Saturday, August 17, 2013

Macroeconomic Monday® - The Demographic Shift to Multi Family, City Dwelling is Real

For those reading this today, Saturday, I normally write this on Saturday then post on Monday.  But, I figured if you want to read on Saturday why not?  However, the name remains the same.

So, last week was an incredible week for economic news and the stock market.  I remind everyone who may think the financial sky is falling that the S&P is still up close to 18% this year so I would not fret too much (Unless you are a late comer to the party then you may wonder what happened).  From a purely financial point of view this week was bound to happen.  Call it reversion to the mean, a short correction or whatever you want the bottom line is stocks cannot just keep going up forever.  The curve is not smooth and if you want it to be smooth then you are involved in the wrong business.

But, there were some very interesting dynamics.  First, retail spending continues to be softer than the analysts predicted.  Sometimes I wonder if the analysts are really forecasting or are they hoping - I have said all along that until unemployment changes significantly (i.e. at 6% or below), retail is going to suffer.  Yes, there are some "must have" items which hit a replacement cycle (Cars and appliances) that you just have to replace no matter what.  But, the discretionary is where consumers just are not going to spend their money.   The graph to the right outlines the anemic changes in retail sales and it shows a very variable and anemic growth for retail sales. My readers know I do not buy into this "weather" blame game people make for why this is adjusted.  The bottom line is it just looks like people are buying essentially what they need.

The other big event was the move in the 10 year note.  This graph is even more telling about what is going on in the economy where you can see the interest rates are spiking fast.

The 10 yr T-Note of course is what a lot of mortgages are tied to which drives the housing market.  This is another "KPI" I monitor for the economy.  If the 10 year T-Note gets above 3% watch out!

Yes, I know and have heard many say that these are incredibly artificially low interest rates and so going above 3% is more of a reversion back to the mean or the norm.  My response channels the blog posting I made recently about Nate Silver and the idea of "out of sample".  Yes, in normal times the 10 Year T-Note should be at 3.5% to 4% and we should be able to live with it.  However these are not normal times.  We are above 7% unemployment, we are coming off of the worst recession (some say depression) since the 1930's and even for those employed many are dramatically underemployed.   So, imagine a scenario where you have 7% or above unemployment AND interest rates above 4%?  That is not a good indicator for the economy.

Finally, this leads to the behavior of the home buyer.  They are not buying.  What they are doing is moving into multi family dwellings. While multifamily dwellings increased over 26%, the building of single family homes declined by 2.2%.  On average people spend more money on other things (think lawnmowers, curtains, a lot more furniture, nicer appliances etc. etc.) when they move into single family homes rather than when they move into multi family homes.  This will be a net drag on the overall consumer spending numbers even though it will keep the builders busy for a short period of time.

So, in summary, we have a situation where the consumer has closed their wallet, interest rates are rising, single family homes are in decline.  All speaks for a sluggish economy with some bright spots (autos for example).  Freight will remain low (especially after these retail numbers) and hopefully the continued rise in 10 Year T-Notes will not choke off any semblance of recovery we may have going.

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