Economic Insights

By Matthew Gardner, Gardner Economics LLC
August 23, 2010

What to Watch This Week

• Existing home sales for the month of July will be announced on Tuesday, and I expect that we will see further declines to an annualized rate of 5.14 million units from June's number of 5.37 million. We will continue to experience a "payback" following the high demand from buyers that took advantage of the tax credit, which will weigh down transactions. Additionally, and as I have said before, I am noting that buyers appear to be in no big hurry to transact, and this too will pull the number down.
  Year-over-year home prices have seen some stabilization in recent months, and it will be interesting to see where this number ends up considering 32 percent of June’s transactions were distressed sales which generally sell for lower prices.
• Durable goods orders for July should swing upward from its negative figure last June. Manufacturing has been hit hard, and I am hopeful for a good figure here.
• New home sales, which jumped last month, are likely to see an additional uptick, but I am slightly cautious here. The increase that we saw in June was partly attributable to a downward revision in May's figures. Still, I am looking for an increase to 338,000 units (annualized) from 330,000 in June.
• Initial unemployment claims, which were not at all good last week, are likely to remain elevated at just below the 500,000 mark. This is certainly not good, but I discuss my reasoning for not being totally despondent with the numbers below.
• The latest estimate for U.S. GDP is likely to be revised lower, and I am looking for a figure of 1.4 percent from the initial estimate of 2.4 percent. All indications are that the government overestimated growth last quarter.
• Revised consumer sentiment figures for August will remain basically where the advanced figures were (or maybe just a hair higher) than the 69.6 number announced earlier this month.

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What I Saw Last Week

• U.S. homebuilder sentiment fell for a third straight month in August to its lowest level in nearly 1 1/2 years, pointing to continued weakness in the housing market. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index slipped one point to 13, defying my expectations for a rise to 15 (a reading above 50 indicates that more builders view sales conditions as good than poor). The NAHB survey showed the current sales conditions gauge for single-family home sales slipped this month to its lowest level since June 2009. The sales expectations measure for the next six months touched its lowest level since March 2009.
  It is apparent that builders are expressing the same concerns that they are hearing from consumers right now – particularly the sense that the overall economy and job market aren't gaining any traction.
• I was very interested to read the Federal Reserve statement that stated that banks have eased their lending standards for small businesses for the first time in nearly four years. In its new survey of bank lending practices, the Senior Loan Officer Survey, taken in July, the Fed found that the easing in loan standards was occurring primarily at the country's largest domestic banks while many smaller banks continued to struggle. Banks had been reporting relaxed credit standards for big corporations, but the new survey marked the first indication that credit was beginning to ease for smaller companies.
  This is of great interest as one of my biggest concerns has been the ability of small businesses to get credit. I was also happy to see that the survey also found less-restrictive lending conditions for most types of commercial and industrial loans.
• I eagerly watched testimony made to Congress regarding the housing market and our governments' role in it. While the executives present disagreed on the exact level of support needed, the group overwhelmingly advocated the government should maintain a large role propping up the nearly $11 trillion market. One of the suggestions that held my attention the most was the idea of resetting interest rates for mortgages insured by Fannie Mae and Freddie Mac. Such a move, it was suggested, would give Americans more money, boost consumer spending by $50 billion to $60 billion and lift housing prices by as much as 10 percent.
• U.S. housing starts rose in July but at a much weaker rate than expected. At the same time, permits for future home construction fell to their lowest level in more than a year. The Commerce Department said last week that housing starts rose 1.7 percent to a seasonally adjusted annual rate of 546,000 units; June's housing starts were revised to show an 8.7 percent fall. Compared to July last year, groundbreaking activity was down 7 percent.
  In the same announcement, building permits, which give a sense of future home construction, dropped 3.1 percent to a 565,000-unit pace last month, the lowest level since May 2009. This followed a 1.6 percent rise in June.
  It is abundantly clear that the end of the homebuyer tax credit in April has left a void in the housing market, along with depressing sales and building activity. As mentioned above, sentiment among homebuilders has now touched a 17-month low.
  The rise in housing starts last month reflected a 32.6 percent surge in groundbreaking activity in the volatile multifamily segment to an annual rate of 114,000 units. Single-family homes starts fell 4.2 percent to a 432,000-unit pace, the lowest since May 2009.
  Home completions tumbled a record 32.8 percent to an all-time low of a 587,000-unit pace. The inventory of total houses under construction fell 1.1 percent to a record-low 444,000 units last month, while the total number of units authorized but not yet started dropped 1.5 percent to 89,000 units.
  These figures are clearly unsustainable, and I would suggest that, unless we see increases in these figures, we will not be providing enough housing to meet household formations which could lead to a shortage of housing in the latter part of next year.
• U.S. producer prices rose in July for the first time in four months, pulled by higher prices for food and consumer goods. Last week, the Labor Department said the seasonally adjusted index for prices paid at the farm and factory gate rose 0.2 percent.
  In the 12 months to July, producer prices increased 4.2 percent after rising 2.8 percent in May. This is a clear demonstration that we are not in a deflationary pattern, but that we are also not yet seeing surging inflation.
• The Federal Reserve reported that output at the nation's factories, mines and utilities increased 1 percent last month, but it said that June's results were revised to a loss of 0.1 percent whichreflects the economy's sluggishness. Factory output grew by a robust 1.1 percent in July, helped by auto plants that kept operating when they normally shutter for summer renovations. Factories are the largest single component of industrial production.
  I feel that strong manufacturing growth should ease fears that the economy could begin to shrink again and send us into a double-dip recession.
• It was not good news on the employment front last week as new U.S. claims for unemployment benefits unexpectedly climbed to a nine-month high with initial claims for state unemployment benefits increasing 12,000 to a seasonally adjusted 500,000 for the week ended August 14. The four-week average of new jobless claims, that I consider a better measure of underlying labor market trends as it irons out week-to-week volatility, rose 8,000 to 482,500, the highest since early December.
  Claims have not come close to the 400,000 level that I view as the dividing line between payroll growth and contraction. Payrolls grew in the first five months of this year, partly due to hiring for the decennial census, but have declined in both June and July.
  That being said, I was pleased to see that the number of people still receiving jobless benefits after an initial week of aid fell 13,000 to 4.48 million from an upwardly revised 4.49 million. The drop in continued claims is certainly an encouraging sign, and when you take the pulse of the labor market, it's not all bad news. But it's certainly not where I would like.
• U.S. mortgage rates continue to fall to fresh lows according to a survey released last Thursday by Freddie Mac. Interest rates on U.S. 30-year fixed-rate mortgages averaged 4.42 percent for the week ended August 19, down from the previous week's 4.44 percent and its year-ago level of 5.12 percent. Meanwhile, 15-year fixed-rate mortgages averaged 3.90 percent, down from 3.92 percent the prior week.
  Investors in long-term bonds appear very confident that inflation will remain in check and, as a result, long-term fixed mortgage rates will continue to fall. With ongoing volatility in the equity markets, there is no lack of interest in fixed-income products. This will certainly keep interest rates low.
• Finally, employers took 1,609 mass layoff actions in July that resulted in the separation of 143,703 workers. This is interesting as the number of mass layoff events in July decreased by 38 from the prior month (-2 percent), and the number of associated initial claims decreased by 1,835.

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