Economic Insights

By Matthew Gardner, Gardner Economics LLC
July 26, 2010

What to Watch This Week

• New home sales numbers may be disappointing after they are released this morning; However, I personally think that there might be a little uptick as we come off the horrendous low of 300,000 units reported last month. The whiplash effect following the expiration of the tax credit pushed transactions to an all-time low, and being the contrarian I am, a small uptick may be on the cards. That being said, the numbers are sure to still be very low from an historic perspective.
• Tuesday's Case Shiller figures will likely show very modest improvement across the entire index, and as I have said for some months now, the Seattle region will continue to claw its way back into positive territory.
• I fear that consumer confidence numbers will continue to retract as the public agonizes over the snail’s pace of our economic recovery.
• Initial and continuing unemployment claims are likely to remain elevated. While we are seeing additional temporary hiring occur in the summer months, employers remain particularly cautious when it comes to new hires. I am sure that there are many readers with children home from school and who are wondering where all the summer jobs are!
• Consumer sentiment numbers are also released this week, and similarly to the confidence index, I expect that these numbers will continue to disappoint. Last month the figure remained benign, but I would not be surprised to see it lower as our economic engine continues to splutter and not roar.
• Finally, we will see the preliminary estimates for U.S. gross domestic product for the second quarter of this year. It is my anticipation that we should see a figure of around 2.7 percent annualized growth that will match that of the first quarter. This is far from stellar, but inventory growth will continue to keep this figure on positive territory.

What I Saw Last Week

• The National Association of Home Builders said that its seasonally adjusted housing-market index fell to 14 in July; It is now at the lowest level since March 2009. June's index level was revised downward to 16 (Readings below 50 indicate negative sentiment about the market). For your information, the last time the index was above 50 was April 2006.
  My take on this is that it is clearly apparent that the pause in sales following expiration of the home buyer tax credits is turning out to be longer than anticipated due to the sluggish pace of recovery in the rest of the economy. That being said, I still anticipate that, on a year-over-year basis, we will see overall sales improve over 2009 levels.
  The level of new sales is important for numerous reasons, not least of which is that each new home built creates, on average, the equivalent of three jobs for a year and generates about $90,000 in taxes paid to local and federal authorities.
• As I had anticipated, U.S. housing starts hit their lowest level in eight months in June, but an unexpected rise in permits offered hope that homebuilding is poised to pick up. Housing starts dropped 5 percent to a seasonally adjusted annual rate of 549,000 units, the lowest since October. It was the second straight month of declines in groundbreaking activity and was well below my expectations for a 580,000-unit annual rate. It's not surprising that housing starts declined given the significant inventory of unsold homes. Until that inventory of unsold homes comes down, we're not likely to see improvement in starts nationally.
  Housing starts were pulled down last month by a 21.5 percent drop in the volatile multifamily segment to a 95,000-unit annual pace, erasing May's 4.3 percent rise. Groundbreaking for single-family homes slipped 0.7 percent to an annual rate of 454,000 units, the lowest since May 2009. The inventory of houses under construction dropped 5.5 percent to a record low 450,000 units in June while units authorized but not yet started rose 3.6 percent to 91,500.
  The only positive sign that I saw was an unexpected 2.1 percent rise in applications for building permits to a 586,000-unit annual pace. That followed a 5.9 percent drop in May and my expectations for a slip to a 570,000 rate.
• U.S. 30- and 15-year mortgage rates fell to fresh lows in the past week amid concerns about the state of the economic recovery. Interest rates on U.S. 30-year fixed-rate mortgages averaged 4.56 percent for the week ended July 22, down from the previous week's 4.57 percent (it was at 5.20 percent a year ago). Meanwhile, 15-year fixed-rate mortgages averaged 4.03 percent, down from 4.06 percent last week.
  With interest rates dropping to their lowest since Freddie Mac started the survey, home-loan refinancing activity should continue to show strength and demand for loans to purchase a home may gain traction
• That being said, sales of previously occupied homes fell in June and are expected to keep sinking, indicating that the housing market's troubles are likely to drag on the economic recovery. As I suggested last week, sales fell 5.1 percent to a seasonally adjusted annual rate of 5.37 million according to the National Association of Realtors.
  This particular report counts home sales once a sale closes. Last month's report captured some buyers receiving federal tax credits of up to $8,000 that boosted sales this year. Buyers initially had to close their purchases by June 30, but Congress extended the deadline to the end of September.
  The drop in June sales was led by a decline of more than 9 percent from a month earlier in the West. Sales were down 7.5 percent in the Midwest and down 6.5 percent in the South, but they rose nearly 8 percent in the Northeast. The median sale price was $183,700, up 1 percent from a year earlier.
  Inventories of homes for sale were up 2.5 percent to 3.99 million units, and at the current sales pace, that represents 8.9 months of supply. The current sales pace ticked down 5 percent in June, even though those numbers are still being swayed by the homebuyer tax credit.
• New U.S. claims for jobless benefits climbed more steeply than anticipated last week. Initial claims for state unemployment benefits rose 37,000 to a seasonally adjusted 464,000 in the week ended July 17 according to the Labor Department, which more than erased the drop reported the prior week. The four-week moving average of new jobless claims, a better measure of underlying labor market trends because it irons out weekly volatility, rose 1,250 to 456,000 last week.
  In the week ended July 10, the number of people still receiving benefits after an initial week of aid dropped 223,000 to 4.49 million. The level was well below market expectations for 4.62 million.

Quote/Links of the Week

As a member of the National Association of Business Economists, I am always interested in the opinions that they offer. I was particularly interested to see that their survey for the second quarter showed that 31 percent of businesses added workers between April and June (the highest level in three years) and that nine percent of those surveyed said they expect to hire more workers over the next six months (the most since January 2008).

A reader submitted this interesting little snippet about our area. Apparently we have the "least miserable" economy in the country!

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