Saturday, March 01, 2008
Plunging home prices, soaring wholesale prices, stalling economic growth, and quickly eroding consumer confidence highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index down 1.7 percent to 1,331, now down 9.4 percent for the year, and the yield of the 10-year U.S. Treasury note fell 26 basis points to 3.53 percent.
Existing Home Sales: Sales of existing homes fell 0.4 percent in January and are now down 23.4 percent on a year-over-year basis, the worst annual decline on record.
Inventory remains at a historically high level, rising from 9.7 months of supply in December to 10.3 months in January, down modestly from the recent high of 10.7 months in October.
The pace of home price declines is now accelerating as the median price fell 2.9 percent in January to $201,100, down 4.6 percent from the level of a year ago. An increasing number of bank owned properties are now coming onto the market and asking prices for these properties are starting out lower and lower as banks are only now beginning to realize that they must slash prices to move their growing inventory.
The combination of tighter credit and an increasingly skittish home buying public will continue to put downward pressure on prices for some time to come.
The sole bright spot in this report from the National Association of Realtors was that sales of existing homes actually rose 0.5 percent in January and the 6.5 percent decline in sales of condominiums, a much smaller market segment, was responsible for the overall sales volume decline.
For a colorful chart of the 20-city S&P Case-Shiller Home Price Index, see Tuesday's post "Home prices continue to plunge".
Producer Prices: Wholesale prices surged in January, up 1.0 percent after a 0.3 percent decline in December. This was far above the consensus estimate and provides further evidence of soaring commodity prices that should show an even bigger increase when the February data is reported next month. On a year-over-year basis, overall producer prices rose 7.7 percent, the biggest annual increase since 1981.
Energy prices rose sharply but other increases were broad-based. Gasoline prices rose 2.9 percent in January after a 7.6 percent decline in December and are now 48.1 percent higher than a year ago. Prices for heating oil surged 8.5 percent and natural gas prices rose 0.7 percent.
New Home Sales: The Commerce Department reported a 2.8 percent decline in new home sales during January to an annualized rate of 588,000 homes, the lowest level since 1991. On a year-over-year basis, new home sales are down 34 percent and, from the peak in 2005, sales are down an astonishing 58 percent.
Inventory remains at levels not seen since 1991, up slightly to 9.9 months of supply, and there is little reason to think that the market for new homes will improve anytime soon, though it is possible that sales may stabilize near the current depressed levels.
Remember that sales volume and sales price are two very different things and that homebuilders and real estate professionals will see some relief if sales volume begins to level out. However, until inventory is brought back to more normal levels, downward pressure on prices will continue.
Prices for new homes are now in a virtual free-fall, down 4.5 percent in January after falling 9.3 percent in December for a year-over-year decline of 15.1 percent, an all-time record decline. Recall that these prices do not include builder incentives, so actual price declines are even greater.
If home prices tumble further, which appears to be unavoidable at this point, there will be an increasing impact on the broader economy as home equity wealth has been one of the key drivers of consumer spending in recent years. Some analysts are now projecting 20 to 30 percent home price declines nationally from the 2005 peak and much more in markets that had the biggest run-ups in price.
Gross Domestic Product: In the second of three estimates for the fourth quarter, real GDP growth was unrevised at a seasonally adjusted, annualized rate of just 0.6 percent. For the full year of 2007, real GDP growth now stands at 2.5 percent.
The final reading for Q4-07 will be released in one month and then the much anticipated first look at economic growth during Q1-08 will be reported at the end of April.
There were modest downward revisions to consumer spending that were offset by a slight increase in inventories, resulting in no change to the headline figure. Tepid growth in the fourth quarter followed two relatively strong quarters in the middle of 2007, but the current quarter is expected to show negative growth.
The GDP price index, used to convert "nominal" economic growth to "real" economic growth was revised up slightly from an annualized rate of 2.6 percent to 2.7 percent. Given how energy and food prices have risen so far in 2008, real growth in the first quarter is likely to be affected by both lower nominal growth and a higher price deflator, resulting in what could be a shockingly bad headline number.
Summary: As if the dismal reports on housing, producer prices, and economic growth were not enough, there was even more bad news elsewhere last week. The mood of the American consumer is now quickly souring, the slowdown in manufacturing is accelerating, the labor market is showing increasing signs of trouble, and personal income and spending both disappointed.
The Conference Board's consumer confidence index plummeted to the lowest level since 2003 with the "expectations" component dropping to a 17-year low. Expectations for business conditions fell to a level not seen since 1972 while expectations for employment dropped to the lowest level since 1980. Also, the Reuters/University of Michigan consumer sentiment index had its largest month-to-month decline since the hurricane-effected period in late-2005, sinking to its lowest level since early 1992 as opinions of government policy fell sharply.
After providing hope for a rebound in manufacturing with a strong advance in December, orders for durable goods (a very volatile data series) gave back all of those gains in January. On the labor front, initial jobless claims, an important leading indicator for the labor market, surged by 19,000 to 373,000 last week and are now at the highest level since October of 2005.
Finally, on Friday, the Chicago Purchasing Managers' Index plunged to its lowest level since late-2001 and a report on personal spending and income showed that inflation is now wiping out all gains in consumer spending while a weakening labor market is restraining income growth. The personal saving rate (after-tax income less personal consumption), remained at minus 0.1 percent for the second consecutive month.
Broad equity markets reacted appropriately to all of this news as the Dow Jones Industrial Average plunged 316 points on Friday. The pace of the economic slowdown has quickened considerably in just the last two months and it is all but assured that, when the determination is finally made later in the year, it will be revealed that the nation is now in a recession.
The Week Ahead: The coming week will be highlighted by the ISM manufacturing report on Monday and the most important economic report of them all, the labor report on Friday. Also scheduled for release are reports on construction spending on Monday, ADP employment, productivity/costs, and ISM nonmanufacturing activity on Wednesday, pending home sales on Thursday, and consumer credit on Friday.