Saturday, March 29, 2008
More reports of falling home prices and a quickly souring mood of the American consumer highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index down 1.1 percent to 1,315, now down 10.4 percent for the year, and the yield of the 10-year U.S. Treasury note rose 13 basis points to 3.46 percent.
Existing Home Sales: Much lower sales prices are now showing up in the data from the National Association of Realtors as a huge 8.2 percent year-over-year decline was reported in the median price for existing home sales in February.
Of course, the headline from the industry trade group painted a rosier picture, "Existing Home Sales Rise in February", which was indeed true as shown in the chart, but the real story was the price declines.
According to the report, "The national median existing- home price for all housing types was $195,900 in February, down 8.2 percent from a year earlier when the median was $213,500." Once again, don't confuse a modest rebound in sales volume, up 2.9 percent from January but down 23.8 percent from February of 2007, with an imminent rebound in sales price.
As long as inventory is at historically high levels - now at 9.6 months of supply - and sales volume is near historic lows, prices will continue to fall. That slightly larger blue bar to the far right in the chart is virtually meaningless as long as that red curve is as high as it is.
Now, if the government steps in and starts buying houses, maybe the blue and the red in the chart will move a little closer - we'll see.
Consumer Confidence: The mood of the American consumer is reaching new multi-year lows, now at levels well below that seen during the aftermath of Hurricane Katrina in 2005. The Conference Board’s Consumer Confidence Index dropped from an upwardly revised 76.4 in February to 64.5 in March, a level not seen since early in 2003 when the U.S. invaded Iraq. Aside from this temporary, war-related plunge, a reading this low has not been seen since 1993.
An increasing number of survey respondents are finding jobs more difficult to find and, importantly, many individuals are now noticing increases in consumer prices and projecting them into the future. One-year inflation expectations jumped from 5.4 percent in February to 6.1 percent March, making the task of the Federal Reserve all the more difficult as it continues to apply "easy money remedies" to an ailing economy.
New Home Sales: The Commerce Department reported that the number of new homes sold in February fell to a fresh 13-year low, down 1.8 percent from January and down 29.8 percent on a year-over-year basis. Inventory remained at historically high levels with the "months of supply" figure unchanged from February at a whopping 9.8 months.
The number of homes on the market, however, dropped by 2.1 percent to the lowest level since July 2005, likely an indication that homebuilders are cutting back amid slowing sales.
The median sales price rose from $225,600 in January to $244,100 in February, but home prices are down 2.7 percent from year-ago levels. It really is hard to make too much of the median price data for new home sales as the value of upgrades and other incentives have an outsized impact on the true cost to the homebuyer and cancellations remain extraordinarily high.
Combined with the existing home sales report on Monday and the sharp decline in the S&P Case-Shiller Home Price Index reported on Tuesday - down 2.2 percent for the month and 11.4 percent on a year-over-year basis - there are two very clear messages in this week's housing reports - the housing market remains very, very weak and home prices are now falling rather dramatically.
Gross Domestic Product: There was little new in the third and final estimate for economic growth during the fourth quarter of 2007. The annualized rate of real growth was unchanged at 0.6 percent and the price index fell modestly from 4.1 percent to 3.9 percent.
Until the normal data revisions occur in a few months, the year 2007 will go down as a year when real growth slowed to 2.2 percent, the lowest level in five years.
For a complete breakdown of components that have contributed to economic growth and contraction in recent years, see Start the recession count-down.
Now that the final reading on fourth quarter GDP is out of the way, analysts all around the world can look toward next month's "advance" estimate of first quarter growth as an early indication of what might someday be declared the "official start" of the current recession.
Though the "official" determination of when a recession starts and stops is the domain of the Bureau of Economic Analysis and they won't make any pronouncement until well after the fact, a recession is generally defined as two or more quarters of negative real economic growth which, apparently, don't have to be consecutive (see the 2000-2001 recession in the chart). The current outlook is for zero real growth in the first quarter, which ends on Monday, and a contraction of one percent is now expected during the second quarter.
Personal Income/Spending: Personal income rose more than expected in February, however, this was largely due to a sharp increase of 2.2 percent in "personal current transfers", payments made by the government to individuals for Medicare reimbursements. The wages and salaries component rose by a modest 0.3 percent.
Spending rose only 0.1 percent in February after rising 0.4 percent in January as a multi-month long consumer pullback is now evident in nearly every economic report on personal spending. In related news, J.C. Penney Co. was the latest retailer to cut its profit forecast, noting that it expects comparable-store sales to decline at a "low-double digit" percentage rate in March versus last year and to decline in the high single digits in its fiscal first quarter ending in May.
While reduced spending is bad for business and the economy as a whole, it is good for the personal saving rate that rebounded from -0.1 percent in January to +0.3 percent in February.
Consumer Sentiment: The Reuters/University of Michigan consumer sentiment index made another new multi-year low which, like the Conference Board's consumer confidence survey earlier in the week, now sits at levels below the Hurricane Katrina affected months in late 2005.
Recall that, in this section of the weekly update over the last few months, comparisons of the current mood of the consumer to that seen in late-2005 have frequently been made, however, those levels had never been breached.
Now that those levels have been exceeded to the downside, one has to go back much further to find a consumer outlook that is worse than the current one and all of these periods are associated with previous recessions (i.e., the early 2000s or the early 1990s).
The back-to-back readings, from 70.8 in February to 69.5 in March, are likely a sign that the last two month's data were not just a phase that will pass quickly and that the mounting troubles consumers face today will make this a longer, more drawn-out affair.
Plunging home prices, a weakening job market, and continuing financial market turmoil will weigh on consumers for some time to come and this does not bode well for the "consumption-based economy" in the U.S.
Summary: If anyone with even a passing interest in the nation's housing market doesn't know that home prices are now falling sharply, they must be living in a cave somewhere as the mainstream media has been saturated with this news over the last week. Now that huge price declines have been confirmed by the National Association of Realtors, the long-feared transformation from "virtuous cycle" to "vicious cycle" in real estate - where price declines begin to reinforce themselves, making the situation even worse - may now begin in earnest.
Consumer confidence is now at levels that have only been associated with recessions in the past and, unless the labor market picks back up (next week's monthly payrolls report will be very important) and/or the stock market works itself back into positive territory for the year and/or credit markets begin to heal themselves in a more permanent way and/or food and energy prices retreat, don't look for any big improvement in the mood of the consumer anytime soon.
More and more analysts are beginning to talk of the current slowdown using terms such as "protracted" and "extended" and fewer optimists are guessing that a second-half rebound (should one materialize) will have any staying power. As the election season heats up, it will be fascinating to watch how the discussion about the health of the economy evolves.
The Week Ahead: The coming week will be highlighted by the ISM manufacturing report on Tuesday and the monthly labor report on Friday. Also scheduled for release are the Chicago purchasing managers' index on Monday, construction spending on Tuesday, the ADP employment report on Wednesday, and the ISM nonmanufacturing report on Thursday.