Saturday, September 27, 2008
A housing market that remains very weak, hefty declines in orders for durable goods, and a better outlook by the consumer highlighted the week's economic reports.
Stocks and bonds ended with the S&P 500 Index down 3.3 percent to 1,213 (for a year-to-date total return of -15.9 percent and the yield of the 10-year U.S. Treasury note rose 5 basis points to 3.83 percent.
Existing Home Sales: Sales of existing homes fell modestly in August, however, home prices were down 9.5 percent from year ago levels, the sharpest decline since record-keeping began in 1968.
Sales of previously owned homes fell 2.2 percent last month, from an upwardly revised annual rate of 5.02 million units in July to 4.91 million in August. Sales are now down 10.7 percent from year ago levels.
Tighter credit conditions and higher interest rates have dampened sales volume with only the Midwest (+0.9 percent) and South (+0.5) posting increases from July to August while sales declined in the Northeast (-6.6 percent) and the West (-5.3 percent).
The inventory of unsold homes remained at historically high levels, dropping slightly from 10.9 months of supply to 10.4 months, and prices will remain under pressure until this imbalance is corrected.
Overall, the median home price fell from $224,400 in August of last year to $203,100 last month paced by a decline of 23.9 percent in the West where distressed property sales are most common. Last month, the realtors' trade group reported that more than one-third of all sales nationwide involved either foreclosures or short sales and this trend is likely to get worse before it gets better.
Durable Goods Orders: Durable goods orders fell sharply last month, down 4.5 percent in August after a downwardly revised gain of 0.8 percent in July. On a year-over-year basis, new orders are now down 4.7 percent. Transportation led all declining categories in August with a drop of 8.9 percent, largely due to an 8.1 percent plunge in automobiles, and the always-volatile aircraft sector also plummeted. Excluding transportation, new orders fell by 3.0 percent after gaining 1.0 percent the month before. With the exception of the export sector, manufacturing remains very weak.
New Home Sales: Sales of new homes fell last month to the slowest rate in 17 years and price declines reached a new all-time record as the troubles in the nation's home construction industry show no signs of improvement and only tentative signs of stabilizing at current levels after the most recent data.
New home sales plunged 11.5 percent in August to an annualized rate of 460,000 units, a level last seen in 1991. On a year-over-year basis, sales were down 34.5 percent and, unlike sales of existing homes, the early signs of forming a bottom for new home sales over the last five months now appear to be in question.
Sales declines were paced by a 36.1 percent drop in the West and a 31.9 percent drop in the Northeast while the Midwest was the only region to show more new home sales than the month before, up 7.2 percent.
Inventory declined slightly, but due to lower sales, the months of supply increased from 10.3 months back up to 10.9 months, down just three-tenths of a percentage point from the high of 11.2 months seen in March.
Prices fell sharply, down 5.5 percent in August to $221,900 for a year-over-year decline of 6.2 percent, however, new home sales continue to come with incentives that can amount to many tens of thousands of dollars, rendering this price data almost meaningless.
Initial Jobless Claims: New claims for unemployment insurance soared to 493,000 during the week ended September 20th, the increase driven by some 50,000 filings that were a direct result of damage done by Hurricanes Gustav and Ike in the Gulf Coast region. Continuing claims made another multi-year high, breaching the 3.5 million mark for the first time since 2003.
Gross Domestic Product: Due to a slowdown in consumer spending and reduced exports, the Commerce Department revised second quarter economic growth downward, from an annualized rate of 3.3 percent as reported last month in the "preliminary" reading to a "final" reading of 2.8 percent.
This follows growth rates of 0.9 percent in the first quarter and -0.2 percent in the fourth quarter of last year.
This was the last of three readings for the second quarter, data that is still subject to change due to annual revisions beginning next year.
More important than the second quarter data, the much-anticipated "advance" estimate of third quarter growth will be released at the end of October and, due to the spending slowdown and credit crunch, economists are rapidly revising their estimates downward for the current quarter, most now thinking it will be either very close to zero or negative.
Consumer Sentiment: Moderating gasoline prices over the last two months have provided some relief for consumers and this continues to show up as improvements in consumer sentiment surveys, the Reuters/University of Michigan survey dropping slightly from the mid-month reading of 73.1 to a month-end reading of 70.3, but vastly improved from the August level of 63.0. Surprisingly, one-year inflation expectations jumped in the most recent survey, up from 3.6 percent to 4.3 percent - it seems the shock of rising gasoline prices has now worn off, but consumers continue to notice other prices that are still going up.
Summary: The housing market continues to show signs of stabilization for existing home sales, which account for 85 percent of housing market activity with new home sales contributing the rest, however, home prices will continue to fall as the number of distressed property sales increase and the credit crisis lurches on. Now two years in to a period of declining home prices, momentum is clearly to the downside as more and more potential homebuyers stop thinking about how much prices have fallen, and consider how much further they might still drop.
The plunge in new orders for durable goods bodes ill for the manufacturing sector with more job losses likely to be reported next week in the Labor Department's monthly payrolls report. Manufacturing exports have been one of the few bright spots for the U.S. economy in 2008, but with the dollar strengthening in recent months and an economic slowdown gathering pace in other parts of the world, this trend is likely to stall or reverse.
The new bright spot for the economy appears to be that gasoline prices have come down from the summer highs giving stressed consumers a little extra money to spend on other items and buoying their confidence after having reached generational lows over the summer. Never mind that gasoline prices are still substantially higher than a year ago - at this point, the economy will take any bright spots it can get.
The Week Ahead: The coming week will be highlighted by the ISM manufacturing report on Wednesday and the labor report on Friday. Also scheduled for release are reports on personal income and spending on Monday, the Case-Shiller home price index, Chicago area manufacturing, and consumer confidence on Tuesday, the ADP labor report and construction spending on Wednesday, and the ISM nonmanufacturing report on Friday.