Auto sales remain strong

June auto sales beat expectations (14.05 million vs 13.9), and the increase over the past year was a very impressive 23%. Sales never move in a straight line up or down, so it's the trend that is most important, and there is no sign that the trend has faltered. From the recession low of early 2009, sales are up over 50%. That's a robust gain of an annualized 14.5% rate, and strong evidence that the economic fundamentals are improving. The economy is still in recovery mode, to judge by this indicator.

The decline in gasoline is just about over

This chart compares wholesale gasoline futures (orange line) with the AAA nationwide average price of regular gasoline at the pump (white line). Futures naturally tend to lead retail prices, and now that futures prices have been flat for the past month, the big decline in pump prices is just about over. Crude prices have ticked up this past week on Middle East tension, which is more reason to suspect that the decline in gasoline prices is essentially over for now. At these levels, gasoline prices don't present any particular threat to the economy, and may even be a source of some comfort.

Factory orders are weak, but fear is declining

Nondefense factory orders in May proved to be stronger than expectations (+0.7% vs. 0.1%), and capital goods orders were revised a tiny bit higher, but neither series shows any meaningful growth. This is more confirmation of the already-known fact that economic growth has been weak in recent months. We've seen slowdowns and pauses such as these before without it being the precursor to a recession, so this does not necessarily bolster the bearish case for the economy.

I think it's more likely that the recent economic weakness is the by-product of Eurozone fears, rather than the beginnings of a recession. Fortunately, those fears are once again subsiding, as the chart above suggests. Spanish 2-yr yields are down almost 150 bps in the past two weeks, as the near-term likelihood of a Spanish default has dropped meaningfully. The Vix/10-yr ratio has backed off its recent highs at the same time, driven mainly by a decline in the level of market fear—the Vix index has dropped from a high of over 27 a month ago to 16.4 today. 2-yr Eurozone swap spreads are in the low 70s, which is still elevated, but substantially lower than the 100+ numbers we saw at the end of last year. 10-yr Treasury yields remain extremely low, however, which means that the rise in risk assets of late (commodities are up over 8% in the past two weeks, and the S&P 500 is up over 7% in the past month) is being driven by a decline in pessimism, not a rise in optimism.

Why the iPhone proved so disruptive

The iPhone recently celebrated its fifth birthday. In the brief span of 5 years it has truly been revolutionary, and is now selling at the rate of more than one million per day. The always-perceptive John Gruber explains why:

What’s happened over the last five years shows not that Apple disrupted the phone handset industry, but rather that Apple destroyed the handset industry — by disrupting the computer industry. Today, cell phones are apps, not devices. The companies that were the most successful at selling cell phones pre-iPhone are now dead or dying. “App” is now a household word.

Indeed. The iPhone was never just a better phone, it was a better computer—totally portable and always on. Making and receiving phone calls is just one of the amazing things this pocket computer can do.

Housing price update

Mark Perry has a nice post detailing the May CoreLogic report on housing prices. It's very similar to what the Radar Logic series is showing: over the past year, the decline in housing prices appears to have come to a halt. CoreLogic actually shows prices increasing 2% in the year ended last May. I've created the two charts above, which cover data going back to 1976, to provide some long-term perspective. I note, for example, that prices today are about 30% below their 2005 high, but still 540% above their 1976 low. That represents an annualized gain in real terms since 1976 of about 1.2% for the typical home, and that does not seem out of line given the larger size and more feature-laden homes of today.

Construction spending continues to improve

Construction spending continues to improve: over the past year, total spending on residential and nonresidential construction is up 7%, with residential spending up at 9.5% annualized pace over the past six months. The sector has been very weak for the past several years, but is now enjoying a nice rebound that should have legs. Construction subtracted from overall economic growth for roughly 5 years, but now it is contributing, albeit only very marginally.

Manufacturing sector slows

The June ISM survey of the manufacturing sector came in substantially below expectations (49.7 vs. 52). This is the first time it's been below 50 (the point at which, according to the PMI people, the manufacturing sector begins to contract instead of expand) since Dec. '07, which was just before the last recession began. As my chart above suggests, however, it takes a reading below 46 before the entire economy is likely to be contracting. Today it is saying that with the manufacturing sector having weakened—with most of the impact related to Eurozone problems—the economy is likely growing at a 2% pace or perhaps a bit less. That happens to be where the current consensus of opinion is, I believe, so in that sense today's ISM report is not new news.

I note that the correlation between the manufacturing sector and real GDP has not been as strong in recent years as it has been during other business cycles, with manufacturing being much stronger in general than the overall economy. Perhaps that pattern is changing (i.e., manufacturing now tending to move more in line with the rest of the economy), but even so today's news is not a clear-cut recession indicator. It mostly confirms what we already know: the U.S. economy is growing at a very slow rate, and the troubles in Europe are one big source of anxiety.

The export sector is the main source of weakness in the manufacturing sector.

Weak commodity prices are the main source of the decline in the prices paid index.

The employment index continues to be a bright spot in the manufacturing sector. Why would this be so strong if the overall manufacturing sector is supposedly on the verge of contraction? One guess is that the weakness that is surfacing in the PMI indices is being exaggerated by the very visible problems in Europe. Everyone knows that the Eurozone is experiencing tremendous difficulties, and that a good part of the region (the southern region) has been in recession for awhile now. Yet the Eurozone accounts for only 12% of U.S. exports, with Spain, Italy, Portugal and Greece accounting for only a small fraction. Even if those economies were in total collapse the impact on the U.S. economy would be minor. But right now the specter of a Eurozone collapse has had a debilitating impact on everyone's confidence—thus the weak PMI reports, which are at times influenced by psychology. The employment index may be less influenced by psychology and instead more driven by facts; after all, manufacturing payrolls have been steadily increasing so far this year, rising at a 3% annualized pace.

This last chart compares the ISM indices for the U.S. and the Eurozone economies. Is the Eurozone tail finally beginning to wag the U.S. dog? That has been and remains a key question. I'm not terribly worried, and I note that Eurozone swap spreads have improved substantially so far this year, suggesting there has been meaningful improvement in the Eurozone fundamentals.