Economic Insights

By Matthew Gardner, Gardner Economics LLC
August 9, 2010

What to Watch This Week

• It is likely that we will see productivity figures, which will be released on Tuesday, show an uptick as we continue to work employees harder instead of increasing hiring. This is supported by increases in the average workweek.
• The Federal Reserve is sure to keep interest rates where they are (0.25 percent), and I do not expect this to increase this year. In fact, the troubling payroll figures that we saw last week are likely to push the Fed to consider further accommodating actions to try and stimulate the very sluggish economic rebound.
• Inflation numbers, which will be released on Friday, will show an increase; However, the movement will be very modest. I am not concerned about inflation at this point.
• Consumer Sentiment numbers will be disappointing. I sometimes feel as if I am a broken record, but we are still concerned with the employment situation, and this will, yet again, weigh on this index.

  Upcoming Economic Announcements

  Day	Date	Time	Event	Period
  Tuesday	Aug 10	5:30 a.m.	Productivity (Prelim.)	Q2
  Tuesday	Aug 10	5:30 a.m.	Unit Labor Costs	Q2
  Tuesday	Aug 10	7 a.m.	Wholesale Inventories	Jun
  Tuesday	Aug 10	11:15 a.m.	FOMC Rate Decision	Aug 10
  Wednesday	Aug 11	5:30 a.m.	Trade Balance	Jun
  Wednesday	Aug 11	7:30 a.m.	Crude Inventories	Aug 7
  Wednesday	Aug 11	11 a.m.	Treasury Budget	Jul
  Thursday	Aug 12	5:30 a.m.	Initial & Continuing Unemployment Claims	Aug 7
  Thursday	Aug 12	5:30 a.m.	Import (ex. oil) & Export Prices (ex. auto.)	Jul
  Friday	Aug 13	5:30 a.m.	Core Consumer Price Index/CPI	Jul
  Friday	Aug 13	5:30 a.m.	Retail Sales/Retail Sales (ex. auto.)	Jul
  Friday	Aug 13	6:55 a.m.	Consumer Sentiment (University of Mich./Rev.)	Aug
  Friday	Aug 13	7 a.m.	Business Inventories	Jun

  What I Saw Last Week

  • U.S. construction spending unexpectedly rose 0.1 percent in June as increased investment in public projects offset the 15th straight monthly decline in private non-residential construction. The Commerce Department release said that construction spending rose to an annual rate of $836 billion. May's construction outlays were revised to show a bigger decline at 1 percent instead of the previously reported 0.2 percent slip.
    Spending on public projects rose 1.5 percent in June, reversing the prior month's slide. State and local government spending on construction projects rose 1.1 percent after slipping 0.1 percent in May. Federal construction jumped 4.6 percent to a record high $31.7 billion, after falling 2 percent in May. However, investment in private construction fell 0.6 percent to $527.6 billion after a 1.4 percent drop in May. Private construction investment spending was held back by a 0.8 percent fall in private homebuilding, no doubt reflecting the end of a homebuyer tax credit.
  • U.S. consumer spending and incomes were flat in June while personal savings were the highest in a year This suggests to me that we will see an anemic economic recovery for the remainder of this year. The Commerce Department said that spending was unchanged in June after rising 0.1 percent in May.
    Personal income was flat after increasing 0.3 percent in May. This is disturbing because this is the first time since last September that incomes did not rise. Real disposable income increased 0.2 percent after rising 0.4 percent the prior month. The saving rate rose to 6.4 percent, the highest since June last year, from 6.3 percent in May. Savings rose to an annual rate of $725.9 billion, the highest level since June of last year.
    These figures seem to be consistent with the near-term slowing of the pace of economic recovery. We are still dealing with a stunningly high unemployment rate and very little in the way of job growth, so it should not be much of a surprise that spending patterns are looking soft.
  • Contracts for pending sales of previously owned U.S. homes fell to a record low in June as buyers continued to sit on the sidelines. The National Association of Realtors said that its Pending Home Sales Index, based on contracts signed in June, fell to a record low 75.7 from a revised 77.7 in May.
    It is clear that we really need to see stronger job creation to have a meaningful recovery in the housing market. If the job market improves, there could be a couple of additional months of slow home-sales activity before it could pick up later in the year.
  • U.S. mortgage rates continue to fall amid concerns about the state of the economy. These historically low rates do offer a glimmer of hope for a housing market that is still struggling to gain traction following the recent expiration of the homebuyer tax credits.
    Interest rates on 30-year fixed-rate mortgages averaged 4.49 percent for the week of Aug. 5, down from 4.54 percent a week earlier and 5.22 percent a year ago (Thirty-year rates have fallen to fresh lows in six out of the last seven weeks). Averaging 3.95 percent, Fifteen-year fixed-rate mortgages are down from 4 percent last week (fifteen-year rates have hit fresh lows in five of the last seven weeks). With rates near their lowest point since Freddie Mac started the survey, demand for loans to refinance or purchase homes has picked up, which is a positive for the economy.
  • The Northwest Multiple Listing Service (NWMLS) came out with their summary for sales activity in our area last week, and in my opinion, there were not really any great surprises. In King and Snohomish counties, available inventory is continuing to rise modestly, pending sales continue to fall precipitously and closed sales are falling as well. After looking at transactional prices, I see we are higher than a year ago in King County (7.14%) but lower in Snohomish County (-7.53%). Prices versus May of this year are up by 8 percent in King County but are 1 percent lower in Snohomish County.
    What are my feelings here? I am happy to see that we are getting traction relative to transactional prices but believe that we will continue to see reductions in the list prices of homes as more inventory becomes available. King County certainly appears to be in better shape than their neighbors to the south and north. This is a function, I believe, of a higher number of distressed properties in the more removed areas. This summer will be a struggle with more housing choices out there, and regardless of the extraordinarily low interest rates, we need to see improving economic fundamentals (i.e. more jobs) if we are to see greater stability in our housing market.
  • New U.S. claims for unemployment benefits unexpectedly rose last week to the highest level since early April, highlighting the continuing weak labor market and very fragile economic recovery. Keep in mind that weekly claims data is volatile, and the figures released last Thursday by the Labor Department had little bearing on the government’s monthly employment report, which was released the following day as it falls outside the survey period. Initial claims for state unemployment benefits rose 19,000 to a seasonally adjusted 479,000.
    While these numbers are volatile, we have not really made progress in the labor market, and that is kind of troubling when you think about the broader economic recovery. For the recovery to turn into a self-sustaining expansion, we need people to have wage income coming in, and until that happens, we are still in a very tenuous position.
  • Friday's employment report was not pleasing and provided an odd mix of unpleasant surprises that add even further question marks relative to the pace and sustainability of the economic recovery. Non-farm payrolls fell 131,000 but private employment, which I consider a better gauge of labor market health, rose 71,000 after increasing 31,000 in June.
    Last month, the dominant service sector added 38,000 jobs after June's 34,000 gain. However, I saw that temporary help services, which is seen as a harbinger of future permanent hiring, fell 5,600 after increasing 11,200 the prior month. Temporary employment gains had averaged 45,000 per month from October 2009 to May of this year.
    We were really hurt in contracting employment within state and local governments. As they continue to struggle with huge budget deficits, jurisdictions purged more workers last month. When combined with mass layoffs of temporary federal census workers, this pushed government payrolls down by 202,000, and this is in addition to a 252,000 reduction in June.
    Payrolls in the goods-producing sector unexpectedly rose in July, reversing the prior month's decline as manufacturing employment was boosted by auto makers who did not shut down their plants in July for retooling. Manufacturing jobs increased 36,000 after gaining 13,000 in June. The sector is leading the economic recovery, which started in the second half of 2009. However, construction employment fell 11,000 (a strike in the sector reduced construction payrolls by 10,000 last month).
    The jobless rate held steady at 9.5 percent and defied expectations for a slight increase. But that was only because thousands more people dropped out of the labor force.

  Quote/Links of the Week

  I found this article to be particularly interesting. Some economists are now suggesting that we may actually see a housing shortage in select states that include Washington and Oregon.
  

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