Economic Insights

By Matthew Gardner, Gardner Economics LLC
July 19, 2010

What to Watch This Week

• I am expecting to see further contraction in housing permits across the U.S. as builders remain wary of demand for housing following expiration of the tax credit. I expect this tocontinue the rest of the summer. We will also see a contraction in housing starts for the same reason.
• Initial and continuing employment claims should continue to show modest improvement but not at the pace that all of us would like to see.
• Existing home sales figures, released on Friday, will also show a substantial drop following the boost in sales from the tax credit. It would not surprise me to see a figure of 5.1 million sales (annualized) from last month’s figure of 5.66 million units.

What I Saw Last Week

• The U.S. trade deficit unexpectedly widened in May. This was led by a big jump in imports from China that helped overpower the best month for exports since September 2008. The trade gap widened 4.8 percent to $42.3 billion, the largest since November 2008, which defied my forecast for it to narrow in May.
  U.S. imports rose 2.9 percent to the highest since October 2008, led by a 12.1 percent increase in shipments from China and stronger U.S. demand for consumer goods, capital goods and automobiles. U.S. exports had their best showing since September 2008, when global trade was in the early stages of a deep plunge as a result of the financial crisis.
• U.S. job openings slipped in May, but the hiring rate climbed to its highest level in nearly two years. Job openings, a measure of labor demand, dipped to 3.21 million from 3.30 million in April, according to the Labor Department’s monthly Job Openings and Labor Turnover Survey.
  The job openings rate, a gauge of how many jobs were still open at the end of the month, eased to 2.4 percent from 2.5 percent in April; However, the rate of hiring rose from 3.3 percent in April to 3.4 percent (the highest since August 2008), lifting the total figures from 4.29 million to 4.50 million.
• On a macro basis, I was not pleased to see retail sales falling in June for the second straight month. This offers further evidence that our overall economic recovery is likely to slow in the second half of the year. Retail spending dropped 0.5 percent in June according to the Commerce Department, which followed a 1.1 percent fall in May. Excluding automobiles, spending was down 0.1 percent in June.
  A closer looking at the figures, however, revealed that much of the weakness last month came from a drop in auto sales and a decline in gasoline prices. Excluding automobiles and gasoline, sales would actually have risen 0.1 percent in June after having dropped 1 percent in May.
• Inventories held by businesses rose 0.1 percent in May, the fifth consecutive monthly increase. Businesses have been building up their stockpiles after slashing them during the recession. Business sales dropped 0.9 percent in May, the first decline after 13 consecutive monthly gains.
  The weakness in May sales that I discuss above is further evidence of an economic slowdown. If consumer demand falters, my worry is that businesses will cut back on new orders. That could dampen factory production and jeopardize the recovery.
• Initial claims for state unemployment benefits dropped 29,000 to a seasonally adjusted 429,000 last week as seasonal layoffs at factories eased. New claims for jobless benefits normally rise this time of the year as manufacturers, including automakers, implement annual shutdowns.· U.S. 30-year fixed-mortgage rates held at record lows last week and remained at 4.57 percent for the week ended July 15, matching the prior week's all-time low. In comparison, the rate averaged 5.14 percent one year ago.
• U.S. 30-year fixed-mortgage rates held at record lows last week and remained at 4.57 percent for the week ended July 15, matching the prior week's all-time low. In comparison, the rate averaged 5.14 percent one year ago.
• Consumer sentiment weakened in early July to its lowest in 11 months on top of a resurgence in fears about the economy. The reversal in consumer sentiment was dramatic after it reached its strongest level in nearly 2 1/2 years last month on hopes of better job and credit conditions. The survey's preliminary July reading on the overall index on consumer sentiment declined dramatically to 66.5 from 76.0 in June.
  Income and job prospects were extraordinarily weak. Those bleak prospects have made consumers much more cautious spenders – consumer spending accounts for some 70 percent of the U.S. economy. The latest survey showed that consumers' intention to buy durable items such as cars fell to its lowest in nine months. · Consumer prices fell for the third straight month, providing some bargains to American shoppers. The Consumer Price Index, the government's most closely watch inflation barometer, dipped 0.1 percent in June according to the Labor Department. It appears that less expensive energy bills were a big factor behind the drop. Prices for some food items and airlines fares also fell last month. So-called "core" consumer prices, which strip out the highly volatile energy and food figures, rose 0.2 percent in June. That means core prices rose only 0.9 percent over the past year. That is below the Fed's inflation target and has core prices holding at a 44-year low.
  It is clear that companies are wary of raising prices because consumers have cut their spending now for two straight months and factories and businesses are still operating well below full throttle. The recent stretch of falling prices, both at the consumer and producer level, has stirred talked about deflation. America's last serious case of deflation was during the Great Depression of the 1930s. I don't believe that we are in a deflationary era at the present time. I am, however, watching this closely.
• In May, foreigners bought fewer long-term U.S. securities, including government and corporate bonds, and China cut its U.S. Treasury holdings for the first time in three months, according to the Treasury. Net long-term capital inflows into the U.S. fell to $35.4 billion in May from a downwardly revised $81.5 billion in April. Purchases of Treasury notes and bonds fell sharply with foreigners buying a net $14.9 billion in May after snapping up $76.4 billion in April.
  Why is this of interest to me? Earlier in the year I suggested that mortgage rates would increase through 2010 and end up close to 6 percent. This has not been the case as the financial crisis in Europe drove a flight to the relative safety of U.S. securities, and this directly affected mortgage rates. With this slowing appetite for U.S. debt, we may now see interest rates start to tick up through the summer.
• As I had hoped, Seattle’s employment situation improved in June and, although many industries are still below employment levels seen a year ago, many are showing month–over-month improvement. The Seattle metropolitan area’s unemployment rate fell from 8.4 to 8.3 percent and is down from 8.8 percent a year ago.
  The biggest monthly gains were seen in the Arts and Entertainment sector and, surprisingly, Heavy Engineering. Additional gains of note were seen in the Construction sector (+3.1 percent), Employment Services (+3.0 percent) and the Leisure & Hospitality sector (+2.2 percent). The chart below shows the change in employment for major industry sectors between May and June of this year. Overall, I find this fits well with my theory of a slow recovery in employment and putting Seattle ahead of the U.S. in terms of employment growth.

click chart for larger view

Quote/Links of the Week

I still keep an eye on the housing market back in my own country. I was less than heartened at this forecast for housing prices to deteriorate by up to 25 percent over the next three years!

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