Manufacturing Neither Weak Nor Strong
Manufacturing data remained mixed in February but managed to show some improvement from January, at least in terms of durable goods orders. The Chicago Purchasing Managers' data backed off of last month's numbers, but was still well above 60, a generally bullish indicator. Given a weakening in export demand and a slowing in the auto sector's growth rate later this spring, I'm not expecting a lot of help from manufacturing in 2012 (though no big declines, either). The economic key remains the U.S. consumer, with a potential added boost from the housing and construction market.
Interpreting Housing Data Requires Picking a Frame of Reference
Real estate data continued to be relatively inconclusive, but at least it's clear that things aren't getting any worse--and might even be improving. Weather has wreaked havoc on real estate data with year-over-year comparisons benefiting from great weather this February compared to 2011's hermit-inducing conditions that included record cold and snow. On the other hand, month-to-month data has looked flat as good weather as early as December ruined normally powerful seasonal bounces. Of course, the media remains thoroughly confused with many outlets featuring month-to-month weakness while others are running headlines trumpeting a new boom based on the year-over-year numbers. I believe the truth lies somewhere in the middle.
A Slowing China Could Hit Developing Markets Hard
If one wants to worry, it appears that emerging markets continue to be a good place to start. In last week's report, I began to pull apart numbers for China's trade partners. It became clear that China was acting as a gigantic middle man gathering raw materials and inputs from other emerging economies and selling them into developed economies. As Europe (its largest export market) has slowed, so has China. And those effects are trickling down to China's major import partners. The BRICS countries also do a fair amount of trading among themselves, further compounding the slowdown. Moreover, higher oil prices have a proportionally large effect on emerging markets, where oil comprises a greater part of consumption. China recently boosted internal gasoline prices (earlier, government entities had absorbed increases in world oil prices). This will further hurt China's economy and those of its trading partners. Similar restraints on gasoline prices are about to be lifted in Indonesia, sparking riots there.
A Slowing China Won't Kill Developed Markets,
But Weak Developed Markets Could Hurt China
In sum, I think a lot of commentators have it backward. A slowing China won't ruin developed, non-commodity-related economies. Much of the developed world exports little to China. So instead of an economic disaster, a slowing China is more likely to take down developing markets' growth by a mere few ticks of a percentage point. However, a slowing developed world is a very bad thing for China, and potentially even worse for its developing-markets partners (and developed Asian neighbors) that are sorely dependent on exports to China and other emerging markets. The question is, can an improving U.S. economy offset a nearly flat European economy that is larger than the U.S. economy in size and is a considerably larger importer of Chinese goods? In 2010, the U.S. imported $283 billion of goods from China while the eurozone imported $370 billion. For the record, China's total GDP was $5.9 trillion in 2010. Meanwhile, U.S. exports to China were a mere $100 billion out of a $15 trillion economy.
Home Prices Stabilizing
The Case-Shiller Home Price Index affirmed the improving trend in home prices as seasonally adjusted home prices for the three months ending in January were flat compared to December. The table below shows that the monthly trend is getting better.
Based on tighter inventories and confirming last week's data from the Federal Housing Finance Agency, I believe the Case-Shiller Index is likely to move into positive territory with next month's report. Year-over-year data also showed improvement, with prices down about 3.8% versus 4.1% the previous month on the 20-city index.
I am not terribly concerned or excited about the current pricing data. Recent changes are small squiggles compared to the 20%-30% declines early in the housing debacle. Potential buyers are looking at near-record-low interest rates and accelerating rent increases that make small changes in home prices irrelevant. What buyers fear is a sudden 10% decline just months after purchasing their homes. The data this week seems to suggest that declines of that magnitude are not in the cards.
Foreclosures Don't Have To Be a Housing Market Killer
I am also less concerned than many people about a foreclosure glut. My contention always has been that people who move out of foreclosures have to live somewhere. So while foreclosures definitely represent greater supply, they also represent a source of additional demand. Also, unlike the beginning of the crisis, investors are now well-positioned to buy homes and then rent them out, representing a potentially huge market for foreclosures. Rental homes now produce some great cash flows in a world starved for higher rates of return. Investors are looking to buy and hold some foreclosures for the income.