The week's economic reports

More weak housing reports and consumer sentiment that remains at multi-year lows highlighted the week's economic data. Stocks and bonds ended with the S&P 500 Index down 1.2 percent to 1,441, now up just 1.6 percent for the year, and the yield of the 10-year U.S. Treasury note fell 14 basis points to 4.01 percent.
Housing Market Index: The National Association of Homebuilders reported a slight improvement in their outlook for housing, however, the index remains extremely weak, still near last month's all-time low of 18. The minor improvement was due to a slight increase in the number of prospective buyers, likely due to the increasing media coverage of housing market woes and falling home prices. Recall that a reading of 50 on this index is the level at which an equal number of builders report good conditions and poor conditions across the three sub-indexes - sales, six-month sales, and buyer traffic.

New Home Construction: Housing starts rebounded slightly in October to 1.229 million units from an upwardly revised 1.193 million units in September, a 3.0 percent increase following last month's drop of 11.4 percent. Permits for new construction plunged to 1.178 million units from an upwardly revised level of 1.261 million units, a 4.6 percent decline from September.


It is somewhat unusual that both housing starts and permits for September were revised upward - over the last year or so, about 80 percent of the revisions to prior month's data have been downward, making month-to-month comparisons look better than they would be if like-data were used (i.e., revised vs. revised or unrevised vs. unrevised). In October, the opposite was true - a like-data comparison would show a slightly better improvement in housing starts and a more modest decline in building permits.

The September revisions should not be interpreted as a sign of a rebound, however, since it was the multi-family home construction that drove the housing starts number higher - single-family home construction continued to decline. More importantly, permits for new construction, a leading indicators for new building, continued to make new lows. Look for a bottom in this index sometime late next year or perhaps early in 2009 - the inventory of unsold homes (both new and used) remains very high and will continue to be impacted by foreclosed homes and canceled new home sales coming back onto the market.

Consumer Sentiment: The mood of the consumer improved marginally in the last two weeks as the final November reading of the Reuters/University of Michigan's consumer sentiment moved up from 75.0 to 76.1. The index moved down 7.2 percent from the October reading of 80.9 and is more than 18 percent below the level of November of 2006. The current reading is at a level not seen since the aftermath of Hurricane Katrina in 2005.

Leading Economic Indicators: After rising 0.1 percent in September, the index of leading economic indicators fell 0.5 percent in October, led down by higher jobless claims, fewer building permits, and a souring consumer confidence. Higher stock prices (that have demonstrably reversed in recent weeks) provided support along with higher factory orders. There was clear wording in this report from the Conference Board of an economic slowdown consistent with the Federal Reserve's latest forecast released earlier in the week.

Summary: In a holiday-shortened week that was relatively light on economic reports, there was no good news to be found. Both housing market reports were weak and, while some may claim that the apparent "leveling off" in home construction is another sign that a bottom is near, most analysts are now looking at late next year or 2009 for a sustainable rebound.

Consumer confidence and the economic outlook remain troubling indicators. The holiday shopping season will be closely watched for signs that consumers are tightening their belts - since more than 70 percent of economic growth is based on consumer spending, any substantive decline there will have an outsized impact on the overall economy.

One of these years, the American consumer will pull back in a big way - whether or not it is this year remains to be seen.

The Week Ahead: The week ahead will be highlighted by the second of three estimates of third quarter economic growth on Thursday. Also scheduled for release are consumer confidence on Tuesday, durable goods orders and existing home sales on Wednesday, new home sales on Thursday, and personal income/spending, the Chicago purchasing managers index, and construction spending on Friday.