February 4th, 2013 10:14 AM by Nick Rapplean
Its difficult, to say the least, to make sense of recent economic indicators. Recent announcements regarding New Home Sales, which I keep expecting to begin an aggressive upward move, are confusing in the extreme. In December, New Home Sales fell by a startling 7.3%.
Ouch! But in November, New Home Sales increased by 9.3%. Hello? I’ve seen comments from analysts asserting that the real estate market isn’t really gaining strength, right? I mean, look at December's New Home Sales.
Okay, we are looking at December's headline data and were quickly realizing how little the figure tells us. There are salient reasons.
1. The Commerce Department’s New Home Sales Figures are some of the most volatile data coming down the pike each month. Unlike Existing Home Sales, the New Home Sales figures aren’t confined to completed sales, but count homes that went into contract and count them in often unreliable ways. The size of the upward revision to November New Home Sales makes the point quite adequately. The addition of 22,000 homes to the sold list boosted November sales to the (supposed) highest levels since April 2010, and crushed any December gains.
A big grain of salt is appropriate here. And we will be wise to wait a few more months and to work with moving averages to get much benefit from these figures. This is not to say, though, that New Home Sales couldn’t have slipped in December. They could have, and probably did. Existing Home Sales (and remember, they are not entirely comparable to New Home Sales) fell by one percent in December.
2. And it is increasingly obvious that it’s difficult to push home sales to record levels when there just aren’t enough homes for sale. That’s why Existing Home Sales declined; it probably has something to do with the New Home Sales declines. Very likely, it makes as much sense to be skeptical of the reported 9.3% increase in November New Home Sales as it does to be wary of the reported 7.3% decline for December.
But we have bigger fish to fry here.
The Gross Domestic Product figure, representing total economic growth in our nation during the fourth quarter of 2012, was estimated to have fallen by 0.1%.
Another ouch! But again, we have fine-print factors that don’t make their way into the headlines along with the ups and downs to overall GDP. Importantly, Brad Plumer of the Washington Post found a 22.2% decline in defense spending by the Pentagon during the third quarter. Had the Pentagon not cut back on spending, the economy would have grown at a weak but positive 1.27 percent pace, Plumer observed.
One of the reasons behind the decrease in Pentagon spending, it turns out, is that the fiscal year ends in September for the Pentagon, and the mega-department wants to spend the money it was allotted for the year (before the fourth quarter begins) so that next years allotment won’t be smaller.
Another reason is that, for many months, defense spending has been undergoing cuts. And one of the reasons for that might be that the Pentagon was preparing for possible sequestering of funds due to the fiscal cliff, when it threatened to fall on us all.
In truth, what we have is neither accurate information nor reason to lack confidence in the economy. When weekly and monthly data releases are jumping around like drops of water in very hot oil, it’s probably time to back off and pay attention to the longer-term, more basic trends. Instead of looking at last months Pending Home Sales Index for a Delphic signal regarding the future, we might gain a far better idea from the real estate market’s (and overall economy) feet-on-the-earth data. Like, noticing how the construction industry is gearing up, how well REITs are doing, and the strength of the recent hiring patterns at Lowes and Home Depot.