Economic Insights

By Matthew Gardner, Gardner Economics LLC
June 28, 2010

What to Watch This Week

• Personal incomes should increase very modestly, and I hope that we will see a tiny increase in expenditures as consumers no longer fear the shopping mall as much as they have been!
• With eyes firmly fixed on the Case Shiller index, I anticipate that we will see a moderate increase in year-over-year prices to around 3.5 percent. Locally, I expect that the Seattle area will continue to claw its way upward toward positive annual appreciation, but we will likely still be short.
• Consumer confidence figures should decline slightly as we remain uncertain on the job front.
• Construction spending should also see retraction as homebuilders worry about demand for their product following conclusion of the tax credit.
• Pending home sales, which saw tax-credit inspired advances last month, will retreat with the end of that program. Do not be surprised if we see a reduction of up to 10 percent here.
• The big number comes in at the end of the week with monthly data on employment and the unemployment rate. I anticipate that we will see the unemployment rate remain static at 9.7 percent, but it is likely that we will see a modest reduction in non-farm payrolls as gains from Census hiring fade.

  Day	Date	Time	Event	Period
  Monday	Jun 28	11:30 a.m.	Personal Income & Spending	May
  Tuesday	Jun 29	Noon	S&P/CaseShiller Home Price Index	Apr
  Tuesday	Jun 29	1 p.m.	Consumer Confidence (Conference Board)	Jun
  Wednesday	Jun 30	11:15 a.m.	ADP Employment Change	Jun
  Wednesday	Jun 30	12:45 p.m.	Chicago Purchasing Manager's Index (PMI)	Jun
  Wednesday	Jun 30	1:30 p.m.	Crude Inventories	Jun 26
  Thursday	Jul 1	11:30 a.m.	Initial & Continuing Unemployment Claims	Jun 19
  Thursday	Jul 1	1 p.m.	Construction Spending	May
  Thursday	Jul 1	1 p.m.	Institute for Supply Management Index (ISM)	Jun
  Thursday	Jul 1	1 p.m.	Pending Home Sales	May
  Thursday	Jul 1	5 p.m.	Auto & Truck Sales	Jun
  Friday	Jul 2	11:30 a.m.	Nonfarm Payrolls	Jun
  Friday	Jul 2	11:30 a.m.	Unemployment Rate	Jun
  Friday	Jul 2	11:30 a.m.	Average Workweek/Hourly Earnings	Jun
  Friday	Jul 2	1 p.m.	Factory Orders	May

  What I Saw Last Week

  • Although I had expected to see an increase in existing home sales last month as the overflow from the tax credit, I was surprised to see that sales of previously owned homes fell in May. I believe that the figures would have been better had it not been for delays in processing mortgage applications that hampered the closing of contracts benefiting from the credit.
    The National Association of Realtors reported that sales fell 2.2 percent month over month to an annual rate of 5.66 million units from an upwardly revised 5.79 million-unit pace in April. Despite the weak sales, the supply of previously owned homes on the market fell 3.4 percent to 3.89 million units. At May's sales pace, that represented a supply of 8.3 months, compared with April's 8.4 months. I want to see this figure get below 6 months. The decline in sales last month appeared broad-based, with sales of single-family dwellings sliding 1.6 percent and condominiums and co-ops dropping by 6.8 percent.
    The national median home price rose 2.7 percent from May last year to $179,600, which is the highest level since last July.
  • As I suggested last week, sales of new homes dropped a record 32.7 percent in May and is now at levels not seen in at least four decades as the boost from a popular tax credit faded. The Commerce Department reported that single-family home sales dropped to an annualized rate of 300,000 units. Additionally, April and March sales figures were revised lower to 446,000 units and 389,000 units respectively. The drop in sales in May unwound two months of gains, which had clearly been inspired by the government tax credit for home buyers. That being said, with the downward revisions, the lift from the tax credit was less than I previously realized and is a cause for concern.
    Last month's weak sales pace saw the supply of new homes available for sale jumping a record 46.6 percent to 8.5 months worth (the highest in nearly a year) from 5.8 months worth in April. However, the number of new homes on the market actually dipped 0.5 percent to 213,000 units, the lowest since November 1970. I expect to see slower starts headed forward until we relieve this oversupply.
    The median sale price for a new home fell 1 percent in May from April to $200,900. In the 12 months leading up to May, prices fell 9.6 percent, the largest decline since July 2009.
  • It was good to see that delinquencies on U.S. home mortgages fell for the first time in more than two years but the number of newly initiated foreclosures rose sharply in the first quarter of this year, according to banking regulators. The total number of serious delinquencies fell 7.5 percent to 2.2 million, while the number of newly initiated foreclosures rose 18.6 percent to 370,856 in the first quarter. This is according to a report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
  • The Mortgage Bankers Association said U.S. mortgage applications fell from a six-month peak last week as persistently low interest rates failed to foster demand for refinancing or home purchase loans.
    The MBA said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended June 18, decreased 5.9 percent. The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was down 0.5 percent.
  • The Federal Reserve acknowledged a faltering pace of U.S. economic recovery last week at their regularly scheduled meeting, and as was widely expected, it renewed its vow to hold benchmark interest rates exceptionally low for an extended period. In a statement at the end of their two-day meeting, the Fed scaled back its assessment of the pace of recovery, taking note of pockets of weakness and also issued a cautionary note about volatile financial markets in light of Europe's debt woes. That being said, it stuck to its expectation that the economy will continue to gradually emerge from the recession.
  • It was pleasing, and a welcome relief from recent data, to see that new claims for jobless benefits fell last week offering hope that the fragile economic recovery remained intact. As I suggested last week, initial claims for state unemployment benefits dropped 19,000 to a seasonally adjusted 457,000 in the week ended June 19. The four-week moving average of new claims, considered a better measure of underlying labor market trends, fell 1,500 to 462,750.
    The number of people still receiving benefits after an initial week of aid fell 45,000 to 4.55 million in the week ended June 12.
  • I was also pleased to see that in May, employers took 1,412 mass layoff actions involving 135,789 workers. Although still elevated, the number of events decreased by 444 over the month, and associated initial claims decreased by 65,081. We need to see continuing declines in mass layoffs to ensure stable, and later declining, unemployment rates.
  • U.S. mortgage rates dropped in the past week, with 30-year fixed-rate loans tumbling to their lowest level in 39 years according to Freddie Mac.
    Interest rates on U.S. 30-year fixed-rate mortgages averaged 4.69 percent for the week ended June 24, the lowest since Freddie Mac started the survey in April 1971. The latest rate is down from the previous week's 4.75 percent and the year-ago level of 5.42 percent. Freddie Mac said the 15-year fixed-rate mortgage averaged 4.13 percent, down from 4.20 percent the previous week.
    The rate on the 5/1 ARM, set at a fixed rate for five years and adjustable each following year, was 3.84 percent, down from 3.89 percent the prior week and the lowest since Freddie Mac started tracking the mortgage type in January 2005.
    The number of people still receiving benefits after an initial week of aid fell 45,000 to 4.55 million in the week ended June 12.
  • It was pleasing to see that consumer sentiment rose in June to its highest since January 2008. The final June reading on the overall index on consumer sentiment rose to 76 from 73.6 in May. The figure was above my forecast of 75. The June 2010 survey recorded the most favorable news heard by consumers about jobs in five years; however, it appears clear that consumers do not anticipate significant declines in unemployment during the year ahead.
    The surveys' barometer of current economic conditions was at 85.6, its highest since January 2008 and also above the 82.9 reading in early June (this compared with 81.0 in May). The index of consumer expectations rose more modestly to 69.8 from 68.8 in May

  Question of the Week

  I was asked by a reader to explain why we see jobs created in the economy when we also see an increase in the unemployment rate.
  This is an interesting question and one that I am happy to answer. It basically boils down to what is referred to as "disenchanted workers." These are people who are out of work but not claiming benefits, and therefore, not included in government figures. As these people see conditions improving, they return to look for work and return to the rolls as unemployed. This can push the overall unemployment rate higher. Economists consider this to actually be a positive sign as it demonstrates that people believe that there may be work available in the economy. As usual, feel free to e-mail me with any economic questions that you may have, and I shall do my best to answer them. Followers of my weekly commentary often pose very interesting questions that they would like answered.

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