Saturday, June 21, 2008
More bad news for both housing and manufacturing highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index down 3.1 percent to 1,318 (for a year-to-date total return of –9.3 percent) and the yield of the 10-year U.S. Treasury note declined 11 basis points to 4.16 percent.
Treasury International Data Flows: There seems to be little let-up in the appetite of foreign investors for U.S. assets as evidenced by last month's increase in net purchases of long term securities from a downwardly revised $79.6 billion in March to $115.1 billion in April. Demand for U.S. Treasuries improved by $80.3 billion, mostly as a result of buying from China, and purchases of corporate bonds registered a net increase of $25.1 billion.
There was a net outflow of $15.9 billion in U.S. equities investments, however, the overall demand for Treasuries and other U.S. credit instruments has been remarkably resilient over the last nine months since the credit crisis began and the dollar resumed its long decline.
New York and Philadelphia Manufacturing Surveys: Contracting business paced by sharp reductions in new orders and significantly higher prices were the continuing themes for manufacturing activity in both the New York and Mid-Atlantic regions based on regional Federal Reserve Bank surveys for the month of June. The New York area index fell from -3.2 to -8.7 and the Philadelphia survey declined from -15.6 to -17.1.
The New York area survey has averaged -6.0 during the first six months of 2008 and the Philadelphia area survey has fared worse at -19.9 during that same time after averaging roughly +20 and +15, respectively, for the last few years. In both surveys, negative numbers indicate contraction.
Housing Starts: Homebuilders began construction on the fewest number of new homes since early in 1991 as housing starts fell 3.3 percent from a downwardly revised, seasonally adjusted, annualized rate of 1.008 million in April to 975,000 in May. This represents a decline of 32.1 percent from year ago levels.
The decline was led by an 8.0 percent drop in multi-family starts and single-family starts fell 1.0 percent. Housing starts gained 62 percent in the Northeast, but fell 25 percent in the Midwest, 10 percent in the West, and 4.4 percent in the South.
Permits for new construction also fell, from an upwardly revised rate of 982,000 in April to 969,000 in May, a decline of 36.3 percent from this time last year.
As if the further decline in housing starts wasn't bad enough, the National Association of Homebuilders' Housing Market Index fell from 19 in April to 18 in May, matching a record low established earlier in the year. The index was driven lower last month largely by reduced buyer traffic through model homes.
Despite what is heard from a few lonely voices, especially after last week's surprising rebound in pending home sales, the bottom in housing is still not in sight. Home prices certainly have much farther and longer to fall and it remains to be seen whether home construction and home sales will make a bottom this year.
Producer Prices: Prices at the wholesale level surged by 1.4 percent in May after rising just 0.2 percent in April. The increase was led by a 4.9 percent increase in energy prices while food prices rose 0.8 percent. The cost of gasoline surged by a whopping 9.3 percent, heating oil rose by 8.0 percent, and natural gas was up 3.8 percent. From year ago levels, overall producer prices are now up 7.2 percent.
Summary: More dismal reports from the manufacturing and housing sectors cast further doubt on any forecasts for a second half recovery for the U.S. economy as neither industry seems to be even beginning the process of making a bottom. Weekly jobless claims are now back in the 380,000+ range after having fallen below that level for most of May indicating, perhaps, another leg down in the labor market in the period ahead.
Fortunately, foreigners continue to send money to the U.S., much of it used to buy government debt which may be set to increase even further in the second half of the year as more stimulus is likely to be needed. Along with higher exports due to a weaker dollar, recently strong retail sales reports (largely a result of the government stimulus money) have been about the only bits of good news on the U.S. economy lately.
The optimism of the last few months regarding the future course of the U.S. economy, since recovering from the Bear Stearns debacle in mid-March, appears to be fading rather quickly as the moment.
The Week Ahead: The coming week will be highlighted by three reports on housing - the Case-Shiller home price index on Tuesday, new home sales on Wednesday, and existing home sales on Thursday. Also scheduled for release are reports on consumer confidence on Tuesday, orders for durable goods on Wednesday, the final estimate on Q1 GDP on Thursday, and consumer sentiment and personal income/spending on Friday.