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Economic Update

June 30, 2014

Economic themes: Housing, GDP, Personal Income and Outlays.

  • Housing: Pending home sales increased by 6.1% in May, well above forecasts of a 1% increase, with gains across all regions and the strongest coming from the Northeast.  Existing home sales increased by 4.9% in May to a 4.89 million pace, with supply falling to 5.6 months.  New home sales surged by 18.6% in May to a 504k unit pace.  With tight supply, steady demand, and favorable interest rates, the housing market could contribute more than expected to economic growth.
  • GDP: Gross Domestic Product for the first quarter was revised to -2.9%, below forecasts of -1.8%, as adverse weather had a greater impact than previously perceived.  The largest declines were seen in personal consumption expenditures and inventories.  The price index increased by 1.3%, well below the Fed’s preferred level.  Strength in consumer, manufacturing, and housing data is boding well for the second quarters’ numbers.
  • Personal Income and Outlays: Personal income increased by 0.4% in May, in line with forecasts, and personal spending increased by 0.2% in May, below forecasts of a 0.4% increase.  Headline inflation increased 0.2% to a 1.8% annual pace, closer to the Fed’s preferred gauge.
  • Economic highlights for the week ahead:

o    Tuesday, 7/01/2014: ISM Manufacturing Index.

o    Thursday, 7/03/2014: Employment Situation, International Trade, ISM Non-Manufacturing Index.

Municipal market themes: Puerto Rico, California.

  • Puerto Rico: Last week, the Commonwealth’s House of Representatives and Senate approved the Puerto Rico Corporations Debt Enforcement and Recovery Act. This will enable either Chapter 2 (75% of creditors would have to agree to the plan) or Chapter 3 (negotiation committee requiring court approval) bankruptcies.  In the crosshairs of the bill are the Puerto Rico Electric Power Authority and the Puerto Rico Highway and Transportation Authority.  The Puerto Rico Aqueduct and Sewer Authority stated they do not anticipate a restructuring, though could be eligible.  The Commonwealth’s general obligation and Sales Tax Financing Authority (COFINA) are explicitly exempt from the bill. The University of Puerto Rico, Infrastructure Financing Authority, Industrial Development Company, Government Development Bank, and Municipal Finance Agency bonds are believed to be excluded from the Act. PREPA now carries a Ba3 Moody’s, BB S&P and CC rating for Fitch, and the senior highway bonds carry a Ba3 Moody’s and a BB+ S&P rating.  Governor Padilla is striving to downplay the risk of restructuring.  In response, both Franklin Funds and Oppenheimer Fund have filed a lawsuit challenging the legislation, under the basis that it is unconstitutional. The Commonwealth has stated the trustee has sufficient funds to make its 7/01/2014 debt service payment.
  • California: On 6/25/2014, Moody’s Investors Service upgraded the State of California general obligation bonds to Aa3, and lease revenue bonds to A2, due to a rapidly improving financial situation, strong employment growth, and declining debt.  Improvements to budget flexibility could result in another upgrade, though economic weakness or increases in pension liabilities could be a credit weakness.

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