Economy Entering New Year on a Roll

December 26th, 2013

Wall Street Journal (12/25/13) Sarah Portlock; Josh Mitchell
WASHINGTON—A pickup in business investment and robust new-home sales point to an economy on stronger footing heading into the new year.

“It’s a holly, jolly data Christmas for the economy as all signs point to an accelerating economy,” said Joel Naroff, chief economist at Naroff Economic Advisors.

Orders for U.S. durable goods—big-ticket items such as cars and aircraft designed to last more than three years—rose 3.5% last month, reversing a decline in October, the Commerce Department said Tuesday. Excluding the volatile transportation category, manufactured-goods orders rose 1.2%, the strongest gain since May.

Meanwhile, Americans continued to purchase new homes at a brisk pace in November, the Commerce Department said in a separate report this week, the latest sign the housing market is regaining traction after a rise in mortgage rates. New-home sales hit a seasonally adjusted annual rate of 464,000 last month, down only 2.1% from October’s upwardly revised annual rate of 474,000. October and November marked the two strongest months of new-home sales since mid-2008.

The pair of reports showed renewed optimism by businesses and prospective homeowners, two of the biggest drivers of the economy, and led Macroeconomic Advisers to raise its estimate for fourth-quarter growth. It now forecasts gross domestic product to expand at an annualized rate of 2.6% in the final three months of the year, up three-tenths of a percentage point from an earlier estimate.

The overall durable-goods increase was driven by business investment, particularly in civilian aircraft orders, which rose nearly 22%. But a broader measure of business spending on software and equipment rose at a solid pace in November after falling in recent months. Orders for nondefense capital goods, excluding aircraft, increased by 4.5%, its strongest pace since January. That could be a sign businesses stepped up spending after the partial government shutdown in October.

Weak business spending has weighed down the U.S. recovery, with many companies pointing to uncertainty from Washington as a reason for holding back. The two-year budget agreement reached in Congress earlier this month may quell some of those concerns.

“The tone of durable-goods orders improved substantially in November,” said TD Securities strategist Gennadiy Goldberg. “Stronger orders bode well for both the fourth quarter and 2014 economic growth prospects, suggesting that companies remain keen on increasing investment and expanding capacity as the economy and consumer sentiment improve.”

Another bright spot was stronger demand for motor vehicles last month. Orders in the category rose 3.3%, the strongest since February. That indicates consumers are once again buying cars after delaying the decision in recent years.

Still, underlying demand in the U.S. remains sluggish compared with past recoveries, with much of the third-quarter growth due to companies restocking inventories. Unemployment remains at an elevated 7% with nearly 11 million unemployed workers. Consumer and business spending, while showing healthy increases lately, are still at sluggish levels. And workers’ wages are growing only tepidly, raising concerns about how long consumers will be able to maintain the current level of spending.

On the housing front, the new-home sales report suggests the market is picking back up after a rise in mortgage rates dented sales earlier this year. Mortgage rates climbed more than a percentage point starting in the spring after Federal Reserve officials signaled they were considering reining in the central bank’s $85 billion-a-month bond-buying program. The higher borrowing costs, coupled with a rise in home prices, likely scared off some prospective buyers. But households may be adjusting to the higher rates, which are still historically low but climbing.

Because new-home sales are tallied at the signing of a contract rather than at the closing, they can be an early indicator of housing-market trends.

From a year ago, new-home sales were up 16.6% in November.

The monthly pace of new-home sales caused inventory to decline, the Commerce Department said. At November’s pace, it would take 4.3 months to sell homes on the market, down from 4.5 months in October.