Housing Starts

By Ryan Barnes

Release Date:	On or around the 17th of the month
Release Time:	8:30am Eastern Standard Time
Coverage:	Previous month's data
Released By:	U.S. Census Bureau
Latest Release:	http://www.census.gov/const/www/newresconstindex.html

Background
The New Residential Construction Report, known as "housing starts" on Wall Street, is a monthly report issued by the U.S. Census Bureau jointly with the U.S. Department of Housing and Urban Development (HUD). The data is derived from surveys of homebuilders nationwide, and three metrics are provided: housing starts, building permits and housing completions. A housing start is defined as beginning the foundation of the home itself. Building permits are counted as of when they are granted.

Both building permits and housing starts will be shown as a percentage change from the prior month and year-over-year period. In addition, both data sets are divided geographically into four regions: Northeast, Midwest, South and West. This helps to reflect the vast differences in real estate markets in different areas of the country. On the national aggregates, the data will be segmented between single-family and multiple-unit housing, and all information is presented with and without seasonal adjustment.

Housing starts and building permits are both considered leading indicators, and building permit figures are used to compute the Conference Board's U.S. Leading Index. Construction growth usually picks up at the beginning of the business cycle (the Leading Indicator Index is used to identify business cycle patterns in the economy, and is used by the Federal Open Market Committee (FOMC) during policy meetings).

What it Means for Investors
This is not typically a report that shocks the markets, but some analysts will use the housing starts report to help create estimates for other consumer-based indicators; people buying new homes tend to spend money on other consumer goods such as furniture, lawn and garden supplies, and home appliances.

The housing market may show the first signs of stalling after a recent rate hike by the Federal Reserve. This is because rising mortgage rates may be enough to convince homebuilders to slow down on new home starts. For investors looking to evaluate the real estate market, housing starts should be looked at in conjunction with existing home sales, the rental component of the Consumer Price Index and the Housing Price Index (also available from the Census Bureau).

According to the Census Bureau, "it may take four months to establish an underlying trend for building permit authorizations, five months for total starts and six months for total completions", so investors should look more closely at the forming patterns to see through often-volatile month to month results.

Strengths

• Very forward-looking, especially building permits; a good gauge for future real estate supply levels
• Can be used to identify business cycle pivot points
• Sample size covers approximately 95% of all residential construction in the U.S.

Weaknesses

• No differentiation between size and quality of homes being initiated, only the nominal amount
• Only focuses on one area of the economy

The Closing Line
Housing starts is best used as a business cycle indicator and a tool for investors researching the real estate markets.

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Gross Domestic Product (GDP)

By Ryan Barnes

Release Date:	Advance release: four weeks after quarter ends; Final release: three months after quarter ends
Release Time:	8:30am Eastern Standard Time
Coverage:	Previous quarter
Released By:	Bureau of Economic Analysis (BEA)
Latest Release:	http://www.bea.doc.gov/bea/dn1.htm

Background
The gross domestic product (GDP) is the godfather of the indicator world. As an aggregate measure of total economic production for a country, GDP represents the market value of all goods and services produced by the economy during the period measured, including personal consumption, government purchases, private inventories, paid-in construction costs and the foreign trade balance (exports are added, imports are subtracted).

Presented only quarterly, GDP is most often presented on an annualized percent basis. Most of the individual data sets will also be given in real terms, meaning that the data is adjusted for price changes, and is therefore net of inflation.

The GDP is an extremely comprehensive and detailed report. In fact, reading the GDP report brings us back to many of the indicators covered in earlier tutorial topics, as GDP incorporates many of them: retail sales, personal consumption and wholesale inventories are all used to help calculate the gross domestic product. Various chain-weighted indexes discussed in earlier topics are used to create Real GDP Quantity Indexes with a current base year of 2000.

What it Means for Investors
Real GDP is the one indicator that says the most about the health of the economy and the advance release will almost always move markets. It is by far the most followed, discussed and digested indicator out there - useful for economists, analysts, investors and policy makers. The general consensus is that 2.5-3.5% per year growth in real GDP is the range of best overall benefit; enough to provide for corporate profit and jobs growth yet moderate enough to not incite undue inflationary concerns. If the economy is just coming out of recession, it is OK for the GDP figure to jump into the 6-8% range briefly, but investors will look for the long-term rate to stay near the 3% level. The general definition of an economic recession is two consecutive quarters of negative GDP growth, which last occurred in the United States in 2001.

While the value of both exports and imports are included in the GDP report, imports are subtracted from total GDP, meaning that all consumer purchases of imported items are not counted as contributions toward GDP. Because the U.S. runs a current account deficit, importing far more than is exported, reported GDP figures have a slight drag on them. A related measure provided in the report, gross national product (GNP), goes one step further by only counting the value of goods and services produced by labor and property within the United States.

The "corporate profits" and "inventory" data in the GDP report are a great resource for equity investors, as both categories show total growth during the period; corporate profits data also displays pre-tax profits, operating cash flows and breakdowns for all major sectors of the economy.

The biggest downside of this data is its lack of timeliness; investors only get one update per quarter and revisions can be large enough to significantly change the percentage change in GDP.

The Bureau of Economic Analysis (BEA) even supplies its own analysis of the quarterly data, presenting several useful documents that condense the massive release down to a manageable and readable size. They also provide an annual analysis of data that segments results down to the industry level - a very useful tool for both equity and fixed-income investors who are interested in particular industries related to their holdings.

Strengths:

• GDP is considered the broadest indicator of economic output and growth.
• Real GDP takes inflation into account, allowing for comparisons against other historical time periods.
• The Bureau of Economic Analysis issues its own analysis document with each GDP release, which is a great investor tool for analyzing figures and trends, and reading highlights of the very lengthy full release

Weaknesses:

• Data is not very timely - it is only released quarterly.
• Revisions can change historical figures measurably (the difference between 3% and 3.5% GDP growth is a big one in terms of monetary policy)

The Closing Line
While quarter-to-quarter figures can show some volatility, long-term trends in GDP growth remain the single most conclusive piece of information on the economy as a whole. This indicator is a must-know for investors in all asset classes.

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Factory Orders Report

By Ryan Barnes

Release Date:	First week of the month
Release Time:	8:30am Eastern Standard Time
Coverage:	Two months prior
Released By:	U.S. Census Bureau
Latest Release:	http://www.census.gov/indicator/www/m3/index.htm

Background
The Manufacturers' Shipments, Inventories and Orders Report, often referred to as the Factory Orders Report, contains partly new and partly old information, although the old information is broken down more thoroughly in this release. The report contains the Durable Goods Report information, which is released about one week prior (but with revisions), and introduces non-durable items into the mix, representing industries such as apparel and food products. The Factory Orders Report is meant to capture the overall health of the entire manufacturing sector, measuring new orders, inventories, total shipments and unfilled orders for the month surveyed.

Statistics are displayed in current dollars and as percent changes from prior month and prior year. As with the Durable Goods Report, the indicator derives most of its value as a supply/demand indicator; inventory levels can be compared to shipments, new orders and other indicators of consumer demand such as retail sales and gross domestic product (GDP).

What it Means for Investors
The Factory Orders Report is more useful than the Durable Goods Report for examining trends within industries. While only "computer equipment" may be counted in the Durable Goods Report, the Factory Orders Report will show separate figures for computer hardware, semiconductors, monitors, etc. This is mainly due to the speed at which the (advance) Durable Goods Report is released, which makes it more timely but also more vague.

The report is not likely to move the broad markets, as about half of the data is already known - the ratio of durable to non-durable manufacturing (in dollars) is about 55/45. Factory Orders Report levels are, however, valuable for estimating future economic output levels, as estimates from the Factory Orders Report are used to calculate GDP itself. Non-durables manufacturing industries may move as a group upon the release, as investors in those stocks pour through the data looking for clues on upcoming earnings levels.

Because current dollars are used to calculate values, neither inflation nor price - changes that may affect how inventories are valued - is accounted for. For example, if the price of petroleum drops mid-month, a company holding the same inventory levels based on volume will show a drop in the value of its inventory in the Factory Orders Report.

Strengths:

• Good industry breakdowns within manufacturing
• Data provided raw and with seasonal adjustments
• Provides forward-looking data such as inventory levels and new business, which may count toward future earnings periods

Weaknesses:

• Rehashes some information on durables manufacturing
• Difficult to make comparisons with indicators that report on volume rather than price
• Not very timely, reporting on two months prior

The Closing Line
The Factor Orders Report arrives early enough to be useful for evaluating possible GDP, but too late to move the markets or carry much of a surprise factor. Holders of manufacturing firms should find this report valuable in preparing upcoming earnings statements.

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Existing Home Sales

By Ryan Barnes

Release Date:	Fourth week of the month
Release Time:	8:30am Eastern Standard Time
Coverage:	Previous month's closings
Released By:	National Association of Realtors
Latest Release:	http://www.realtor.org/research.nsf/pages/EHSdata

Background
The Existing Home Sales Report is a monthly release covering the number of existing homes that were closed during the survey month along with average sales prices by geographic region. The "closed" distinction is important because most closing periods are anywhere from six to eight weeks, so values listed are likely to relate to sales made about two months prior. The data is collected and released by the National Association of Realtors.

There are three important metrics in this report; in addition to the aggregate number of existing homes sold and median selling prices, inventory levels are provided through the "months supply" figure, a number that represents the length of time in months required to burn through all of the existing inventory measured during the period.

Data is provided raw and with seasonal adjustments. This is because weather is a big factor in determining month-to-month demand. As with the Housing Starts Report, the data is also broken down by geographic region (Northeast, Midwest, South and West). Price data will show percentage changes from the year-over-year period and the prior month.

What it Means for Investors
Whereas the Housing Starts release deals with construction levels and is therefore a supply-oriented housing indicator, existing sales are much more about aggregate demand among consumers. While not included in the Conference Board's U.S. Leading Index, existing home sales are considered a leading indicator as well because higher levels are typically reached when the economy is coming out of a recession. The inventory metric also points to how much slack exists in the housing market, as a high reading in the month supply figure means that prices could fall as inventory is worked down to more normalized levels.

Besides business cycle considerations, prevailing mortgage rates are the biggest factors to consider when evaluating the sales levels. All else being equal, as rates rise, sales will fall as consumers wait for a more opportune time to purchase a home. If home sales are strong, other consumer industries may see an uptick in sales, such as home improvement retailers and retail mortgage lenders.

Because of the lag between when a sale is made and when closing occurs, the report is not as timely as the Housing Starts Report, but the sample size is larger and less likely to have large revisions. Also, condominium sales are included in this report, but not in the starts report.

Strengths:

• Large sample size
• Together with housing starts provides a clear picture of the strength of the housing market.
• A key leading indicator and predicator of future consumer purchases such as home furnishings and insurance services.
• Shows the level of demand within housing market.
• Released before the New Home Sales Report in the given month
• Includes condo sales, which are not included in the Housing Starts Report

Weaknesses:

• No detailed information on types of homes, just median sales prices.
• Subject to large bouts of seasonality

The Closing Line
The Existing Home Sales Report can be a good leading indicator during times of concern over the housing market in general, and is best used in conjunction with the Housing Starts report.

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