RBC ECONOMICS RESEARCH - ECONOMIC UPDATE

U.S. existing home sales unexpectedly slip lower in December

• Existing home sales in the US unexpectedly slipped by 1.0% to 4.94 million annualized units in December 2012 from a revised 4.99 million (previously reported as 5.04 million) in November. Market expectations had been for sales to rise to 5.10 million in December.
• The drop in sales was outpaced by an 8.5% decline in the number of homes available for sale in December. With inventories falling faster than sales, the months’ supply of unsold homes declined to 4.4 from 4.8 in November. This marked the lowest months’ supply since May 2005.
• Consistent with tightening inventories as well as a declining share of distressed property sales, the median price of existing homes jumped by 11.5% on a year-over-year basis in December, which was up from 9.4% in November. The December increase was the fastest pace of annual price growth since November 2005.
• On an annual basis, sales rose by 9.2% to 4.65 million units in 2012 as a whole, therein marking the highest volume since 2007. The median price rose by 6.3% in 2012 as a whole, thereby marking the strongest annual price gain since 2005.
• Even with the dip in December, existing home sales still remained 12.8% above year-ago levels, and, following gains in both November and October, average sales in the fourth quarter of 2012 as a whole still rose by an outsized 21.6% at an annualized rate from the third quarter of 2012. Along with gains in construction activity in the quarter, this was in line with our forecast for residential investment to rise for a seventh consecutive quarter in the fourth quarter of 2012 and likely at a faster pace than the 13.6% increase recorded in the third quarter. This will likely not prevent a near-term slowing in GDP growth in the fourth quarter of 2012 to a 1.2% rate from the 3.1% third-quarter 2012 gain as an outsized build in third-quarter 2012 inventories is not likely to be repeated, and net trade looks set to swing to a drag in the fourth quarter of 2012 from an add to third-quarter 2012 growth. Relative strength in domestic demand, however, and the prospect for further improvement in housing markets bode well for modest acceleration early in 2013 despite some near-term fiscal restraint.

US existing home sales unexpectedly slipped by 1.0% in December 2012 to 4.94 million units, on a seasonally adjusted and annualized basis, from a revised 4.99 million (was 5.04 million) units sold in November. With that said, the data are volatile on a month-over-month basis, and, despite the monthly decline, the pace of sales remained 12.8% above its year-ago level. The monthly decline was concentrated in lower sales in the Midwest (-5.9%) and the South (-3.0%) with increases in the Northeast (3.2%) and the West (5.1%) providing some offset. Sales of single-family units declined by 1.4% partially retracing a 4.8% increase in November while sales of condos and co-ops climbed by 1.7% and built on a 5.5% November gain. The drop in sales was outpaced by an 8.5% decline in the number of homes available for sale in December. With inventories falling faster than sales, the months’ supply of unsold homes declined to 4.4 from 4.8 in November. This marked the lowest months’ supply since May 2005. The national median sales price of existing homes rose by 11.5% on a year-over-year basis in December, which was up from a 9.4% increase in November and marked the fastest pace of annual price growth since November 2005. The strong gain in prices came because distressed sales (foreclosures and short sales that typically sell at steep discounts) accounted for 24% of December 2012 sales. This was above the 22% share in November 2012 but still well below the 32% share in December 2011. On an annual basis, sales rose by 9.2% to 4.65 million units in 2012 as a whole, therein marking the highest volume since 2007. The median price rose by 6.3% in 2012 as a whole, thereby marking the strongest annual price gain since 2005. Even with the dip in December, existing home sales still remained 12.8% above year-ago levels, and, following gains in both November and October, average sales in the fourth quarter of 2012 as a whole still rose by an outsized 21.6% at an annualized rate from the third quarter of 2012. Along with gains in construction activity in the quarter, this was in line with our forecast for residential investment to rise for a seventh consecutive quarter in the fourth quarter of 2012 and likely at a faster pace than the 13.6% increase recorded in the third quarter of 2012. This will likely not prevent a near-term slowing in GDP growth in the fourth quarter of 2012 to a 1.2% rate from the 3.1% third-quarter 2012 gain as an outsized build in third-quarter 2012 inventories is not likely to be repeated, and net trade looks set to swing to a drag in the fourth quarter of 2012 from an add to third-quarter 2012 growth. Relative strength in domestic demand, however, and the prospect for further improvement in housing markets bode well for a modest acceleration early in 2013 despite some near-term fiscal restraint. Nathan Janzen, Economist, RBC Economics Canadian retail sales rise in November

• Canadian retail sales inched up by 0.2% in November 2012, which was slightly stronger than market expectations for sales to be unchanged, although followed a downwardly revised 0.5% gain (was 0.7%) in October.
• Excluding the auto component, sales slipped by 0.3%, which was below expectations for a 0.1% gain; however, weakness was largely concentrated in a sizeable 2.3% drop in sales at gasoline stations, much of which likely resulted from lower prices.
• Eliminating the effect of prices, the volume of retail activity climbed by 0.8%, although October’s previously reported 0.3% increase was revised lower to show no change from September.
• The stronger than expected gain in retail volumes in November offset a downward revision to October to leave the level of sales for the two months combined still tracking in line with our forecast that overall consumer spending grew at a respectable 2.2% annualized rate in the fourth quarter of 2012, although this still would mark moderation from the 3.8% jump in the third quarter. As well, the gain in retail sales along with earlier reported increases in the volume of wholesale and manufacturing sales (0.5% and 1.6%, respectively) points to overall GDP growth strengthening to 0.2% in the month following a 0.1% gain in October and September’s unchanged reading. Weakness in earlier months still points to overall GDP growth improving to just a 1.2% annualized rate in the fourth quarter of 2012 as a whole from the 0.6% gain in the third quarter; however, the indications of strengthening activity in November provide a reason for optimism that, as we expect, growth will pick up to above a 2% rate early in 2013.

Retail sales inched up by 0.2% in November 2012 following a downwardly revised 0.5% (was 0.7%) gain in October. Sales of motor vehicles and parts rose by 1.8% following a 1.6% gain in October. Excluding the auto sector, sales declined by 0.3%, which was below expectations for a 0.1% increase; however, much of the weakness was accounted for by a price-related 2.3% decline in sales at gasoline service stations. Excluding both the volatile motor vehicle and gasoline station components, sales inched up by 0.1% following an unchanged October reading. An outsized 8.9% gain at electronics and parts stores, potentially reflecting the effect of the fall release of the iPhone 5 and new iPad, and a 3.9% gain in furniture and home furnishing stores offset relatively broadly based declines elsewhere. Excluding the effect of prices, the volume of sales jumped by a stronger than expected 0.8% in November. This marked the strongest gain since May 2012, although the previously reported 0.3% gain in October was revised to be unchanged. The stronger than expected gain in retail volumes in November offset a downward revision to October to leave the level of sales for the two months combined still tracking in line with our forecast that overall consumer spending grew at a respectable 2.2% annualized rate in the fourth quarter of 2012, although this still would mark moderation from the 3.8% jump in the third quarter. As well, the gain in retail sales along with earlier reported increases in the volume of wholesale and manufacturing sales (0.5% and 1.6%, respectively) points to overall GDP growth strengthening to 0.2% in the month following a 0.1% gain in October and September’s unchanged reading. Weakness in earlier months still points to overall GDP growth improving to just a 1.2% annualized rate in the fourth quarter of 2012 as a whole from the 0.6% gain in the third quarter; however, the indications of strengthening activity in November provide reason for optimism that, as we expect, growth will pick up to above a 2% rate early in 2013.