Saturday, June 28, 2008
Falling home prices and plunging consumer confidence, now at multi-decade lows, highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index down 3.0 percent to 1,279 (for a year-to-date total return of –12.3 percent) and the yield of the 10-year U.S. Treasury note declined 17 basis points to 3.99 percent.
New Home Sales: Sales of newly constructed homes declined 2.5 percent last month, from a downwardly revised, seasonally adjusted annual rate of 525,000 units in April to just 512,000 in May.
On a year-over-year basis, sales are currently down a whopping 40.3 percent and, from the peak in July of 2005, sales volume has declined 64 percent.
Aside from the March total of 501,000 two months before, sales levels have not been this low since 1991 when the population of the U.S. was about 50 million less than it is today.
Prices for new homes fell to $231,000, a decline of 5.1 percent from last month and 5.7 percent below last year at this time. Note that the median sales price data for new homes has become increasingly erratic in recent months and, due to continuing cancellations and ever larger builder incentives, this data point contains little or no value for analytical purposes.
The most important piece of information in this report is that sales continue to decline faster than inventory, resulting in an uptick in the "months of supply" statistic, from 10.7 in April to 10.9 months in May. Until there is a significant reduction in inventory relative to sales volume, look for prices to continue to fall.
Durable Goods Orders: As expected, new orders for durable goods were unchanged in May after a downwardly revised decline of 1.0 percent in April. Excluding the always-volatile transportation sector, new orders dropped 0.9 percent following a surge of 1.9 percent the month before. On a year-over-year basis, durable goods orders have declined 1.5 percent, a figure that is not adjusted for inflation. Manufacturing remains in a funk, as corroborated by the many other reports on declining activity and falling employment, and would be even worse if not for the increased demand for exported goods.
Real Gross Domestic Product: The more you look at economic growth as measured by the quarterly change to gross domestic product, the more you realize how much value this data series has lost as an indicator of the health of the economy due to the many and varied contortions that the inflation calculations have undergone through the years.
In the final estimate for the first quarter prior to the annual revision later this year, real economic growth was revised upward from an annualized rate of 0.9 percent to 1.0 percent making Q1 the third quarter in the last five with real GDP of one percent or less.
The price deflator or "chain price index", used to convert "nominal" GDP to "real" GDP, also rose slightly from 2.6 percent to 2.7 percent. Note that if one were to plug a more realistic measure for rising prices into the "real economic growth" calculation, it's easy to see how we could be "mired in a recession" as the term is commonly (but incorrectly) defined - two consecutive quarters of negative economic growth.
Attention will now shift to next month's "advance" estimate for economic growth during the second quarter, to be followed by the "preliminary" estimate and the "final" estimate in subsequent months. Current estimates for the second quarter are for real growth of between one and two percent.
Existing Home Sales: Sales of existing homes rose 2.0 percent in May to a seasonally adjusted, annualized rate of 4.99 million units, 15.9 percent lower than last year at this time. The inventory of unsold homes remains historically high, down slightly from 11.2 months in April to 10.8 months in May.
The national median existing-home price fell to $208,600 in May, down 6.3 percent from a year ago when the median was $222,700. Home prices have fallen most in the West, down 16.0 percent over the last year, followed by a 4.3 percent decline in the Northeast.
Naturally, a few more ill-advised calls were heard last week that the recent data marks a "bottom" in housing. As shown in the chart, it may well be that a bottom in sales is nine months in the making, but prices will continue to decline for some time to come as an increasing number of monthly sales are now foreclosures or short sales.
An astonishing one-third of all existing homes sold last month were reportedly either foreclosure sales or short-sales and this figure likely understates the actual percentage of distressed home sales as some of these properties do not involve realtors and hence, are not included in the monthly data from the realtors' trade group.
The S&P Case-Shiller Home Price Index was also updated last week and year-over-year price declines were reported for all twenty cities in the index, led by 27 percent year-over-year price drops for both Las Vegas and Miami. For the usual colorful chart see this item from last Tuesday
Consumer Confidence/Sentiment: It just keeps getting worse and worse for consumers as both well-known measures of their mood - the Conference Board's Consumer Confidence Index and the Reuters/University of Michigan Consumer Sentiment Index - plumbed new lows.
Consumer Confidence fell to its fifth worst monthly reading in its 40 year history, down almost 15 percent from 58.2 in May to 50.4 in June with the expectations component at a record low of 41.0.
One year inflation expectations remained at 7.7 percent and, in a bad omen for next week's labor report, the number of respondents saying jobs are hard to get was double those saying they are plentiful - an extremely wide gap of 30.5 percent to 14.1 percent.
The final June reading on consumer sentiment fell to its third lowest reading of all time, this series going all the way back to 1952. The index fell three tenths of a percentage point from 56.7 at mid-month to 56.4, down from May's final reading of 59.8.
Inflation expectations over the next year were unchanged at 3.4 percent and, over five years, the outlook was for 5.1 percent annual inflation. These "inflation expectations" remain at very elevated levels due to soaring food and energy prices that are hitting consumers hard. There have been only a few other times when the mood of the consumer has been this foul.
Personal Income/Spending: Personal income and spending got a big boost from the tax rebate checks that were sent out in May with more to follow in June. Income rose 1.9 percent in May after a 0.3 percent increase in April and spending jumped 0.8 percent after a 0.4 percent increase the month prior. It's hard to get too excited about these increases as this is simply money borrowed by the government going out to consumers, much of which is spent on costlier food and energy.
Summary: While there may be a bottom forming in housing sales, housing prices remain in a virtual free-fall in many parts of the country as huge numbers of distressed properties continue to come onto the market. The housing market is still very, very troubled though you wouldn't know it by looking at the government's measure of economic well-being as understated inflation allowed first quarter GDP to remain positive, coming in at an even one percent.
Meanwhile, both income and spending rose last month but, more than anything else, this was a result of the delivery of half of the government's $100 billion in stimulus money. Look for more "stimulus" later this year.
As seen in the recent data on the mood of the consumer, now at multi-decade lows, Americans are well aware that there is something very seriously wrong with the economy and they don't see things improving anytime soon unless food and energy prices start going down and housing and stock prices go back up.
The Week Ahead: The coming week will be highlighted by reports on ISM Manufacturing on Tuesday and the labor report on Thursday. Also scheduled for release are reports on Chicago area manufacturing on Monday, construction spending on Tuesday, ADP employment on Wednesday, and the ISM nonmanufacturing report on Thursday.