Economic Insights

By Matthew Gardner, Gardner Economics LLC
July 06, 2010

What to Watch This Week

• We will get data on housing transactions for our market on Tuesday and I anticipate that we will see the highest transactional figures for the year as we see the end of the tax credit. I believe that figures for both King and Snohomish counties will be moderately higher than the prior month, and we will see continued stability in transactional prices.
• The Institute for Supply Management figures will likely remain about where they were in May (55.4).
• 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 throughout the summer.
• Consumer Credit figures are the only other data point in this shortened week that is worthy of discussion. I anticipate that we will see further erosion in credit, especially revolving credit, and a likely slowdown in non-revolving credit. We are still cautious and maintain our posture of retiring debt, especially credit card debt as we become able to.

What I Saw Last Week

• You may remember that last week I predicted a slim decline in consumer confidence figures for June. It appears as if consumers are far more fearful than I had anticipated. Worried about jobs and the sluggish economic recovery, Americans appear to be having a relapse in confidence, which is causing this widely watched index to tumble in June and causing me concern over consumer spending in the months ahead. The Conference Board announced that its Consumer Confidence Index dropped almost 10 points to 52.9, down from the revised 62.7 in May. And June's reading marked the biggest drop since February when the index fell 10 points.
  Increasing uncertainty and apprehension about the future state of the economy and labor market, no doubt a result of the recent slowdown in job growth, are the primary reasons for the sharp reversal in confidence. It is becoming clear that until the pace of job growth picks up, consumer confidence is not likely to increase.
• As I thought, data from Case-Shiller showed that we are headed in the right direction relative to home prices and that the tax credit certainly assisted in buoying our local market. April data showed a 1 percent increase between March and April, but we are still modestly negative on a year-over-year basis (down 2.8 percent). Last year prices rose 0.2 percent from March to April, and year-over-year prices were down 16.8 percent (the largest year-over-year decrease on record). Eleven of 30 Case-Shiller-tracked cities are now in positive year-over-year territory: Phoenix, Los Angeles, San Diego, San Francisco, Denver, Washington, D.C., Atlanta, Boston, Minneapolis, Cleveland and Dallas.
  The 20-city composite index rose by 3.8 percent which is slightly higher than my 3.5- percent prediction last week. Month over month, U.SMortgage rates have sunk to the lowest level in more than five decades according to Freddie Mac. The average rate for 30-year fixed loans sank to 4.58 percent last week. That's down from the previous record of 4.69 percent set last week and the lowest since the mortgage company began keeping records way back in 1971. To put this in perswary of the European debt crisis and the stock market) have shifted money into the safety of treasury bonds, driving down yields. Now, mortgage rates tend to track the yields on long-term treasuries and this has compressed rates further.
  However, tighter lending standards and declining home equity have made it difficult for many borrowers to refinance. Many who do qualify have already done so over the past 18 months, and there is insufficient spread between their existing rates and the new rates to justify refinancing again. Rates on 15-year fixed-rate mortgages fell to an average of 4.04 percent, the lowest on records dating to September 1991, down from 4.13 percent a week earlier. Rates on five-year adjustable-rate mortgages averaged 3.79 percent, down from 3.84 percent a week earlier. That was also the lowest on Freddie Mac's records, which date back only to January 2005.
• Contracts for pending sales of previously owned homes dropped a record 30 percent in May, far more than expected after the tax credit expired at the end of last month. The National Association of Realtors said that its Pending Home Sales Index, based on contracts signed in May, fell to a record low 77.6 from 110.9 in April. This just demonstrates that consumers are rational, and they rushed to meet the tax credit eligibility deadline in April. The sharp decline in contract signings in May is a natural result, and I anticipate similar low levels of sales activity in June.
  Contracts fell 33.3 percent in the South, the country's largest region, and dropped 20.9 percent in the West. Contracts dropped 31.6 percent in the Northeast and fell 32.1 percent in the Midwest.
• U.S. construction spending slid less than expected in May as declines in private-sector building overshadowed gains in public-funded construction. Construction outlays fell 0.2 percent in the month to an annual rate of $841.9 billion, according to the Commerce Department. Private residential construction fell 0.4 percent after two months of gains, underscoring the setback to housing markets from the expiration of the tax credit.
• New claims for state unemployment aid unexpectedly rose last week, heightening fears the U.S. economic recovery is stalling. Initial claims for state unemployment benefits increased 13,000 to a seasonally adjusted 472,000, according to the Labor Department.
  While layoffs have slowed sharply from early last year, I believe that businesses remain skeptical of the strength of the recovery and are holding back on hiring, which is keeping claims for unemployment benefits at uncomfortably lofty levels. It's looking more and more like the job market is treading water. Layoffs are down from 2009, but hiring hasn't really picked up, and this is disappointing. There is a lot of uncertainty on the hiring side that's causing things to remain sluggish.
• Congress, at the eleventh hour, passed an extension of the closing date on the home buyer tax credit. This is a very interesting move and is worthy of some discussion. The credit was set to expire at midnight on June 30, but there was a stay of execution. The reason? If we look at last week's existing home sales report, the National Association of Realtors' chief economist, Lawrence Yun, told reporters that if the closing date wasn't extended, 180,000 home buyers who signed contracts by April 30 would lose the tax credit due to delays in closing. He blamed these delays on the tough mortgage market, new appraisal rules and the still-complicated short sale process. I am also wondering how much influence the forthcoming elections had on the decision to extend this deadline. Just a thought!
• The jobs report for June came in, and in all honesty, it was about what I expected. Non-farm employment shrank by 125,000, and the jobless rate declined slightly from 9.7 to 9.5 percent as more people dropped out of the labor force. What I did find interesting was that, when you take out the jobs lost from the end of Census hiring (225,000), private sector employers added 83,000 new jobs after increasing by just 33,000 jobs in May.
  Payrolls in the dominant services sector rose 91,000 last month after increasing 20,000 in May. Temporary help employment rose 20,500, while retail hiring fell 6,600. In the goods-producing sector, payrolls fell 8,000 in June (pulled down by declines in construction as home building dropped sharply following the end of the government tax credit), and manufacturing employment rose 9,000 after a 32,000 gain in May.
  Is the recovery losing steam? With unemployment stubbornly high, household spending has turned sluggish in recent months threatening to create a vicious cycle that has stock market investors and some analysts (including myself) worrying that a slowdown in a recovery could tip the economy back into recession. We are in a difficult situation now. Personally speaking, I don't think there is political will to have another stimulus program to further bolster the economic recovery, and even if we did, I am not sure that people feel it would be that effective.

Quote/Links of the Week

Likely not interesting to some, but I did get a giggle at this article. What happens when a distiller has a deficit in their pension fund?

They fill it with whisky, of course; enough to fill 180 Olympic-sized swimming pools!

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