We got a boatload of data this morning. Although much ignored by the maintream media, the consumer data was very very weak. June retail sales are off to a very poor start. After a 0.2%last week the ICSC retail sales report showed a week over week loss of 0.6%. The year over year decline was 1.5%. The Redbook was unusually weak again. This week’s 4.8% decline is setting June up to be a huge disappointment on the consumer front. This remains the most important leg of the economic stool. To say it is not looking good is a bit of an understatement.
On the housing front we had May housing starts which came in better than expected at 532K. In a normal housing decline I would be inclined to say that this is an overwhelming positive. Unfortunately, one of the primary reasons why this recession has been so drawn out is due to the never ending home building. With housing supply of well over 10 months the last thing we need is more housing. Multi family units were especially strong with a 77% increase and contributed to much of the rise. Monthly starts are notoriously volatile. As Econoday reports:
“Monthly figures are often volatile; housing starts fluctuate more than many indicators. According to the Commerce Department, it takes five months for total housing starts to establish a trend. Consequently, we have depicted total starts relative to a five month moving average.”
May PPI came in much weaker than expected and showed signs that inflation is far from becoming a problem. PPI came in at 0.2% vs an expected reading of 0.7%. Energy accounted for most of the gains, but we continued to see declining prices throughout most of the other segments. This is a clear sign that deflation’s death grip has loosened, but not let go of the economy. I continue to believe bonds are incredibly attractive at these levels. An anti reflation trade should begin to perform extremely well as the seasonal strength in oil subsides into the latter half of summer.
Industrial production was weak again this month. Production in May fell 1.1% which was in-line with expectations. Capacity utilization set a new low at 68.3%. This is a historical low.
All in all, there is little to like about these reports. The market is unfazed at this point, but after yesterday’s meltdown it’s not surprising to see the markets stable. The consumer data remains my primary focus. As strong as the housing starts appeared today, none of it matters if the consumer remains weak.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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