in electronics retailers, mostly thanks to the introduction of the Apple (NASDAQ:AAPL) iPhone 5. But excluding sales at electronics stores and even gas stations, September retail sales still rose a very healthy 0.9%. Also notable is that July and August’s retail sales were revised up to 0.7% and 1.2% gains respectively. As a result, economists are now planning to revise their third quarter GDP estimates significantly higher, since consumer spending steadily improved in the third quarter.
The Consumer Price Index (CPI) surged 0.6% in September. Energy prices rose 5.6% in August and 4.5% in September and remain the culprit behind surging inflation. Excluding food and energy prices, the core CPI rose 0.1%. This was the second back-to-back 0.6% month increase for both August and September, and considering that both headline CPI and core CPI have risen 2% in the past 12 months, inflation is definitely brewing.
The Housing Market
Housing starts soared 15% in September to an 872,000 annual rate, hitting a four-year high. This came way above analysts’ estimates of 765,000 housing starts. The surge was driven by a 11% jump in single-family home construction, which accounts for nearly 70% of the total figure. Since last September, housing starts have advanced 34.8%, a tremendous sign for the housing recovery.
Building permits jumped 11.6% to 894,000 in September. This also topped the consensus estimate, which called for an annual rate of 815,000. This is also the highest level since July 2008. Permits, which indicate future building prospects, tend to be less volatile than housing starts, so it’s encouraging to see such broad based gains on this front as well.
Existing home sales declined 1.7% in September to a seasonally adjusted rate of 4.75 million. This came below economists’ estimates of 4.9 million. But the overall trends are positive; especially considering that inventory of existing homes for sale is now down to only 5.9 months. As inventories continue to tighten, home prices should firm up. In fact, median home prices have advanced 11.3% over the past 12 months.
The Private Sector
Business inventories climbed 0.6% in August, representing a slowdown from July’s 0.8% gain. Considering that the past two months saw the largest retail sales growth in two years, it’s no wonder that stockpiles are falling. Even so, inventories still came above the 0.5% consensus estimate. Right now, businesses have enough goods on hand for a 1.28 month supply.
Industrial output advanced 0.4% in September, after falling a revised 1.4% in August. Much of the past month’s decline resulted from the idling oil rigs in the Gulf of Mexico in anticipation of Hurricane Isaac. Now that oil production has resumed, September’s industrial output recovered. Otherwise, the most positive signs form this report was a 0.2% in manufacturing output (following a 0.9% drop in August). Excluding auto manufacturing, overall manufacturing rose 0.4% thanks to gains in business equipment and consumer goods. Overall industrial output declined 0.4% in the third quarter, so it will be somewhat of a drag on GDP estimates.
The Jobs Market
Following last week’s 30,000 plunge, jobless claims rebounded (and then some) 46,000 this week to 388,000. This came above the 370,000 consensus estimate and represents a three-month high. The reason that we’ve seen such dramatic swings over the past two weeks is due to a seasonal quirk; we tend to see wild shifts at quarter’s end. What’s more important is the more stable four-week moving average, which remained largely unchanged at 365,500. What’s driving the bulk of the jobs market recovery is a decrease in layoffs.
The Big Picture
The Index of Leading Economic Indicators gained 0.6% in September. This outpaced analysts’ forecasts of a 0.1% gain and represented a reversal from August’s 0.4% drop. September’s reading was helped by stronger building permits, stock prices and the interest rate spread. Meanwhile, consumer confidence and jobless claims weighed on the index. In the past six months, the index has risen 1.3%, and while this is positive, it wouldn’t hurt to see faster growth.