By Matthew Gardner, Gardner Economics LLC
August 30, 2010

What to Watch This Week

• It's a big week for economic announcements, which start with personal incomes and spending. We were at zero last month, and I expect that we will see a slight rise for July. The number should come in at about 0.3 percent. Whilst not stellar, it appears that consumers are still willing to open their pocket books a little as their wages modestly increase.
• Of great interest will be the figures coming from Case Shiller. I expect they will show a modest upward move for the 20-City Index and that the Seattle market will show slight improvement too. I have been suggesting that Seattle has lagged the U.S. in recovery and that I thought we would see year-over-year appreciation this summer. I do not think that we are there yet. We were down by 1.44 percent between May of 2009 and May of this year, but we are very close to it.
• Consumer confidence will likely follow last week's improvement in consumer sentiment and increase from 50.4 to around 51.3. We are in a bumpy, up-and-down pattern, and it's our turn to be a little positive.
• The ADP (Automatic Data Processing, Inc.) figures for employment come out ahead of the federal figures, and I would not be surprised to see a decline there. I don't hold great stock in this report and will be waiting impatiently for the non-farm payroll to provide better insight as to growth.
• Construction spending, which increased by 0.1 percent in June, will likely show a contraction of about 0.4 percent in July. Weak sales figures will contract starts, which will be shown here.
• Pending-home sales figures are announced on Thursday, and I fully anticipate a weak number having pulled sales forward in the spring due to the tax credit.
• The big announcement of the week comes from the federal government's data on non-farm payrolls. The highlight number will be negative as we continue to see the removal of temporary census positions., which is no big surprise. I am far more interested in the private sector figure. We saw an increase last month, but I am not sure that it can be sustained again. I hope that I am wrong here. A decline in productivity with output and hours rising might lead one to think that business owners need to add to their staff; However, there is no certainty that this will be the case.

Upcoming Economic Announcements

What I Saw Last Week

• As I suggested last week, sales of previously owned homes dropped in July to their lowest sales pace in 15 years. The National Association of Realtors reported that sales dropped to an annual rate of 3.83 million units from a revised 5.25 million units in June. In as much as I saw the decline, this reduction was far more dramatic than anyone, including myself, anticipated.
  Regular readers of this column may remember my thoughts about how sales are down because buyers appear to be in no hurry right now. They do not see prices rising to any great degree and believe that mortgage rate increases are not going to occur in the near future. As such, there appears to be a standoff as sellers are not reducing their price expectations, and buyers believe that the bottom has not yet been seen.
  The median sale price was $182,600, up 0.7 percent from a year ago, but down 0.2 percent from June.
• New single-family home sales unexpectedly fell in July to set their slowest pace on record while prices were the lowest in more than 6 1/2 years. The Commerce Department announced that sales dropped 12.4 percent to a 276,000 unit annual rate, the lowest since the series started in 1963, from a downwardly revised 315,000 units in June.
  What I believe we are seeing now is the downside of government intervention. It had fanned expectations of a market bottom when it may have been creating a false bottom. I expect home sales to stay at this remarkably low range as long as we see remarkably high unemployment. Additionally, it appears there is little demand for lending. The number of new homes on the market was unchanged at 210,000 units, and the median sale price for a new home fell last month to $204,000, the lowest since December 2003.
• I was correct in my projection of an increase in durable goods orders in July. However, the underlying data was worse than I had hoped for. Overall orders rose 0.3 percent following a revised 0.1 percent fall in June. However, after excluding transportation, orders dropped by 3.8 percent, the biggest decline since January of last year. Overall orders last month were lifted by the volatile commercial aircraft component, which jumped an amazing 75.9 percent after a surprise 25.3 percent fall in June.
  Orders outside transportation were depressed by weak bookings for machinery, electrical equipment, computers and related products. Non-defense capital goods orders, excluding aircraft, a closely watched proxy for business spending, fell 8 percent last month after a 3.6 percent increase in June.
  This is sobering news. However, I maintain my position that we are not yet looking at double-dip as a base case scenario, but clearly the risk of entering into a period of very sluggish growth has risen. When looking at the cyclical areas of the economy, it's hard for me to expect material economic weakness in the second half of this year and into 2011.
• New U.S. claims for unemployment benefits fell more than expected last week as initial claims for state unemployment benefits fell 31,000 to a seasonally adjusted 473,000 in the week ended Aug. 21. The four-week average of new claims, considered a better measure of underlying labor market trends as it irons out week-to-week volatility, rose 3,250 to 486,750, the highest since late November.
  The number of people still receiving benefits after an initial week of aid fell 62,000 to 4.46 million in the week ended Aug. 14 from an upwardly revised 4.52 million the prior week.
  In as much as I am happy to report any number that shows slowing unemployment claims (and this number is certainly a relief), it doesn't change the fact that it is still very elevated at this point of an economic expansion as the labor market still remains very sluggish with businesses reluctant to hire and take risk.
• Mortgage rates fell to the lowest level in decades for the ninth time in 10 weeks. Freddie Mac said that the average rate for a 30-year fixed loan was 4.36 percent this week, down from 4.42 percent last week. The average rate on 15-year fixed loan dropped to 3.86 percent from 3.90 percent the previous week.
  As I have stated before, rates have fallen since spring as investors shifted money into the safety of treasury bonds, increasing their prices and lowering yields that mortgage rates follow. I now anticipate that rates will stay lower longer than I had originally forecast. This is good and bad news as it might inspire buyers, but knowing that rates will stay low for some time to come, it takes any urgency away from them.
• Consumer sentiment pulled back in late August from earlier in the month but still improved from late July in the face of less-than-stellar labor and housing conditions. The Thomson Reuters/University of Michigan's Surveys of Consumers showed a modest pickup in consumer mood that came after a drop in July to the lowest level since last November. The survey's final August reading on the overall index of consumer sentiments was 68.9, below the 69.6 earlier this month but above the 67.8 at the end of July.
  The survey's barometer of current economic conditions held steady from its earlier August reading at 78.3, up from 76.5 in July. The consumer expectations index ended at 62.9 for the month; This was down from earlier at 64.1 but up from 62.3 in July.
  The good news is that consumers have shown some resilience in the face of slowing economic growth and the media's double-dip drumbeat. The bad news is that consumers expect lackluster income and job growth for an extended period of time. While an outright decline in consumer spending, which drives nearly 70 percent of the U.S. economy, is unlikely, the chances for a double-dip recession is now uncomfortably high.
• Talking of "double-dips," I said last week that I expected the final gross domestic product (GDP) number for the second quarter to be revised downward and that proved to be the case. U.S. economic growth slowed more sharply than initially thought in the second quarter, held back by the largest increase in imports in 26 years. GDP expanded at a 1.6 percent annual rate according to the Commerce Department, instead of the 2.4 percent pace it had estimated last month.
  There is no doubt we are losing momentum in the economic recovery, but if we define recession as two or more consecutive declining quarters of GDP, I still believe that we are not going to go there. What we will see is a pattern where we may have declining GDP in one quarter followed by smaller gains in the next quarter – bouncing along the bottom, as it were.
  There were some bright spots in the report, with growth in consumer spending revised up to a 2 percent rate from 1.6 percent. Consumer spending grew at a 1.9 percent rate in the first quarter. Although businesses have been reluctant to hire new workers, they have been splurging on equipment and software, which also contributed to the surge in imports. Business investment was revised up to a 17.6 percent rate.
  Growth in new home construction was revised down slightly to 27.2 percent from 27.9 percent. This sector, which was a drag on growth in the first quarter, was lifted by a spurt in building activity spurred by a popular homebuyer tax credit that has since expired. The rate of increase was still the biggest since the third quarter of 1983. Residential investment had contracted at a 12.3 percent rate in the first quarter. Regular readers will note my earlier comments regarding July's employment figures. I have had a few additional questions regarding the employment situation and thought it worthy of some additional analysis.
  It is clear that state and local governments, facing substantial budget shortfalls, are being forced to downsize, and as such, they eliminated 48,000 positions in July. These losses, when combined with a reduction of 11,000 workers at the federal level and the release of 143,000 temporary census positions, generated a total downsizing of 202,000 government positions in July. This led to an overall net loss of 131,000 workers which was irrespective of a gain of 71,000 jobs in the private sector.
  The chart below shows private sector hiring, and in as much as the improvement has been far from stellar, we have created jobs for the past seven months.
  
  

Quote/Link of the Week

I was interested to see that the Seattle market was one of 105 metro areas that were removed from PMI Mortgage Insurance Company's list of distressed markets.

The 20 riskiest markets, along with the probability of further price declines in the next two years, as identified by PMI were:

1. Miami-Miami Beach-Kendall, Fla. (99.9 percent)
2. Las Vegas-Paradise, Nev. (99.9)
3. Ft. Lauderdale-Pompano-Deerfield, Fla. (99.9)
4. Riverside-San Bernardino-Ontario, Calif. (99.9)
5. Tampa-St. Petersburg-Clearwater, Fla. (99.9)
6. Orlando-Kissimmee-Sanford, Fla. (99.9)
7. Jacksonville, Fla. (99.9)
8. Los Angeles-Long Beach-Glendale, Calif. (99.9)
9. Santa Ana-Anaheim-Irvine, Calif. (99.7)
10. Phoenix-Mesa-Glendale, Ariz. (99.4)
11. San Diego-Carlsbad-San Marcos, Calif. (98.8)
12. Detroit-Livonia-Dearborn, Mich. (98.7)
13. Sacramento-Arden-Rovesville, Calif. (98)
14. Newark-Union, N.J.-Penn. (94.7)
15. Edison-New Brunswick, N.J. (94.7)
16. Providence-New Bedford-Fall River, R.I.-Mass. (93.6)
17. Oakland-Fremont-Hayward, Calif. (91.9)
18. Nassau-Suffolk, N.Y. (91.5)
19. New York-White Plains-Wayne N.Y.-N.J. (90.4)
20. San Jose-Sunnyvale-Santa Clara, Calif. (90)

http://www.pmi-us.com/media/pdf/resourcecenter/uwguides/distressed_markets_list_0610.pdf

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