Today: Capex revival, U.S. housing.
Durable-Goods Orders Surge
Purchases of durable goods—products such as airplanes, cars and heavy machinery designed to last at least three years—rose a seasonally adjusted 22.6% to $300.1 billion in July from the prior month, the Commerce Department said Tuesday. That was the sharpest increase and highest level in records going back to 1992. The surge largely reflected strong sales atBoeing Co. BA +0.21% , which had reported signing purchases for a record 324 planes last month.
Excluding aircraft and other transportation equipment, orders fell 0.8% in July from the prior month’s upwardly revised gain of 3%, and were up 6.6% from a year earlier.
One key measure of business investment—orders for nondefense capital goods excluding aircraft—fell 0.5% in July from June, but the prior month’s gain was revised up to a 5.4% rise. July orders in this category were 8.3% higher than a year earlier, the fastest rate of annual increase since December.
Non-def cap. goods ex-aircrafts declined in 2 of the last 3 months but June’s 5.4% gain (revised from +1.4%!) more than offset the weaker months. Last 3 months: +3.5% or +14.8% annualized. Orders for motor vehicles & parts increased 10.2% (+15.0% Y/Y), following a 1.3% decline in June.
According to forecasting firm Macroeconomic Advisers’ latest tracking estimate, spending on business equipment appears to have grown at an 8.6% annual rate in the second quarter. That would be higher than the 7% the Commerce Department reported in its advance report on gross domestic product. And for the third quarter, Morgan Stanley economists now see business-equipment spending growing by 11.7%, way up from their earlier estimate of 6.4%. (WSJ)
ISI estimates that real capex in Q3 is on track for +11% a.r.
Here’s a Doug Short chart with my markings:
And this chart from BMO Capital illustrating capex plans into 2015:
U.S HOUSING
Business spending and housing were the only ingredients missing in the U.S. recovery. It now looks like housing has become the only laggard. Here’s why in 7 charts:
For whatever reasons, 5-yr rates are not following longer-term rates downward move:
- 30-Yr rates down 90 bps (23%) YTD:
- 10-Yr rates down 60 bps (20%) YTD:
- 5-Yr rates down 8 bps (5%) YTD:
So mortgage rates are sticky:
- 30-Yr mortgage rates down 40 bps (9%) YTD:
Hence, lower affordability:
And look who can’t afford a new home (chart fro Doug Short):
New homes priced below $200k are 20-25% of recent sales, down from 55-65% in 2002 as this CalculatedRisk chart reveals. In actual numbers, that means that some 570k houses below $200k were sold in 2002. We are down to some 95k in 2014. By comparison, the actual number of houses sold at priced above $200k declined from 430k in 2002 to 310k in 2014.
Will that be cash or credit? There is simply no demand from people with no cash:
(More Laid-Off Workers Are Bouncing Back, And Fewer are Taking Pay Cuts For the first time in six years, a Labor Department survey shows most long-tenured workers laid off from full-time jobs and returning to work full time are not taking pay cuts.
(…) As of January, 1.8 million workers who had held a full-time job for at least three years, then lost it between 2011 and 2013, were back at work in full-time jobs. A majority, 52%, of those reporting wages said they were earning the same or more than they had at the jobs they had lost.
That’s an improvement from the Labor Department’s surveys in 2012, when 54% were in lower-paying full-time jobs, and 2010, when 55% were in lower-paying positions. In January 2008, a month after the U.S. economy slipped into recession, 55% were in full-time jobs that paid the same or more as their former jobs.
Home-Price Growth Slows
The home price index covering the entire nation increased 6.2% in the 12 months ended in June, said the S&P/Case-Shiller Home Price Index report. In the past the national index was published quarterly but the report noted it will now be released monthly.
The home price index covering 10 major U.S. cities increased 8.1% in the year ended in June, and the 20-city price index was also up 8.1%. That pace is down from a 9.4% yearly rate in May but close to the 8.2% expected by economists surveyed by The Wall Street Journal.
On an unadjusted basis, the national index increased 0.9% in June over May, while the 10-city index and the 20-city composite each increased 1.0%. Seasonally adjusted, the U.S. index fell 0.1% in June, the 10-city gauge slipped 0.1% and the 20-city composite was down 0.2%.
U.S. Farm Incomes Forecast to Fall U.S. farm incomes are expected to fall 13.8% this year to the lowest level in four years, the U.S. Department of Agriculture says, as expectations of a second straight bumper harvest push down prices for key crops.
Federal forecasters projected net farm income would slide to $113.2 billion from an estimated $131.3 billion in 2013, which was the highest since 1973 on an inflation-adjusted basis.
The latest projected decline is narrower than the 27% drop in 2014 net farm income that the USDA forecast in February. The change is due largely to an improved outlook for livestock farmers, who are benefiting from record prices for beef and pork as well as low prices for corn and other grains used in animal feed. The USDA said on Tuesday that it expects livestock farmers’ receipts to rise 15% this year, compared with a February projection of a 0.7% rise.
Expectations for a bumper harvest have caused prices of corn, the nation’s biggest crop, to fall 15% this year to near four-year lows, after plunging 40% last year. Soybeans, the No. 2 U.S. crop, also are near four-year lows. (…)
The USDA also predicted a 4% rise in production expenses for farmers, with increased costs for seeds, fertilizer and pesticides. That marks the fifth consecutive year of increased costs, to the highest level on record. (…)
For grain producers, weak incomes are likely to persist through at least 2015, said Michael Boehlje, an agricultural economist at Purdue University. Crop “prices are down much lower than anyone had anticipated,” he said.
The combination of lower prices and high costs has some farmers worried that they could see negative returns for the first time in years. Mr. Hanna said he and his father are carefully assessing the value of items such as fungicide and insecticide before making purchases for the next growing season.
Chinese developers slash home prices
In the latest sign of Chinese developers’ desperation to unload inventory into a weak property market, China Vanke Co is offering discounts of up to $325,000 to homebuyers who shop on Alibaba’s Taobao, an e-commerce platform.
The country’s biggest developer will give discounts that match shoppers’ spending of up to Rmb2m ($325,000) on the eBay-like service. Homes in real estate developments in Beijing, Shanghai, Guangzhou and Chongqing, among other cities, will qualify, according to an advertisement on Taobao’s website. (…)
“Putting full effort into destocking has become the common choice of most developers. They’re still not optimistic about the market situation,” the China Real Estate Index System, a private data provider, said in a commentary last week. (…)
French Manufacturing Confidence Falls to 13-Month Low French factory confidence fell to the lowest in 13 months in August, adding to signs that the economy may struggle to grow after a stagnant first half.
Warren Buffett’s Tax Whopper Obama’s business front man finances ‘corporate deserters.’
President Obama and Senate Democrats are going to need a new business front man. This week they’ve been officially abandoned by their erstwhile tax-policy patron saintWarren Buffett, who has joined up with what the President likes to call the “corporate deserters” who locate their legal headquarters somewhere other than the United States. (…)
Mr. Buffett and Burger King’s controlling shareholders at 3G Capital are providing a valuable public education on the need to reform America’s noncompetitive tax system. Will Senator Brown also boycott Geico insurance or other Berkshire Hathaway businesses?
The Burger King deal also signals the continuing success of Canada’s historic move toward open markets and economic growth. A series of tax cuts since 2000 have reduced Canada’s federal corporate rate to 15% from 28%. Provincial rates tack on roughly 12% more, but the combined rate in Canada is still more than 10 percentage points below the overall U.S. rate.
Canada’s Department of Finance says it now has the lowest rate on new investment in the G-7 and cites a KPMG study in claiming that Canada’s total business tax costs are now 46% lower than those in the U.S. That’s a boast you’d never hear from the Obama Treasury, which is even now looking for ways it can unilaterally raise corporate taxes without going to Congress. (…)
Hopes
Israel, Hamas Agree to Open-Ended Cease-Fire
Putin Says Ukraine Summit Positive as Talks Begin
“Russia, for its part, will do everything for this peace process,” Putin said early today after meeting Ukrainian President Petro Poroshenko at a summit in Minsk. “In our opinion, it should start as soon as possible.”
Poroshenko said on Twitter after the talks that Russia backed a Ukrainian peace strategy to stem fighting between the army and pro-Russian insurgents in the eastern Donetsk and Luhansk regions. While Putin didn’t mention the proposal, Poroshenko told reporters a “road map” would be drawn up and a three-way contact group involving the European Union would work toward a truce. (…)
“Any dialogue is a good thing, and they’ve agreed to additional meetings,” Yevgeny Minchenko, head of the Moscow-based International Institute for Political Expertise, said by phone. “However, it’s difficult to imagine any deal could be made in the current environment.” (…)
“With the negotiation process now started, a new wave of Russia-West confrontations has become less likely -– indeed, both sides clearly seem to be looking for an acceptable way to de-escalate relations and to end the crisis.”
Putin said that no talks were held on conditions for a cease-fire in Ukraine because Russia isn’t a party to the conflict.
Hmmm…
“Regular Russian units are operating in eastern Ukraine,” Polish Prime Minister Donald Tusk told parliament in Warsaw today, citing information from the country’s intelligence services and NATO. (…)
Ukraine released video footage yesterday of men in military fatigues that it said were Russian paratroopers captured when an armored column crossed the border. One, identified as Sergey Smirnov, said they were ordered to cover up Russian markings on their vehicles and paint on white circles before being sent to Ukraine without documents and mobile phones.
Russia’s state-run RIA Novosti news service cited an unidentified Defense Ministry official as saying that troops patrolling the border crossed into Ukraine accidentally and didn’t resist when detained.
From The Economist last week:
Battering on The fighting in eastern Ukraine intensifies as pro-Russian rebels lose ground, raising fresh questions over the plans of Russia’s Vladimir Putin
The war is reaching a crunch point. Pushing forward with artillery and bombing raids, Ukrainian forces are recapturing territory and closing in on rebel forces in the east. The mood in Kiev, as Olexsiy Melnyk of the Razumkov Centre sums it up, is to “go to the end”—to finish the war by force. In a purely military contest, without an influx of heavy weapons or ground troops from Russia, the anti-Kiev insurgency would lose. The human cost could be high, but it would give President Petro Poroshenko a battlefield victory without making concessions to Moscow.
Discipline is breaking down in rebel ranks, as the Kremlin pulls out high-profile proxies in favour of untested and unqualified locals who have the credibility of being from eastern Ukraine but neither competence nor experience. Donetsk and Luhansk, the two rebel strongholds, are under siege. This suggests that Russia’s Vladimir Putin may face a stark choice: to offer more support to the rebels with extra weapons and covert assistance, perhaps all the way to open invasion; or to pursue a negotiated end to the fighting that sees him withdrawing support for the rebels and facing an embarrassing geopolitical loss.
Endgame for Putin in Ukraine?
(…) But the fact remains that Russia is too weak to challenge the West further, at least in the way that it did in Ukraine. Russia’s GDP is around $2 trillion, and its population of 143 million is falling fast. The United States and the European Union have a combined GDP of about $34 trillion and a population of 822 million, with the US population growing rapidly. This means that the West can inflict much more damage on Russia than Russia can inflict on the West. (…)
So we are left with a looming endgame in which Putin can neither retain his spoils – Crimea and control of Russian-speaking parts of eastern Ukraine – nor back down. Russia will be required to disgorge these acquisitions as a condition of normalizing its relations with the West. But Putin will most likely try to prop up eastern Ukraine’s separatists as long as he can – perhaps with military assistance disguised as humanitarian aid – and will absolutely refuse to give up Crimea.
This will lead to a further escalation of Western sanctions: restrictions on gas exports, general export restrictions, suspension from the World Trade Organization, withdrawal of the FIFA 2018 World Cup soccer tournament, and so on. This, in conjunction with the tightening of current sanctions, including the exclusion of Russian banks from Western capital markets, is bound to cause serious shortages, declining living standards, and major problems for Russia’s ownership class.
The Russian public’s natural reaction will be to rally to their leader. But support for Putin, though broad, may not be deep. It is support before, not after, the debate about the costs of Putin’s policy has taken place. And that debate is being silenced by state control of the media and the suppression of opposition.
It is natural and right to think of possible compromises: Ukraine’s guaranteed neutrality, greater regional autonomy within a federal Ukraine, an interim international administration in Crimea to supervise a referendum on its future, and the like.
The question is not how much of this kind of package Putin would accept, but whether any of it will be offered to him. The West no longer believes anything he says. US President Barack Obama has publicly accused him of lying. German Chancellor Angela Merkel, formerly Putin’s strongest backer in Europe, is reported to have described him as delusional. (The last straw for her apparently was his attempt to blame the downing of Malaysia Airlines Flight 17 on the Ukrainian government.)
All leaders lie and dissemble to some extent; but the scale of disinformation coming from the Kremlin has been epic. So the question must be asked: Will the West be prepared to make peace with Putin?
Leaders whose foreign-policy adventures end in defeat do not usually survive long in office. Either formal mechanisms are used to dethrone them – as occurred, for example, in the Soviet Union, when the Central Committee forced Nikita Khrushchev out of power in 1964 – or informal mechanisms come into play. Putin’s power elite will start fracturing – indeed, that process may have begun already. Pressure will grow for him to step aside. There is no need, it will be said, for his country to go down with him.
Such a scenario, unimaginable a few months ago, may already be shaping up as the Ukraine drama moves to its endgame. The Putin era may be over sooner than we think.
Much of the problem stems from steel, trucks, car parts, industrial machinery and furniture. 
The pendulum is poised to change direction again, though as billions of dollars in new plants in the U.S. come online in the next few years.