The Week's Economic Reports

Following is a summary of last week's economic reports. Housing starts and home sales that both exceeded expectations and a monetary policy statement from the Fed that was interpreted as abandoning their tightening bias lifted nearly all markets. As is often the case, the headlines moved the markets but the underlying details paint a less rosy picture. As for stocks and bonds, the S&P 500 Index rose 3.5 percent to 1,436, now up 1.3 percent on the year, and the yield of the 10-year U.S. Treasury note rose 7 basis points to 4.61 percent.


Housing Market Index: The National Association of Home Builders' housing market index fell to 36 in March from a February level of 40. All categories declined and "deepening problems" with subprime lending were cited by the organization as cause for continuing concern for the rest of the year.

Housing Starts: Housing starts rebounded from a 14.3 percent decline and a new 57 month low in January, the seasonally adjusted total of housing starts rising 9.0 percent in February to 1.525 million units. The number of permits issued for new construction declined 2.5 percent to a rate of 1.532 million units in February, down from an upwardly revised total of 1,571 the month prior.

Starts were up where the weather was good last month in the West (+26.4 percent) and in the South (+18.0 percent). Declines were seen where the weather was uncooperative in the Northeast (-29.7 percent) and in the Midwest (-14.4 percent). The combination of the erratic weather and other seasonal factors make the data very "noisy" around this time of year. From year-ago levels housing starts are down 28.5 percent.

Housing permits declined for the 12th time in the last 13 months and the 14th time in the last 17 months now standing at annual rates seen during 1997 and 1998. From year-ago levels, permits are down 28.6 percent.

The health of the home building industry will not be known for a few more months - not until after the spring building season gets into full swing and home buyers once again appear in numbers that are historically much higher than during the winter. It still appears to be way too early to call the bottom in the housing market based on the most recent incoming data.

Leading Economic Indicators: The Conference Board's index of leading economic indicators fell 0.5 percent in February after a downwardly revised decline of 0.3 percent in January. Measures of money supply, stock prices, consumer goods, and capital goods advanced while consumer expectations, building permits, jobless claims, interest rate spreads, and vendor performance declined.

Existing Home Sales: Sales of existing homes rebounded sharply in February, up 3.9 percent to a seasonally adjusted annual rate of 6.69 million, after posting gains in each of the two prior months. Markets apparently reacted to this news without considering a very important factor - the delay between sales agreement and closing. Since escrow typically takes between 30 and 60 days, February sales are based on sales agreements that occurred in December and January when the weather was unseasonably warm and before most of the news on subprime lending hit the mainstream media. Look for lower sales totals next month as a result of these two factors.

The median price of a single family home rose from $210,900 in January to $212,800 in February, however, from year ago levels, the median price is down 2.3 percent. Inventory of unsold homes rose from 6.6 months in January to 6.7 months in February, still at levels that would be considered historically high and after considering that the inventory figures do not include the rapidly rising number of foreclosures, this measure understates current inventory levels.

Little will really be known about the health of the nation's housing market for a few months, that is, until after the spring sales begin to show up in the data for the reports due in May and June. Until then it appears that weather will depress next month's statistics and then in May and June the facts will be laid bare for all to see. National Association of Realtors Chief Economist David Lereah was interviewed on Bloomberg after the existing home sales report was released and he was surprisingly "cautious" about the prospects for housing this summer.

FOMC Meeting: There was no surprise in the policy action that resulted from the Federal Open Market Committee meeting as short-term rates were left unchanged at 5.25 percent. The policy statement, however, was widely interpreted as having removed the tightening bias of previous statements where the phrase "any additional firming" was replaced by "future policy adjustments" in the key area dealing with the outlook for the future.

Policy statement from Jan. 31st ------ Policy statement from Mar. 21st

Like some others, in the blog post Stagflation Alert!, I initially interpreted this as not being a significant change in stance and thought that the combination of slowing growth and inflation concerns appearing elsewhere in the statement were the more important elements. That is, despite dropping the wording "additional firming", there were enough hawkish words elsewhere to more than compensate. Traders moved markets quickly on the "removal of the tightening bias" interpretation with equities rising sharply and the implied federal funds futures moving down in anticipation of possible rate cuts later this year. Economists applauded the Fed's continuing "vigilance" on inflation.

It appears that traders and economists both heard what they wanted to hear.

Notably absent from the policy statement was any acknowledgment of recent troubles in subprime lending and their possible impact on the broader economy. On Thursday, Federal Reserve Bank of New York President Timothy Geithner stated, "there are few signs that the disruptions in this one sector of the credit markets will have a lasting impact on credit markets as a whole."

Summary: When viewed a few weeks hence, last week may turn out to have been a week of false hope for equity investors for two reasons. First, while the headlines for both housing reports were cheered, weather related factors may have masked an underlying trend that is getting worse and not better. Second, the Fed policy statement, widely interpreted as dropping a tightening bias, may have caused heightened expectations for lower interest rates that may not materialize if inflation readings remain high and no significant weakness develops in other economic indicators such as employment.

As long as employment remains firm, it is hard to envision rate cuts occurring while consumer prices continue to rise, as they are expected to do in the month ahead. Weekly initial claims for unemployment insurance, considered a leading indicator for employment, have drifted higher in recent months but are still far short of the 400,000 per week level that would indicate trouble ahead in the monthly labor report.

The Week Ahead: Economic reports in the week ahead will be highlighted by the final revision to fourth quarter GDP on Thursday. Also on tap are reports on new home sales on Monday, consumer confidence on Tuesday, orders for durable goods on Wednesday, and construction spending, consumer sentiment, Chicago PMI, and personal income and spending on Friday.