JPMorgan Chase Bank NA, New York Economic Research

Robert Mellman Global Data Watch

January 21, 2011

ISM manufacturing survey, regional surveys with data released for Jan.
United States Sa Sa, avg of composite indices
ISM manufacturing
• Early January manufacturing surveys support the 62 Average of New York and 58
forecast of stronger growth this quarter Philadelphia Fed surveys
56
60
• Existing home sales rebound through December, but 54
other indicators of housing demand are more downbeat 58
52
• 4Q10 GDP apt to be positive for 1Q11 growth; expect 56
50
5.4% final sales and a sharp slowing in inventories
54 48
Incoming data over the next few weeks will test the view Jan 10 Apr 10 Jul 10 Oct 10 Jan 11
that real GDP growth is accelerating from an estimated
2.9% pace in 4Q10 to 4.0% this quarter. The evidence to Single-family home sales, existing and new
date is still sketchy, but it is generally consistent with the Mn, saar, both scales
anticipated upturn in growth. Existing homes New homes
6.0 0.45
• Manufacturing surveys stronger. Manufacturing is a 5.5
key cyclically sensitive sector, and it should be doing well 0.40
5.0
in a 4% economy. The December IP report had confirmed
4.5 0.35
an acceleration in factory output in the three months
through December. And the early regional manufacturing 4.0
0.30
surveys for January from the New York Fed and the 3.5
Philly Fed each posted large increases in both new orders
3.0 0.25
and shipments. This early evidence is consistent with the 2009 2010 2011
forecast of stronger growth this quarter.

• Initial jobless claims still trending lower. The sharp de-
cline in initial jobless claims during the fourth quarter sent
a strong message that the economy was improving. But
the declining trend was interrupted by a combined in-
crease in claims of 50,000 in the weeks of January 1 and
January 8, and it was unclear whether the rise reflected a
downshift in momentum or just volatility in claims around
the holidays. The 37,000 drop in initial jobless claims re-
ported this past week supports the view that the trend is
still down. The four-week average of initial claims, a
measure that smooths the volatility, has fallen nearly
12,000 since the week of the December labor market re-
port, and the insured unemployment rate has edged lower.
• Housing reports are mixed. The latest batch of housing
reports is mixed. Existing home sales increased 12.3% in
December and are climbing back toward levels that were
reached in the first half with help from the homebuyer
tax credit. But new home sales are key to any upturn in
residential construction. Sales figures through November
indicate that new home sales are still stuck near expan-
sion lows, and the more timely Homebuilders survey
fails to show any improvement through January. More-
over, the slide in mortgage purchase applications so far
this month suggests that even the upturn in existing
home sales may soon stall.
December is always a month when housing starts are sea-
sonally depressed. But the information content of the De-
cember 2010 report is especially hard to interpret. Housing
starts fell 4.0% but may have been depressed by unusually
severe weather. Housing permits, usually a better trend in-
dicator because they are less affected by weather, rose 5.5%
but may have been boosted by attempts to get building au-
thorized before early-2011 changes in building codes in
California, New York, and Pennsylvania went into effect.
Confirmation of stronger manufacturing
The forecast real GDP growth of 4.0% this quarter reflects
nearly 4% growth of final sales and the recent end to the
4Q10 inventory correction, a combination that should be
especially friendly to the manufacturing sector. Early manu-
facturing surveys for January indicate that this view is
tracking. The headline readings of the New York Fed and
Philadelphia Fed surveys (reflecting overall perceptions of
the economy) were not much changed. But the components
measuring activity at respondent firms posted large gains in
both surveys.
In particular, the key new orders component surged well
above the average 4Q10 levels in both regional surveys,
and so did the measure of shipments. Survey responses for

23
JPMorgan Chase Bank NA, New York Economic Research
Robert Mellman United States
January 21, 2011

the six-month-ahead outlook have not been reliable leading January regional manufacturing surveys in hand
indicators of activity in the past, but responses to questions Sa
about capital spending plans do tend to lead spending on 3Q10 4Q10 Dec Jan
equipment and software, even spending for the broader
New orders:
economy. Results from regional surveys show that capital
New York Fed 4.1 -3.9 2.0 12.4
spending plans increased substantially through 4Q10 and,
Philadelphia Fed -6.5 5.1 10.6 23.6
based on results from the two regional surveys already re-
leased, are tracking still higher in January. Shipments:
New York Fed -0.7 6.8 7.2 25.4
Not surprisingly, the composite index for both surveys (ag- Philadelphia Fed -2.5 6.9 5.2 13.4
gregated from components using ISM weights) also in- Employment
creased, by 6.1pts for the New York Fed survey (to 54.4) New York Fed 12.4 9.1 -3.4 8.4
and by 4.3pts for the Philadelphia Fed survey (to 56.4). Philadelphia Fed 1.4 5.8 4.3 17.6
These readings tentatively point to an increase in the ISM Capital spending plans
manufacturing survey for January from a reading of 57.0 in New York Fed 20.8 23.7 22.7 34.7
December. But this view may be adjusted in light of results Philadelphia Fed 9.5 24.1 30.0 29.0
from the other January surveys, including those out next
week from the Richmond Fed (Tuesday) and Kansas City
Fed (Thursday).
Capital spending plans and real spending on equipment, software
Sa, simple avg of 5 regional surveys %ch saar
Even construction is stabilizing
40 Capital spending plans 40
The November report on construction activity showed
30
nominal spending up 9.8% saar, the largest three-month 20
increase since early 2006. An end to sustained declines in 20
construction activity, if realized, would be an important 10 0
support for growth. But figures on construction spending Real spending on equipment
0 and software
are notoriously volatile and are subject to large revisions. -20
-10
This past week’s release of the December AIA architectural -20 -40
2005 2006 2007 2008 2009 2010
billings index, a useful leading indicator of construction
Note: Plot of capital spending plans includes the forecast of a further increase in January
activity, provides some confirmation of the view that con- based on results of the two regional surveys already released. Plot of spending on equip-
struction activity may start to turn up before long. The AIA ment and software includes forecast for 3Q10.
billings index increased 2.2pts to 54.2, the third reading
above 50 in the past four months. And the AIA inquiries
for new work, an indicator with a longer lead, reached a AIA architectural billing index and construction spending
new high for the expansion at 62.6. Sa %ch saar, 3m/3m
Billing index
Construction spending
60 10
A busy calendar ahead
Next week’s calendar includes the January 25-26 FOMC 0
50
meeting, which should bring some upgrading of the Fed’s
growth outlook but no change in plans to continue the as- -10
set-purchase program through June. 40
-20
There will be a lot more data out next week, including re-
30 -30
ports on December durable goods orders, new home sales, 2007 2008 2009 2010
pending home sales, and January consumer confidence.
Friday’s reports on 4Q10 GDP and the Employment Cost
Index are expected to provide considerable additional detail sales and a massive 2.5%-pt drag from an inventory correc-
about economic performance last quarter. The GDP report tion. The ECI is expected to report that hourly labor costs
is expected to show 2.9% growth, but with 5.4% real final in 4Q10 increased 0.5% samr and 2.0%oya.

24
JPMorgan Chase Bank, New York Economic Research
Michael Feroli Global Data Watch
January 21, 2011
Daniel Silver

Data releases and forecasts since February (-43.3) despite the fall in the unemploy-
ment rate reported for the month—about half of the
Week of January 24 - 28 0.4%-pt December decline in the unemployment rate
was attributable to a reduction in the participation rate,
Tue S&P/Case-Shiller home price index which would not necessarily be reflected in the Confer-
Jan 25 %oya, unless noted ence Board data.
9:00am Aug Sep Oct Nov
20-city composite 1.6 0.4 -0.8 -2.0 Tue FHFA home price indexes
%m/m sa -0.7 -1.0 -1.0 -0.9 Jan 25 Purchase-only
10-city composite 2.5 1.4 0.2 10:00am Aug Sep Oct Nov

We forecast that the Case-Shiller 20-city composite %oya -2.8 -3.8 -3.4 -3.6
index will decline 0.9% in November (-2.0%oya). The %m/m sa 0.0 -1.2 0.7 0.0
index has been declining each month since the end of
the homebuyer tax credit (falling almost 3% between We expect the FHFA house price index to hold steady
June and October) with weakness spread across the in November from October but to fall 3.6% below the
various cities included in the sample. House prices are level reported one year earlier. The FHFA index—along
one of the few economic indicators that have not gained with other house price measures—has looked weak in
momentum in recent months, and with limited demand recent months since the end of the homebuyer tax
and distressed sales weighing on prices there is little credit; the index fell 3.0% between May and September
reason to expect this to change. The LoanPerformance before increasing 0.7% in October. The lift reported for
house price index—which like the Case-Shiller index is October may signal that the FHFA index is starting to
a three-month moving average of house prices—de- stabilize, but the housing market continues to look frag-
clined 1.5% in November when including distressed ile. The LoanPerformance index (already reported) con-
sales and fell a more modest 0.1% when distressed sales tinued to decline in November—the LoanPerformance
are excluded from the sample. The Case-Shiller sample figure is a three-month moving average of house prices
includes distressed sales (when its other criteria are while the FHFA index is a monthly measure.
met), though in recent years it has correlated slightly
Wed New home sales
better with the LoanPerformance data that exclude dis-
Jan 26
tressed sales.
10:00am Sep Oct Nov Dec
Tue Consumer confidence
Jan 25 Sa Total (000s, saar) 308 275 290 290
10:00am Oct Nov Dec Jan %m/m 12.4 -10.7 5.5 0.0
%oya nsa -20.0 -33.3 -19.2 -18.5
Conference Bd index 49.9 54.3 52.5 54.5
Months’ supply 7.9 8.8 8.2
Present situation 23.5 25.4 23.5
Median price (%oya) 5.9 -8.3 -2.7
Jobs plentiful 3.5 4.3 3.9
Jobs hard to get 46.3 46.3 46.8 We expect the pace of new home sales to hold steady at
Plentiful less hard to get -42.8 -42.0 -42.9 an annualized rate of 290,000 units in December. New
Expectations 67.5 73.6 71.9 home sales have fluctuated around very low levels since
We look for the Conference Board consumer confidence plunging after the end of the homebuyer tax credit. The
index to increase 2.0pts in January to 54.5. This im- volume of mortgage purchase applications increased
provement would bring the index slightly higher than its 1.5% in December, but with bad weather likely discour-
November level (54.3) after it fell 1.8pts in December, aging some buyers, we do not anticipate seeing a rise in
and would be more consistent with the general improve- new home sales for the month. The weakening in the
ment in the economic data in recent months than was the measure of homebuying conditions reported by respon-
December decline. Rising gasoline prices may be weigh- dents to the University of Michigan sentiment survey
ing a bit on confidence, but with some payback expected also indicates limited buying activity for the month.
from the December decline, as well as continued im- If our forecast is realized (and there are no revisions to
provement in equity markets and jobless claims data, we previously released data), new home sales would de-
expect confidence to increase in January. cline at an annualized rate of 5% in 4Q after falling
The University of Michigan sentiment index declined much more sharply (-45% saar) in the third quarter.
1.8pts in the preliminary January reading. While the This reflects the persistent weakness in new home sales
Conference Board and Michigan indexes tend to move even after the plunge following the tax credit’s expira-
in the same direction each month, this was not the case tion. In contrast, existing home sales—which are re-
in December when the Michigan index increased 2.9pts, ported separately with data available through Decem-
but we do not expect this divergence to be repeated in ber—have rebounded about 40% from the low reached
January (we also expect a portion of the decline in the in July after the tax credit.
Michigan index to be undone in the final print).
We will also take note of any changes to the labor mar-
ket differential in the Conference Board report. In De-
cember this measure reached its widest level (-42.9)

25
JPMorgan Chase Bank, New York Economic Research
Michael Feroli United States
January 21, 2011
Daniel Silver

Thu Jobless claims Thu Durable goods

Jan 27 000s, sa Jan 27 %m/m sa
8:30am New claims (wr.) Continuing claims Insured 8:30am Sep Oct Nov Dec
Wkly 4-wk avg Wkly 4-wk avg Jobless,%
New orders 4.9 -3.1 -0.3 -0.1
Ex transportation 1.1 -2.0 3.6 0.8
Nov 13¹ 441 444 4217 4318 3.4
Nondef cap. gds ex air 1.8 -3.2 2.6 2.0
Nov 20 410 437 4277 4290 3.4
Shipments 0.0 -0.9 -0.1 1.0
Nov 27 438 432 4114 4233 3.3
Nondef cap. gds ex air 1.0 -1.0 1.1 1.5
Dec 4 423 428 4167 4194 3.3
Inventories 0.7 0.6 0.6
Dec 11¹ 423 424 4070 4157 3.2
Dec 18 420 426 4150 4125 3.3 We expect weakness in the transportation components
Dec 25 391 414 4127 4129 3.3 to weigh on the December durable goods report, but the
Jan 1 411 411 3887 4059 3.1 details away from transportation should be decent. We
Jan 8 441 416 3861 4006 3.1 forecast a 0.1% decline in headline orders and a 1.0%
Jan 15¹ 404 412 increase in overall shipments, but excluding the trans-
Jan 22 400 414 portation components, we anticipate an 0.8% increase
1. Payroll survey week in orders and 1.4% growth in shipments. The important
core capital goods components generally look strong in
We expect initial claims to decline a slight 4,000 for the the last month of each quarter (due to technical factors
week ending January 22 to 400,000. The claims data related to the seasonal adjustment of the data), and we
have been volatile in recent weeks, which is normal for expect this to hold true in December with CCG orders
this time of year due to large swings in the seasonal increasing 2.0% and CCG shipments up 1.5%.
factors. Claims increased 50,000 between the weeks Our analysis of available industry data on nondefense
ending December 25 and January 8, before dropping aircraft points to a significant decline in aircraft orders
37,000 in the week ending January 15. We expect to see while aircraft shipments should be unchanged. We also
a bit more payback from the earlier jump in claims in expect motor vehicle orders and shipments to remain
the upcoming data. Through the recent volatility, the unchanged in December—a slight decline in the indus-
four-week moving average for initial claims has held trial production of motor vehicles and parts reported for
around 415,000, and this would continue to be the case the month and a modest increase in related retail sales
if our forecast is realized. The week ending January 22 send offsetting signals about motor vehicle orders and
is the last week with a significant move in the seasonal shipments.
factor around the holiday season, so we expect to see We anticipate declines in defense-related orders and
the data become “cleaner” as the seasonal factors be- shipments in December based on our seasonal adjust-
come more stable. ment and analysis of Department of Defense spending
The data on continuing claims have been steadily drop- data.
ping in recent months reflecting improvement in the Away from these components, we expect to see modest
labor market. Continuing claims declined 26,000 to gains in the durable goods data. New orders in the ISM
3.861 million for the week ending January 8. The four- manufacturing index increased 4.3 points in December
week moving average for continuing claims has fallen to 60.9. Prices may also provide a lift this month since
about 11% since the end of September. the PPIs related to metals and machinery increased in
December.
Initial jobless claims
000s, sa Nominal durable goods orders and shipments
%ch ov er 3 months, saar
700
60
600 Shipments
40
500
20
400 0

300 -20

-40 Orders
200
2007 2008 2009 2010 2011 -60
01 03 05 07 09

26
JPMorgan Chase Bank, New York Economic Research
Michael Feroli Global Data Watch
January 21, 2011
Daniel Silver

Thu Pending home sales of the recovery, consumption has been very restrained,
Jan 27 Sa, unless noted averaging only 1.9% saar growth, so the expected ac-
10:00am Sep Oct Nov Dec celeration in spending would represent a welcome
change.
Total (mn, ar) 80.9 89.1 92.2 93.3
%ch m/m -1.8 10.1 3.5 1.2 We expect inventories to be a significant drag on the
%oya (nsa) -24.9 -22.6 -2.4 -4.6 economy in 4Q after inventories increased a very strong
annualized rate of $121.4 billion in the third quarter.
We anticipate that the pending home sales index im-
We expect a much more modest pace of growth in 4Q
proved slightly in December, increasing 1.2% to 93.3.
($41.2 billion) based on the inventory data available so
There has been some improvement in the pending home
far for the quarter, and this slowing should subtract
sales data since the index bottomed at 75.5 in June as a
2.5%-pts from real GDP growth.
result of the end of the homebuyer tax credit. However,
the index has remained at a low level—our forecast The trade data available through November indicate
calls for the index to remain 1.9% below the average that the trade balance narrowed markedly in 4Q—we
level from 2009. forecast a narrowing of the trade balance from -$505.0
billion in 3Q to -$441.7 billion in 4Q. This should add
The volume of mortgage purchase applications in-
2.1%-pts to GDP growth—the first contribution from
creased almost 10% in November before slowing to
trade in one year.
1.5% in December; this slowdown came as mortgage
interest rates increased 30bp to 5.0% between Novem- The data on new housing activity have remained stuck
ber and December. The measure of conditions for buy- at depressed levels since bottoming after the end of the
ing houses reported in the University of Michigan con- homebuyer tax credit. We look for only a slight 3.0%
sumer sentiment data weakened from 154 in November saar move up in residential investment in 4Q after this
to 150 in December (though most of this decline was component plunged 27.3% saar in 3Q following the tax
subsequently undone in the preliminary January data). credit’s expiration.
With this evidence of a slowing in homebuying activity The price data available for the fourth quarter show that
in December, we look for very modest growth in pend- food and energy prices have picked up a bit, but core
ing home sales for the month. prices remain soft. We forecast 1.8% saar growth in the
PCE price index for the quarter and a much softer 0.4%
Fri Gross domestic product saar change in the core measure. We expect the GDP
Jan 28 %ch, q/q saar, unless noted chain price index for 4Q to increase 1.1% saar.
8:30am Adv
1Q10 2Q10 3Q10 4Q10 Fri Employment cost index
Real GDP 3.7 1.7 2.6 2.9 Jan 28
Final sales 1.1 0.9 0.9 5.4 8:30am 1Q10 2Q10 3Q10 4Q10
Domestic final sales 1.3 4.3 2.6 3.3 Total (%q/q sa) 0.6 0.5 0.4 0.5
Consumption 1.9 2.2 2.4 4.0 Wages and salaries 0.4 0.5 0.3 0.6
Equip. and software 20.5 24.8 15.4 5.0 Benefits 1.1 0.7 0.6 0.4
Nonres. structures -17.8 -0.5 -3.6 0.0 Total (%oya nsa) 1.7 1.9 1.9 2.0
Residential investment -12.3 25.6 -27.3 3.0 Wages and salaries 1.5 1.6 1.5 1.7
Government -1.6 3.9 3.9 0.7 Benefits 2.2 2.5 2.8 2.9
Net exports (pct.pt.contr.) -0.3 -3.5 -1.7 2.1
Inventories (pct.pt.contr.) 2.6 0.8 1.6 -2.5 We expect the employment cost index increased 0.5%
Core PCE price index 1.2 1.0 0.5 0.4
in 4Q10, with a 0.6% rise in wages and salaries and a
(%oya) 1.8 1.5 1.2 0.8 0.5% gain in benefits for the quarter. The year-ago
GDP chain price index 1.0 1.9 2.1 1.1 change in the ECI for the fourth quarter (+2.0%) would
(%oya) 0.5 0.8 1.2 1.5
be the largest change reported since 1Q09.
Real GDP is expected to have grown at an annualized Wages and salaries rose only 0.3% in 3Q10 after in-
rate of 2.9% in the fourth quarter of 2010. Although the creasing 0.5% in 2Q. We look for an acceleration to
headline reading would only be slightly higher than that 0.6% in 4Q based on the 0.6% increase reported in av-
reported for 3Q (2.6%), we expect the composition of erage hourly earnings in the private sector for the quar-
the report to be more favorable, highlighted by the ter. Although these figures are calculated separately,
strongest growth in consumption in four years. Our they tend to behave similarly; growth rates for average
forecast calls for the level of real GDP to finally eclipse hourly earnings and wages and salaries for the private
the pre-crisis level reported for 2Q08 (the 3Q10 level sector were very close to each other in the second and
was less than 1% below the pre-crisis level). third quarters of 2010.
We forecast a 4.0% saar increase in real consumption in We expect growth in benefits to continue to slow in the
4Q, which should lead final sales up 5.4% saar. The fourth quarter, increasing 0.5% after averaging a 0.8%
data on retail sales and auto sales looked strong in the pace over the prior three quarters. Data available on
fourth quarter, although much of this strength was con- supplements to wages and salaries as well as the medical
centrated early in the quarter. In the prior five quarters deflator in the PCE data (both available through Novem-
ber) have indicated slowing in the fourth quarter.

27
JPMorgan Chase Bank, New York Economic Research
Michael Feroli United States
January 21, 2011
Daniel Silver

Fri Consumer sentiment months—increased from -15.9 to 4.2. The measure of deliv-
Jan 28 Pre Fin ery times was the only component of the composite to de-
9:55am Nov Dec Jan Jan cline in January, edging down slightly from -6.8 to -6.3.
Univ. of Mich. Index (nsa) 71.6 74.5 72.7 73.5 Away from the composite, the measure of expectations six
Current conditions 82.1 85.3 79.8 months ahead reached its highest level since March 2004,
Expectations 64.8 67.5 68.2 improving from 48.9 in December to 59.0 in January. Both
Inflation expectations price measures also increased in January. Prices received
Short term 3.0 3.0 3.3 increased from 3.4 to 15.8, which is the highest level since
Long term 2.8 2.8 2.8 October 2008. Prices paid increased from 28.4 to 35.8,
Homebuying conditions 154.0 150.0 153.0 which is only a few points higher than the average level over
We forecast that the final January reading for the Uni- the past 12 months.
versity of Michigan sentiment index will be 73.5; this
would be an 0.8pt improvement over the preliminary The January Empire State survey is the first regional manu-
January data and would reduce the decline in sentiment facturing survey available for the month. It looked weaker
between December and January to 1.0pt. The 1.8pt de- than the other manufacturing surveys in December, so the
cline in the preliminary January report was a bit surpris- improvement in the January data better aligns it with the
ing, and we look for most of this decline to be undone others.
in the final data for the month. The decline was concen-
trated in the measure of current conditions (down Homebuilders survey (Jan 18)
5.5pts), which seems to be contrary to the general im- Sa
provement in the tone of the economic data recently as Nov Dec Jan
well as the gains in equity prices so far in January,
which tend to boost sentiment (though rising gasoline Housing market 16 16 16
prices may dampen sentiment). Regardless of the tone Present sales 16 16 16
of the data, the Michigan index has tended to be higher Prospective buyer traffic 12 11 12
in the final monthly readings than in the preliminary
prints over the past year. The January NAHB survey held at 16 for the third straight
month. The survey has remained depressed since the end of
One-year-ahead inflation expectations increased from the homebuyer tax credit, and has improved only 3pts since
3.0% in December to 3.3% in the preliminary January bottoming out in August and September. The homebuilders’
data and are up 1.1%-pts off of the recent low reported survey has reflected the persistent weakness in the data on
for September. This rise in inflation expectations has residential construction and new home buying.
corresponded with rising gasoline prices, which are up
about 15% over this timespan. Five-year-ahead infla- The details of the January survey were little changed and
tion expectations have held at 2.8% over the last four continue to look very weak. The measure of present sales
reported months. held at 16 for the fourth straight month, while the expecta-
tions measure remained at 25 for the third consecutive
Review of past week’s data month. Prospective buyer traffic ticked up from 11 to 12,
remaining in the narrow range reported in recent months.
Empire State survey (Jan 18) There was little variation across regions.
Diffusion indices, sa
Nov Dec Jan
Housing starts (Jan 19)
General bus. conditions -11.1 -10.4 10.6 9.9 12.5 11.9 Mn units, saar
New orders -24.4 -23.8 2.6 2.0 12.4 Oct Nov Dec
Shipments -6.1 -5.3 7.1 7.2 25.4
Unfilled orders -24.7 -18.2 -11.6 Starts 0.53 0.56 0.55 0.54 0.53
Prices paid 22.1 28.4 35.8 Single-family starts 0.44 0.43 0.46 0.45 0.42
Prices received -2.6 3.4 15.8 Multifamily starts 0.10 0.09 0.10 0.10 0.11
Composite 46.9 47.1 48.4 48.3 54.4 Permits 0.55 0.54 0.56 0.64

The details of the Empire State survey strengthened signifi-
cantly between December and January, though the headline
reading showed little improvement. The headline number
increased only 2.0pts to 11.9, but the ISM-weighted com-
posite (calculated from components using ISM weights)
jumped from 48.3 to 54.4, reaching its highest level since
June 2010. The important new orders and shipments mea-
sures led the improvement in the details, with new orders
increasing from 2.0 to 12.4 and shipments jumping from 7.2
to 25.4. The employment measure also crossed back into
positive ground in January, increasing from -3.4 to 8.4. The
inventory index—which has been choppy in recent
Housing starts fell 4.3% to an annualized rate of 529,000
units in December, while housing permits jumped 16.7% to
an annualized rate of 635,000 permits. The December data
were likely distorted by weather and changes to the building
codes in some states; the underlying trend in housing starts
is probably a bit stronger than the headline reading suggests,
while the trend in permits is likely much weaker.
Housing starts fell significantly in the Northeast (-25%) and
Midwest (-38%), where there were sizable winter storms in
December, while starts jumped 46% in the West and were
little changed in the South. Overall in the West and South

28
JPMorgan Chase Bank, New York Economic Research
Michael Feroli Global Data Watch
January 21, 2011
Daniel Silver

(where the weather was not as severe as the other regions), Philadelphia Fed survey (Jan 20)
single-family starts fell a slight 2.2% in December, and re- Diffusion indices, sa
main within the range reported since the end of the Nov Dec Jan
homebuyer tax credit at a depressed level. Multifamily starts
General bus. conditions 18.1 20.8 20.0 19.3
in these regions doubled in December, but remain at a very
New orders 8.0 10.6 23.6
low level; starts had fallen about 60% between September
Shipments 14.4 5.2 13.4
and November.
Inventories -5.5 -5.9 6.8
California, Pennsylvania, and New York altered their build- Prices paid 33.7 47.9 54.3
ing codes at the end of the year to change environmental Prices received -3.3 9.4 17.1
and/or safety standards, and builders in these states probably Composite 53.1 52.1 56.4
rushed in permits in December ahead of these changes to the
The Philadelphia Fed and Empire State (already reported)
code. State-specific data are not available at this time, so the
magnitude of this effect is unclear, but this is evident in the surveys indicate that manufacturing activity strengthened in
January. The details of the Philadelphia Fed survey were
surges in permits in the West (+44%) and Northeast (+81%).
strong for January despite the headline reading declining
In the other regions that were not affected by these changes
in code, permits fell 4.8% to the lowest annualized rate on slightly from 20.8 to 19.3. The ISM-weighted composite
(calculated from components using ISM weights) increased
record back to 1960 (337,000 units); single-family permits
from 52.1 to 56.4, which is its highest level since March
declined 5.9% in December and multifamily permits were
unchanged. 2006. This improvement echoes the Empire State survey—
its headline reading increased an uninspiring 2.0pts, but its
ISM-weighted composite moved up 6.1pts to 54.4.
Existing home sales (Jan 20)
Within the Philadelphia Fed survey, the important new or-
Oct Nov Dec
ders measure continued to improve in January, jumping
Total (mn, saar) 4.43 4.68 4.70 4.85 5.28 13.0pts to 23.6, which is the strongest reading since 2004.
%m/m -2.2 5.6 6.1 3.6 12.3 The shipments index—which has bounced around over the
%oya nsa -27.9 -25.1 -24.6 -10.8 -2.2 past four months—increased 8.2pts to 13.4. The measure of
Months’ supply (nsa) 10.5 9.5 8.1 employment—which has also been choppy lately—jumped
Single-family 10.1 9.3 7.8 13.3pts to 17.6, which is its highest level since 2006. The
Median price (%oya) -0.9 0.4 0.1 -1.0 measure of inventories increased 12.7pts to 6.8, which is the
first positive reading since July, possibly indicating a pro-
Existing home sales increased 12.3% in December to an an- gression in the inventory cycle. Delivery times was the only
nualized rate of 5.28 million units. Existing home sales have component of the ISM-weighted composite to decline in
bounced back almost 40% since the nadir reached in July January, decreasing from 7.0 to 2.3.
following the originally scheduled end of the homebuyer tax
credit (the tax credit was eventually extended with limited Away from the composite’s components, the survey’s two
effect). While the data on existing home sales have re- price measures continued to increase in January, reaching
bounded from the plunge following the end of the tax credit, their highest levels since 3Q10; prices paid rose from 47.9 to
the data on new home sales (available through November) 54.3 and prices received increased from 9.4 to 17.1. The
have yet to show any meaningful signs of recovery. expectations index declined from 55.4 in December to 49.8
in January. Although this decline looks contrary to the
The improvement in the December existing home sales was strength in the other details (and the increase in the expecta-
widespread throughout the report. Single-family home sales tions measure reported in the Empire State survey), the De-
increased 11.8%, while multifamily home sales jumped cember level was the highest in seven years, so some cool-
16.4%, and there were solid gains reported by all four re- ing is reasonable.
gions in December (ranging from 10% to 17%). Both inven-
tory measures (homes available for sale and months’ supply
on the market) declined in December; although these data
are not seasonally adjusted, the levels reported for December
were the lowest in more than six months.
The price measures in the existing home sales data weak-
ened a bit in December, which may have been the result of a
higher percentage of distressed sales available in the market
(36% in December versus 33% in November). The median
price of all homes fell 1.0%oya in December after being up
0.1%oya in November. The median price of single-family
homes declined 0.2%oya in December after being up 1.0%
in November.

29
JPMorgan Chase Bank NA, New York Economic Research
Daniel Silver Global Data Watch
January 21, 2011

Focus: commodity prices CRB spot commodity price index

Index
push higher 550
• The prices of most commodities have been climbing very 500
consistently since the spring of 2009. The CRB spot 450
commodity price index reached an all-time high in the 400
middle of January, more than 60% above its average 350
level over the past 10 years. 300
250
• Food prices have risen steadily throughout the current 200
recovery; in recent months, sugar, coffee, eggs, and flour 90 95 00 05 10
prices have risen substantially. The CRB foodstuffs in- CRB price index: foodstuffs
dex also reached an all-time high in the middle of Janu-
Index
ary, about 7% higher than its prior peak reached in Au-
gust 2008. The food CPI generally reflects changes in the 500
prices of foodstuffs with approximately a six- or seven- 450
month lag; given the recent peak in food prices, we may 400
see the food CPI rise to +5%-6%oya in 2H11 from only 350
1.5%oya in December. 300
250
• Gasoline prices have been rising in recent months but are
200
not near the highs reached in the summer of 2008. Retail
150
gasoline prices have increased about 15% since June and 90 95 00 05 10
are up more than 80% off of the low reached in Decem-
ber 2008. The CPI generally reflects these changes in Energy prices
Ct/gal Wkly avg, $/mmbtu
gasoline prices in the months that they occur, so the rise
in prices through December has already been incorpo- 450 15
rated into the CPI data.
350
10
• Natural gas prices have basically moved sideways since Natural gas
early 2010. 250
5
• Metal prices have been increasing since early 2009, 150
driven up largely by copper prices, though aluminum, Gasoline
50 0
lead, and tin prices have also seen solid gains (not pic- 94 96 98 00 02 04 06 08 10
tured). The CRB index for metals has increased about
140% over the past two years, reaching an all-time high Metal prices
for the series. Index $/lb

• The CRB indexes for raw industrial materials, fats and 1200 5
oils, and livestock and products all reached all-time highs 1000 4
in the middle of January, while the index for textiles and 800
fibers remains close to its peak level (not pictured). 3
600 CRB spot metal index
2
• Lumber prices have increased about 22% since Septem- 400
ber, making up about half of the plunge in prices that oc- 200 1
Copper prices
curred when home construction slowed dramatically after 0 0
the end of the homebuyer tax credit (not pictured). 90 95 00 05 10

30