The week's economic reports

Following is a summary of last week's economic reports. The continuing theme of weak economic growth due to a slumping housing market and rising consumer prices along with falling consumer confidence were all confirmed in this latest batch of reports - first quarter GDP, March home sales, and the latest measures of the mood of consumers all fell.

Stocks and bonds ended the week with the S&P 500 Index rising 0.7 percent to 1494, now up 5.3 percent on the year, and the yield of the 10-year U.S. Treasury note up 3 basis points to 4.70 percent.


Existing Home Sales: Sales of existing homes fell 8.4 percent in March to a seasonally adjusted annualized rate of 6.120 million, far below expectations and making for a number of very negative headlines based on the following:

• Lowest sales total since June of 2003
• Largest monthly decline since 1989
• Sales down in all four regions of the U.S.
• Inventory back near last summer's highs

The National Association of Realtors blamed bad weather and a "decrease in subprime lending volume" for the decline, though skittish buyers and sellers who are reluctant to lower their price are surely more to blame. From February to March, sales declined 8.2 percent in the Northeast, 10.9 percent in the Midwest, 6.2 percent in the South, and 9.1 percent in the West. Inventory rose from 6.8 months to 7.3 months, close to last year's high of 7.4 months, and the median price fell to $217,000, down 0.3 percent on a year-over-year basis and almost 6 percent below the July 2006 high of $230,200.

This was just a horrible report but it came off of two relatively strong months in January and February. Now clear of huge seasonal adjustments and some strange late-winter weather, the data for the next two or three months will paint a much clearer picture of the health of the nation's real estate market.

Consumer Confidence: The Conference Board's Consumer Confidence Index fell to 104.0 in April following an upwardly revised reading of 108.2 in March. This is the lowest level since August of 2006 during the peak of the last summer's gasoline price surge, further evidence of the relationship between consumer confidence and prices at the pump. Not surprisingly, one-year inflation expectations rose, climbing from 4.9 percent to 5.2 percent.

For the first time in months, the outlook for jobs soured. Those saying that jobs are hard to get rose from 18.9 percent to 20.4 percent and those saying that jobs are plentiful fell from 30.3 percent to 27.8 percent.

Durable Goods: Orders for durable goods exceeded estimates in March, rising 3.4 percent following a downwardly revised gain of 2.4 percent in February. The overall increase was led by a 37.6 percent jump in orders for nondefense aircraft following a 101.6 percent increase in this category during February.

Excluding aircraft, orders for nondefense capital goods rose 4.7 percent, an encouraging sign after last month's 2.3 percent decline, but this series has become so volatile that it is difficult to draw conclusions about the manufacturing sector based on either the monthly or year-over-year results. If the pattern of the last year continues, look for a huge decline next month as a result of a sharp drop in orders for civilian aircraft.

New Home Sales: Sales of new homes rose 2.6 percent in March after sharp declines of 14.4 percent in January and 4.2 percent in February. The new sales figure came in well below expectations and the sales volume for January and February were both revised lower by a total of 21,000 units. Inventory fell slightly, from 8.1 months in February to 7.8 months in March, but these are still very high levels, historically.

Sales increased in the Northwest and Midwest but fell in the West and in the South as the median price of a single family home rose 0.9 percent to $254,000, up 6.4 percent from year ago levels. The price increase was attributed to the spike in sales in the Northeast (up 50 percent on the month) and does not signal a rebound in prices overall as homebuilders continue to provide incentives worth many thousands of dollars.

Gross Domestic Product: See yesterday's summary of the disappointing advance estimate of first quarter GDP. The chart below is worth repeating here as it shows the dramatic reversal between homebuilding and consumption in their contribution to overall output.


Consumer Sentiment: The April reading of 87.1 for the Reuters/University of Michigan consumer sentiment index was up 1.8 percentage points from the mid-month reading but down 1.3 percentage points from March. Inflation expectations, heavily influenced by higher gasoline prices, were unchanged from mid-month at 3.3 percent but up from 3.0 percent last month.

Beige Book: The anecdotal accounts of economic activity in the twelve Federal Reserve districts, commonly known as the "Beige Book" because of the color of the printed report, showed only "modest or moderate" economic activity. Retail sales were generally at healthy levels however, problems persist in residential real estate, only partially offset by some increase in commercial building. This report is largely the same as the one in early March, rising energy prices being the only notable difference.

Summary: The highly anticipated slowdown in economic growth arrived in a big way with the advance estimate of first quarter real GDP of only 1.3 percent. Without rising energy prices, the report would not have been nearly as bad, however, the era of high growth with low commodity prices appears to have come to an end more than a year ago.

The existing home sales report casts further doubt on any imminent recovery in the nation's housing market. More likely, we are just beginning to see the impact of housing weakness on the overall economy where residential construction is the first macro impact to be followed later this year by weakness in personal consumption due to the waning real estate "wealth effect". With consumption playing an ever-greater role in economic growth, the question of the severity of the consumption slowdown as a result of weakness in housing continues to be the all important question.

The Week Ahead: Economic reports in the week ahead will be highlighted by the labor report on Friday which will be scrutinized for spillover effects from the housing slowdown. Also scheduled for release are personal income and spending along with construction spending on Monday, the ISM manufacturing index and pending home sales on Tuesday, the ADP employment report and factory orders on Wednesday, and the ISM non-manufacturing survey on Thursday.