Real Estate and Economics

Gross Domestic Product (GDP) expanded at an annual rate of 4.8% in the first quarter of 2006, up from the prior quarter’s 1.7% expansion, almost exactly at the 4.9% rate Wall Street economists had forecast.

Many GDP components with high Q/Q growth rates this quarter are likely caused by a timing issue related to the Pentagon’s 9/30 fiscal year end. Smoothing 06Q1 with 05Q4 may be a more meaningful economic representation. Duruable goods spending was -16.6% in 05Q4 and 20.6% in 06Q1. Government consumption was -0.8% last quarter and is 3.9% this quarter. Final sales of domestic product was -0.2% last quarter and 5.4% this quarter.

Residential fixed investment, which includes spending on housing, climbed 3.5% (SA) in the fourth quarter, less than the third quarter’s 7.3% rate.

March posted a 4.7% unemployment rate along with a healthy 211 thousand new jobs added. Although the employment cost index is not yet reflecting it, I believe our economy is now experiencing significant wage inflation (The BLS employment cost index is often up to 6 months behind the market). Looking at monster and careerbuilder I think employers are offering about 10% more across the board then they were a year ago. A BS in economics or finance, with mobility, can most likely find an analyst position at 60k. Moderate skill manufacturing positions at $20/hr are becoming more common, and construction job salaries have been shooting through the roof (though this will almost certainly change as housing cools down).

While these are only anecdotal observations, if correct this may leave the fed in a tough spot. Wage inflation very quickly trickles into inflation in everything which the Fed will need to raise interest rates against. My question is how when we may be on the brink of a 2 trillion dollar loss in housing value? 5 to 7 percent inflation may start looking like a nice solution to housing, and foreign debt really soon. My suggestion: Buy into metals (inflation hedge), life insurance companies (interest rate hedge), and emerging markets. I have been buying into TIE, RTI, AEG, ING, and several foreign market index funds since early 2005 (and I still think they are the sectors to be investing in).

The two main contributors to the increase in fourth quarter real GDP were private domestic investment and imports. Government spending slowed from 2.9% to a -2.4% annual rate, the biggest drop since 2000.
The decrease was due to a 13.1% decline in defense spending, following a 10% increase in the third quarter. This is likely a timing issue related to the Pentagon’s 9/30 fiscal year end. Smoothing the expenditures over two quarters would result in a lower third quarter GDP and a higher fourth quarter GDP.

The MSA's with the most notable inventory increases (using a 5 week moving average) were Phoenix, Norfolk, Tampa, and Cape Coral. I attached a graph showing the magnitude of inventory increases... in a couple more months we will know how much of this is seasonality.

On this graph look at the scale (both inventory and date), not the lines, to see how large this is. A special thanks to http://www.benengebreth.org/housingtracker/ for tracking and publishing this data series.

The US trade deficit is on the rise again after a declining Q2 and flat Q3. Q4 reported $650.3 billion. That subtracted 1.2 percentage points from GDP.
A comparatively weak US Dollar is fueling a growth in exports, as US goods are relatively inexpensive on the world market. Steadily rising export growth is expected to continue into 2006, though high energy costs may prevent the deficit from decreasing.
If China, a growing source of imported goods, furtherde-links its currency from the US Dollar the deficit should see improvement as relative costs or impacts would rise. This could relatively impact US apparel and retailers.