Economic Insights

By Matthew Gardner, Gardner Economics LLC
August 2, 2010

What to Watch This Week

• General consensus is that we will see a reduction in construction spending when figures are announced today; However, I am not so sure. The improved sales that were announced last week may lead to a moderate increase in residential construction, but this may also be offset by weakness in the commercial sector.
• Personal incomes should rise, although the increase will be very modest. My model is calling for a 0.2 percent increase following May's 0.4 percent rise. We are not in an inflationary environment at the present time.
• Auto and truck sales numbers are also likely to see a modest bump that will be led by autos, but we will likely see a reduction in truck sales. Numbers are, however, well off the pre-recessionary levels.
• I will be focused on payroll numbers when they are announced on Friday, and I am predicting that we will see a modest rise following the 125,000 decline seen in June. As I mentioned earlier this month, June's decline was a result of laying off 225,000 Census workers, and in fact, private payrolls expanded by 83,000. I am looking for a modest gain in the July figures.
• Consumer Credit, which has been on the decline since October 2008, will continue its downward trend. We saw a very substantial reduction in revolving debt levels (-10.5 percent year-over-year), and this will continue to slide as banks contract further and consumers continue to try to deleverage.

  Upcoming Economic Announcements

  Day	Date	Time	Event	Period
  Monday	Aug 2	7 a.m.	Construction Spending	Jun
  Monday	Aug 2	7 a.m.	Institute for Supply Management Index (ISM)	Jul
  Tuesday	Aug 3	5:30 a.m.	Personal Income & Spending	Jun
  Tuesday	Aug 3	7 a.m.	Factory Orders	Jun
  Tuesday	Aug 3	11 a.m.	Auto & Truck Sales	Jul
  Wednesday	Aug 4	5:15 a.m.	ADP Employment Change	Jul
  Wednesday	Aug 4	7 a.m.	Institute for Supply Management Services (ISM)	Jul
  Wednesday	Aug 4	7:30 a.m.	Crude Inventories	Jul 31
  Thursday	Aug 5	5:30 a.m.	Initial & Continuing Unemployment Claims	Jul 24
  Friday	Aug 6	5:30 a.m.	Nonfarm Payrolls	Jul
  Friday	Aug 6	5:30 a.m.	Unemployment Rate	Jul
  Friday	Aug 6	5:30 a.m.	Average Workweek/Hourly Earnings	Jul
  Friday	Aug 6	noon	Consumer Credit	Jun

  What I Saw Last Week

  • It was good to see new home sales, which were abysmal last month, pick up as I had predicted last week. The latest Commerce Department report showed new home sales rising 23.6 percent to an annualized rate of 330,000 units. The not so encouraging part is that the rate is still the second lowest on record. Last month's surge in sales saw the supply of new homes available for sale dropping to 7.6 months from 9.6 months in May. Additionally, the number of new homes on the market dropped 1.4 percent to 210,000 units, the lowest level since September 1968. The median sale price for a new home fell 1.4 percent last month to $213,400, and in the 12 months to June, prices have dropped by 0.6 percent.
  • Right now we're running at about 60 percent below the average annualized transactional rate for the last decade, so I believe that there is a lot of potential out there for improvement. It appears that sales are bottoming, so I am focused on clearing the foreclosure inventory. After that, I believe that we will start seeing some upside, and I expect that to happen later this year or early 2011.
  • Also as I had suggested in last week's column, U.S. consumer confidence sank in July, its lowest since February, on job market worries. The group's index of consumer attitudes fell to 50.4 in July from an upwardly revised 54.3 in June. It is clear that the fading fiscal stimulus and the European debt situation have had an impact on consumer confidence, and it is also clear that the big problem for consumers remains to be the employment situation.
  • U.S. single-family home prices rose a little more than I had expected in May, reflecting robust spring sales spurred by homebuyer tax credits according to the Case Shiller Index. May was a strong seasonal period for home sales and buyers as they rushed into the market to sign contracts by the April 30 deadline, which allowed up to $8,000 in tax credits. Looking closely at the figures, home prices have essentially moved sideways over the past seven months. However, they are likely to bounce around the bottom for the foreseeable future. There is still a huge amount of supply on the market, but sales appear to have improved enough to stabilize prices.
  • The 20-city composite price index rose 0.5 percent on a seasonally adjusted basis in May after an upwardly revised 0.6 percent gain in April. Unadjusted prices jumped 1.3 percent in May after a 0.9 percent gain in April and declines over the prior six months. The index increased 4.6 percent in May from a year earlier. Locally, prices on a non-seasonally adjusted basis rose 1.2 percent over the prior month but are still down by 1.4 percent year-over-year.
  • It is my position that, as we were late to the party in seeing our prices start to decline, we will lag in recovery. The chart below shows annual percentage changes in the index values for Seattle as well as the 20-city conglomeration. As can be seen, our prices continued to rise as sales were spluttering and falling nationally. Prices started to recover on a national basis before we did and they remain ahead of us at this time. That being said, I maintain my position that we will turn positive on a year-over-year basis by the end of the summer.
    
    
  • New U.S. claims for unemployment benefits fell slightly more than expected last week with initial claims dropping 11,000 to 457,000. The four-week average of new jobless claims, seen as a better measure of underlying labor market trends, fell 4,500 to 452,500.
  • It is certainly a relief to see a decline in the number of Americans filing for unemployment insurance for the first time. Although that takes some of the sting out of the prior week's upwardly revised jump of 41,000, the level is still too high for anyone's liking.
  • U.S. economic growth slowed in the second quarter as a capital investment drive by businesses sucked in imports at the fastest pace since the first quarter of 1984. Gross domestic product expanded at a 2.4-percent annual rate according to the Commerce Department after an upwardly revised 3.7 percent growth pace in the January-March quarter.
  • Growth in the last quarter was held back by a 28.8 percent surge in imports, which eclipsed a 10.3 percent rise in exports. The widening trade deficit lopped off 2.78 percentage points from growth, the largest subtraction since the third quarter of 1982. While the import surge subtracted from the Gross Domestic Product, growing imports and robust business spending suggest strength in underlying demand. Imports are a bit peculiar because rising imports suggest strong demand in the economy, ergo increased optimism. But it's also a leakage from the U.S as production dollars don't go to U.S. income. I anticipate that growth for the balance of 2010 will remain tepid at best.
  • Sales of new U.S. single-family homes rebounded strongly in June from the prior month's record low driving the number of houses on the market to its lowest level in nearly 42 years. Sales jumped 23.6 percent to a 330,000-unit annual rate from a downwardly revised 267,000 units in May. Last month, the sales pace was still the second lowest since records started in 1963. That being said, the percentage increase was the largest since May 1980, which partially unwound the prior month's historic 36.7 percent decline.
  • It seems to me that new home sales are bottoming, so 's just a matter of seeing inventory clear up. After that we can start seeing some upside, and I expect that to happen later this year or maybe next year.
  • Mortgage company Freddie Mac said the average rate for 30-year fixed loans last week was 4.54 percent, down from 4.56 the prior week. The week's average rate was the lowest since Freddie Mac began tracking rates in 1971 and marked the fifth time in six weeks rates set a record.
  • U.S. consumer sentiment plunged in July to its lowest level in nine months on bleak prospects for jobs and income since the economic recovery began. There was a slim improvement in late July from early July, but the month-over-month deterioration in confidence signals for weak consumer spending in the months ahead.
  • Rather than an economy gaining strength, consumers now anticipate a slowing pace of growth. Rather than economic policies acting to improve prospects, economic uncertainty among consumers have greatly increased.

  Quote/Links of the Week

  According to the US News & World Report, . Washington State has the country's most promising real estate market.
  

  Follow my thoughts on the economy and real estate on Twitter.