Economic Insights

By Matthew Gardner, Gardner Economics LLC
October 4, 2010

What to Watch This Week

• Orders for aircraft gave overall factory order a boost in July, but it is likely that this will not be seen again in the August data. We will see a slight (0.1 percent) decline in this number.
• Pending home sales, which rose modestly last month after the sharp drop seen post tax credit, will likely see further modest gains. But, to put his in perspective, we are still almost 20 percent below the same period last year.
• Mortgage applications, which have been rising, should see further modest gains in purchase applications. However, the top line figure will likely still be down as refinancing continues to slow (see a discussion of this lower in this column).
• Consumer credit, which has been on the decline since August of 2008, is certain to continue to drop from the July figure of $827 billion. I am putting the decline at a little over $1 billion.
• By far the most important release of the week comes in the form of non-farm payroll data for September. I believe that we will see a split figure for the month with overall payrolls declining by about 15,000 (still a hangover from Census hiring), but private payrolls will expand by about 50,000. We have seen the private sector expand modestly every month in 2010, and I anticipate that this will continue.

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What I Saw Last Week

• Single-family home prices dipped in July and are stabilizing near the lows without the homebuyer tax credit that ended in April, according to the Case-Shiller home price index data. The composite index of 20 metropolitan areas declined 0.1 percent in July from June on a seasonally adjusted basis. The dip followed a 0.2 percent June rise, which was revised down from 0.3 percent. Unadjusted, the 20-city index gained 0.6 percent after June's 1 percent gain.
  In our own market, prices were down by 1.6 percent from July of 2009 but up by 0.14 percent over June 2010. As I have been suggesting for some time, we are on the cusp of price growth.
• U.S. September consumer confidence sagged to its lowest levels since February, driven by deteriorating labor markets and business conditions. The Conference Board said its index of consumer attitudes fell to 48.5 in September from a revised 53.2 in August. Consumer's labor market assessment worsened. The "jobs hard to get" index rose to 46.1 from 45.5, while the "jobs plentiful" index decreased to 3.8 from 4.0.
  September's pull-back in confidence was due to less favorable business and labor market conditions, coupled with a more pessimistic short-term outlook. Overall, consumer’s confidence in the state of the economy remains grimmer than I was hoping for.
• U.S. mortgage applications fell for a fourth straight week, reflecting the inability of many homeowners to take advantage of record-low interest rates; However, demand for loans to purchase a home rose for the first time in three weeks. The Mortgage Bankers Association (MBA) said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended Sept. 24 decreased 0.8 percent. The four-week moving average of mortgage applications was down 3.3 percent while the MBA's seasonally adjusted purchase index, a tentative early indicator of home sales, increased 2.4 percent.
  My thoughts are that, as far as the purchase index is concerned, it does not matter how low interest rates on mortgages are, if you do not have a job or fear you may lose your job, you are not going to buy a home. Looking at the decline in refinancing activity, “underwater" mortgages, where the amount owed on the mortgage exceeds the value of the home, are one of the biggest banes of homeowners. This negative equity makes many of them unqualified for home loan refinancing and prevents some from selling.
• New U.S. claims for jobless benefits fell last week, pointing to a modest strengthening in the labor market with initial claims for state unemployment benefits falling 16,000 to 453,000 for the week ending September 24. This was good to see, but we appear to be stuck in a narrow range which is disconcerting.
• The Chicago Purchasing Manufacturers Index jumped to 60.4 in September from a reading of 56.7 in August, buoyed up by new orders and production. This is good!
• Surprisingly, gross domestic product growth, which measures total goods and services output within U.S. borders, was revised up to an annualized rate of 1.7 percent from 1.6 percent. Growth in the second quarter was supported by consumer spending, which was revised up to a 2.2 percent growth rate, the largest increase in three years, from the previously reported 2 percent rise.
• U.S. consumer sentiment improved more than expected in September but was still stuck at its weakest level in more than a year due to economic worries among upper-income families. The Thomson Reuters/University of Michigan's final September reading on the overall index on consumer sentiment stood at 68.2, up from a preliminary figure of 66.6 but down from 68.9 in August. The survey's barometer of current economic conditions was 79.6 in September, up from 78.4 in September and 78.3 in August. The survey's gauge of consumer expectations rose to 60.9 from 59.1. The measure on consumers' 12-month economic outlook improved to 61 from to 59 in the preliminary September data.
  It was interesting to see that the entire late-September gain was among households with incomes under $75,000, while upper-income households reported much less favorable economic prospects. This was partly caused by worries over a protracted delay to an extension of federal tax cuts to families with incomes above $250,000. It is hardly a surprise that potential reductions in after-tax incomes a few months from now will influence people's current spending decisions.
• Consumer spending rose by a moderate amount in August while incomes increased by the largest amount in eight months, a gain that was propelled by the resumption of extended unemployment benefits. Spending increased 0.4 percent in August, matching the July increase with the two increases that followed June's flat reading. Incomes were up 0.5 percent, which is better than the 0.2 percent rise in July and the flat reading in June.
  The two straight months of 0.4 percent gains in spending bolstered confidence that the country is not slipping back into a recession, which were based on fears that had been fueled by flat readings on spending in both April and June.
• Construction spending strengthened in August, rising 0.4 percent to an annual rate of $811.8 billion, which was based on a rebound in public construction while spending on private construction was 0.9 percent below the revised July estimate. Breaking this figure down, residential construction was 0.3 percent below the July estimates and non-residential construction was 1.4 percent below July's number.

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