The week's economic reports

More dismal housing reports and a consumer outlook that continues to sour overshadowed solid economic growth during the second quarter, which, given the events of the last six weeks, is now largely irrelevant.

Stocks and bonds ended the week with the S&P 500 Index up 0.1 percent to 1,527, now up 7.7 percent for the year, and the yield of the 10-year U.S. Treasury note down 6 basis points to 4.57 percent.

Existing Home Sales: Sales of existing homes dropped 4.3 percent from July to August and are now 12.8 percent lower on a year-over-year basis. The supply of unsold homes now stands at 10 months, a very high level by historical standards (three months or less is much more typical), so it is only a matter of time until sellers capitulate by dropping their prices in order to remain competitive with builders and an increasing supply of bank-owned properties currently for sale.

The August median home price dipped 1.8 percent and, surprisingly, now shows a 0.2 percent gain from year ago levels, though this small gain is due to statistical anomalies related to a healthier high-end of the real estate market and not broadly rising home prices.

Consumer Confidence/Consumer Sentiment: Both of the most important measures of the mood of the consumer, the consumer confidence index from the Conference Board and the consumer sentiment index from the University of Michigan, now show deepening distress. Consumer confidence plunged from 105.6 in August to 99.8 in September, the lowest level since Hurricane Katrina struck in the fall of 2005 (note that readings in the 60s and 70s were common during the last recession). The consumer sentiment index came in at 83.4, no change from the August reading, just above levels seen last summer when gasoline prices spiked. The credit crunch, the housing mess, and high energy prices appear to be taking their toll.

Durable Goods Orders: In what is one of the more volatile sets of economic data, largely due to orders for new aircraft that swing wildly from month to month, orders for durable goods declined 4.9 percent in August following an upwardly revised gain of 6.1 percent in July. As might be expected, weakness was seen primarily in the transportation category which includes civilian aircraft. Excluding the transportation category, new orders fell only 1.8 percent in August, however, consistent with many other manufacturing reports in recent months, it is fair to say that orders for durable goods have been weakening.

Gross Domestic Product: The final estimate of second quarter GDP surprised virtually no one as real economic growth came in at 3.8 percent, down slightly from the preliminary estimate of 4.0 percent in August, due to downward revisions to net exports. The much more important news will come in one month when the advance estimate (the first of three readings) for third quarter GDP will be released and the first "economy-wide" impact of the recent credit market tumult will be assessed.

When looked at over a period of almost nine years, as seen in the graphic above, growth has clearly slowed over the past year despite the uptick seen in the second quarter. In light of recent events in the credit and housing markets combined with rate cuts by the Federal Reserve, the October report on third quarter growth will be highly anticipated.

New Home Sales: In the first look at housing data affected by the unhinging of credit markets in early August, new home sales plunged 8.3 percent to 16 year lows. Home prices, not including builder incentives, were down sharply, the median sales price falling 7.5 percent to $225,700 compared with a year earlier, the largest year-over-year decline in 37 years. Based on many anecdotal accounts of cancellations, builder incentives, and builder auctions, prices for new homes are now in a virtual free-fall with no bottom in sight.

Supply rose from 7.5 months in July to 8.2 months in August, well below the inventory of unsold existing homes but still very high historically, and this is likely to result in further pricing pressure when combined with an increasingly wary home buying public.

Personal Income and Spending: Once again, increases in spending outpaced increases in income as American consumers continued to do their job in supporting the economy. During the month of August, personal spending rose 0.6 percent, twice as quickly as income, making next month's first look at third quarter GDP all the more interesting as it relates to consumption, the key element in U.S. economic growth. The savings rate, revised recently to pull the last two years out of "negative savings rate" territory came in at +0.7 percent - a far cry from double-digit rates of personal saving that were the norm for most of the 20th century.

Summary: Second quarter GDP is old news and has little relevance in a world that has changed significantly since the end of June. This report came and went during the week with little fanfare although next month's first look at third quarter GDP will be quite a different story.

Weakness in consumer spending (accounting for 70 percent GDP) during the first two quarters of the year preceded the increasingly sour mood of consumers due to the housing and credit market mess. As a result, both third and fourth quarter economic growth could surprise to the downside, particularly when considering higher oil prices and their impact on the trade deficit, along with what is likely to be a higher rate of inflation that will detract from "real" growth.

The Week Ahead: The week ahead will be highlighted by the ISM manufacturing report on Monday and the labor report on Friday. Also scheduled for release are pending home sales on Tuesday, the ADP employment report and the ISM non-manufacturing index on Wednesday, and consumer credit on Friday.