Economic Insights

By Matthew Gardner, Gardner Economics LLC
July 12, 2010

What to Watch This Week

• Last week was fairly slim when it came to economic announcements; however, this week there is far more to sink our teeth into. I will be delving into our local employment situation for June when data is released on Tuesday. Although I do not believe that we will see positive growth on a year-over-year basis quite yet, we are on the verge of it and recent month-over-month numbers have shown signs of growth in some sectors. The unemployment rate might bump up a little with temporary census workers contracts ending, but this decrease is fairly minimal.
• Retail sales figures will continue to point to improvement and that consumers are buying, albeit modestly. Last months figure of negative 1.2 percent will likely improve to negative 0.1 percent.
• Business inventories should contract slightly as demand for goods grows.
• Prices paid at factory gates (PPI) will show a very slight increase, furthering my belief that inflation remains very tame.
• Consumer prices, which retracted slightly in May, will more than likely stay flat in sync with the PPI figure.
• I am hopeful that initial employment claims, which came in better than expected last week (see below), will continue to show modest improvement. 

What I Saw Last Week

• The Northwest MLS data was released last week and the data was pretty much as I had expected. Inventory rates in the two-county area are headed higher, pending sales took a substantial tumble following expiration of the tax credit and closed sales, which include transactions that took advantage of the tax credit, surged. Year-over-year prices are still down (modestly in King County) but showed a more pronounced decline in Snohomish County, which has yet to see a bottoming market. Month-over-month, prices rose slightly in King County but still slipped in Snohomish County.
• The service sector grew more slowly in June, suggesting that the economic recovery appears to be weakening as the second half of the year begins. The Institute for Supply Management, a trade group of purchasing executives, said that its index tracking service-oriented companies slid to 53.8 last month from 55.4 in May, the highest point since the recovery began.
  A reading above 50 indicates expansion. June's reading is well above the 37.2 low in November 2008, but it's far below the pre-recession high of 67.7 back in 2004.
• Data from the Mortgage Bankers Association showed that refinancing drove total U.S. mortgage applications to a nine-month high last week, while demand for loans to purchase homes sunk to a near 13-year low because buyers remained sidelined after the expiration of the federal tax credit. Refinancing requests jumped 9.2 percent in the week ended July 2 to the highest level since May 2009, lifting total applications by 6.7 percent (seasonally adjusted) to the highest level since early October 2009. Demand for mortgages to buy homes slipped 2 percent. It was the eighth weekly drop in the nine weeks since the federal tax credit for homebuyers expired on April 30.
  It is my contention that home purchases will stay weak over the next few months as the housing market adjusts to the end of the government incentives and that prices should bottom around the third quarter. I am also seeing that the fallout from record defaults and foreclosures have started to sway many younger buyers from making such a big commitment in the near term. That being said, as I discuss below, mortgage rates have never been lower which may bring some first-time buyers back to market.
• Rates on the 30-year mortgage dropped to a record low in the past week, according to Freddie Mac. Rates on 30-year fixed-rate mortgages averaged 4.57 percent for the week ended July 8, down from the previous week's 4.58 percent. One year ago the rate was at 5.20 percent. The 15-year fixed-rate mortgage averaged 4.07 percent, up from 4.04 percent last week.
• New U.S. claims for unemployment insurance fell more than expected the week before last, while the number of people continuing to receive benefits in the final week of June was the lowest we have seen in seven months. Initial claims for state unemployment benefits dropped 21,000 to a seasonally adjusted 454,000 in the week ended July 3. The four-week moving average of new jobless claims, one that I consider to be a better measure of underlying labor market trends, fell 1,250 to 466,000. Although layoffs have abated, claims for jobless benefits have not declined significantly this year. This implies only a gradual labor market improvement. The number of people still receiving benefits after an initial week of aid dropped 224,000 to 4.41 million in the week ended June 26, the lowest since November last year. 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.
  

Quote/Links of the Week

At various parties over the holiday weekend, I was asked by a number of people what I thought about the likelihood of a “double-dip” recession. There appears to be an increasingly vocal group in the “W” camp these days! My opinion is that it is still unlikely. Looking back at data, I note that we have only seen one such event occur in the past 70 years. Back in the 1980s (1982 to be precise) such an event occurred. This was when then Federal Reserve Chairman Paul Volcker was trying to tame inflation and pushed the Federal Funds rate to 18 percent. This is very unlikely to happen this time around. Although I cannot say with absolute certainty that it will not occur, it is my opinion that, rather than a double dip, we will just see extremely sluggish growth through this year and into 2011; Without expanding credit, we are still facing a slog. Earnings season is now upon us, and I believe that results from the second quarter of this year will add (or detract) credence from this position. Only time will tell. As usual, if anyone has a different position that that would like to share, I would be happy to discuss it.

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