Economic Insights

By Matthew Gardner, Gardner Economics LLC
June 21, 2010

What to Watch This Week

• Existing homes sale figures for May will be announced on Tuesday, and I expect that there will be a moderate increase in transactions and that we may exceed the 6M figure (annualized). I am not as confident when looking at the new home sale figures for May and I anticipate that we will see a reduction in transactions from 504,000 to around 480,000, as theexpiration of the tax credit weighs more on this product and the gains that we saw in April (65,0000) weaken dramatically.
• Nobody expects that we will see any adjustment in the Fed Funds rate. Actually, I am now predicting that we will not see a rate hike until well into the New Year. This might surprise some of my readers, but I was very interested in a paper released by the Federal Reserve Bank of San Francisco who suggested that, given the statistical relationship between core-consumer price inflation and the gap between actual unemployment and the natural (or normal) rate of unemployment, we may not see rates rise until 2012!
• I hope that we will see weekly employment numbers show very modest improvement, but improvement all the same. Nothing stellar to report yet, and I anticipate that gains will be sluggish through the summer.
• Gross Domestic Product revisions will likely be modest, as we have already seen substantial revisions to this figure (3.0 percent). It is likely that this will stand.
• Revised Consumer sentiment numbers for June should basically be in line with the previous report of 75.5, but if we see any revisions at all they will likely be to the negative, as we continue to fret about the availability of new jobs as well as our overall economic recovery.

What I Saw Last Week

• Credit card delinquencies fell again at major lenders in May as more consumers managed to pay their bills despite a sluggish economic recovery. I looked at data from Capital One, Discover, JPMorgan Chase and American Express who all said that their 30-day delinquency rates for credit cards fell for the fifth straight month in May to their lowest levels this year.
  I consider credit card accounts that are at least 30 days past due an early warning sign of future losses. The improvement in delinquencies exceeded some analyst expectations and indicated that more consumers are staying on top of their bills. My concern with this is whether consumers are paying their credit cards rather than their mortgages!
• U.S. home-builder sentiment fell in June by the sharpest amount since the height of the financial crisis, as the expiration of a popular homebuyer tax credit dimmed prospective sales. The NAHB/Wells Fargo Housing Market index dropped 5 points to 17, the sharpest point decline since November 2008. The sharper-than-expected decline followed two successive increases as the tax credit ran its course.
  The current sales conditions gauge fell six points to 17, the sharpest drop since August 2006 and the lowest level since March. The sales expectations measure for the next six months fell four points to 23, the lowest level since March 2009. The traffic of prospective buyers index fell two points to 14.
  Builders remain very cautious and are aware that several factors could impede the nascent housing recovery including serious problems in obtaining financing for the production of housing, faulty appraisal practices and competition from short sales and foreclosed properties. This lends credence to my forecast for lower new-construction sales (see comment above).
• As I suggested last week, housing starts saw a substantial drop in May. This decline was more than I had anticipated (655,000) and came in at 593,000 (a 10 percent drop). April's housing starts were revised down to show a 3.9 percent increase, which was previously reported as a 5.8 percent rise.
  I was wrong in my anticipation that we would see an increase in permits. New building permits dropped 5.9 percent to a 574,000-unit pace in May, the lowest in a year. That followed a 10.9 percent drop in April and compared to my forecasts for a rise to 630,000 units.
  Groundbreaking for single-family homes tumbled 17.2 percent to an annual rate of 468,000 units in May after a 5.6 percent increase in April. The percentage decline in May was the largest since January 1991 and snapped four months of gains. However, starts for the volatile multifamily segment surged 33 percent to a 125,000-unit annual pace.
  The inventory of total houses under construction fell 2.3 percent to a record low 475,000 units in May, while the total number of units authorized but not yet started dropped 4 percent to 91,200 units, the lowest since November.
• Producer prices retreated in May as the cost of energy plunged. This gives the Federal Reserve more time to maintain its ultra-low interest rate policy. The Labor Department said that its producer price index (which measures costs at the wholesale level) fell 0.3 percent last month. However, the core reading (excluding food and energy) climbed just 1.3 percent, slightly above forecasts but still near the lower bound of the U.S. central bank's presumed comfort range.
• I was pleased to see that U.S. mortgage demand jumped to a five-month peak the week before last, with applications to buy homes up from 13-year lows set in the wake of homebuyer tax credits while refinance loans hit the highest level since May 2009. Mortgage purchase applications rose 7.3 percent after sinking for five weeks in payback for steamy demand before the April 30 deadline for $8,000 in tax credits according to the Mortgage Bankers Association. Total home loan applications, up 17.7 percent in the week on a seasonally adjusted basis, have not been higher since mid-December.
  It is premature to determine that the tax credit hangover has fully played out and that the U.S. housing market is crossing the threshold into recovery. While it is clear that purchase applications in May dropped sharply as a result of the tax credit induced increase in applications in April, it is unclear whether we are seeing the beginnings of a rebound.
• The number of people filing new claims for jobless benefits jumped last week after three straight weeks of decline. Initial claims for jobless benefits rose by 12,000 to a seasonally adjusted 472,000, according to the Labor Department. It was the highest level in a month. First-time jobless claims have hovered near 450,000 since the beginning of the year after falling steadily in the second half of 2009. This raises my fear that lackluster hiring could slow the recovery.
  Still, the four-week average for unemployment claims, which smoothes volatility, dipped slightly to 463,500. That number is down by 3,750 from the start of January.
• Consumer prices fell for the second straight month. The 0.2 decline in the Consumer Price Index was pulled down by falling energy prices – the most notable was a 5.2 percent drop in gasoline prices. Declining energy bills were the main factor pulling down prices.
  However, core consumer prices, which strip out volatile energy and food, edged up 0.1 percent in May, after being flat in April. Core prices are up only 0.9 percent over the past year, below the Fed's inflation target.

Quote/Links of the Week

I don't know if I can actually consider this to be an economic indicator, but it appears that cost to have lunch with the Oracle of Omaha has beaten all records! Lunch with Mr. Buffett will set the winning bidder back a cool $2.62M!

http://www.cnbc.com/id/37654458/

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