By Matthew Gardner, Gardner Economics LLC
September 7, 2010

What to Watch This Week

Following the holiday weekend, it is a slow week for major announcements, but there are a few worthy of discussion.

• Consumer credit has been dropping for several months and is sure to continue to fall as consumers remain wary of extending themselves further than they have to. This is important as the consumer represents over 70 percent of our economy. Data tells me that although spending has not dried up completely, as long as the public remains cautious about the economy, this figure will continue to fall.
• Wholesale inventory levels are likely to bump up as demand has been slowing for goods. However, if we see any decline at all, it will be a good sign that businesses are still purchasing.

Upcoming Economic Announcements

What I Saw Last Week

• Consumer spending that I had anticipated rising by 0.3 percent increased by 0.4 percent in July which, when placed in tandem with a small gain in income, adds additional credibility to my belief that consumers will be able to keep contributing, albeit modestly, to what is certain to be a meek economic recovery. I will say though, that I also believe when consumer spending is growing, it's hard to get a double-dip recession to take place. In the same Commerce Department report, personal incomes increased 0.2 percent last month after being unchanged in June. Wages and salaries rose at a $22 billion annual rate during July after shrinking at an $8 billion rate in June; this is good to see.
• The personal consumption expenditures price index, excluding food and energy, was up 1.4 percent in the 12 months to July, which is unchanged from June. This is interesting as it represents a key inflation measure monitored by the Federal Reserve. The sluggish economy, in concert with high unemployment, should nudge this index a little lower in coming months, and if it moves below the Fed's longer-range forecast of 1.7 percent to 2.0 percent, then I anticipate that we will see renewed quantitative easing (of monetary policy) by year-end.
• Prices of U.S. single-family homes gained more than expected in June and rose in the second quarter, according to the Case-Shiller Index figures that were announced last Tuesday. I believe this largely reflects the lingering boost from homebuyer tax credits which ended back in April. As the effects finish filtering through, I anticipate we will start to see little in the way of marked increases in value through the balance of the summer and into the fall.
  The S&P/Case-Shiller composite index of 20 metropolitan areas rose 0.3 percent in June from May on a seasonally-adjusted basis, and unadjusted, the 20-city index gained 1 percent following May's 1.3 percent jump. So far this year, prices have risen by 4.2 percent. Home prices nationally rose 4.4 percent in the second quarter after a 2.8 percent drop in the first quarter. The Seattle market took a little year-over-year dip, but I do like the fact that we are up by 1.2 percent this year to date.
  
  
• As I had anticipated, Americans' confidence in the economy improved slightly in August, but the mood is still gloomy amid job worries. Last week the Conference Board said that its Consumer Confidence Index improved slightly to 53.5, up from a revised 51.0 in July. The improvement came after two straight months of declines. It takes a reading of 90 or more to indicate a healthy economy  a level not reached since the recession began in December 2007.
  The Index, which measures how Americans feel about business conditions, the job market and the next six months, has been recovering fitfully since hitting an all-time low of 25.3 back in February of last year. However, the August reading tells me that American confidence hasn't improved from a year ago. The slight improvement in the index was boosted by shoppers' improved outlook over the next six months (that gauge rose to 72.5 from 67.5). The other, which measures how consumers feel now about the economy, decreased to 24.9 from 26.4.
  Expectations about future business and labor market conditions did brighten somewhat, but overall consumers remain apprehensive about the future.
• The U.S. loan picture improved slightly during the second quarter. According to the Federal Deposit Insurance Corp (FDIC), the amount of loans 90 days or more past-due declined for the first time in more than four years. The FDIC also revealed some encouraging figures about the banking industry, saying the sector earned $21.6 billion during the quarter, largely due to banks putting away less money to cover expected loan losses. In other signs of improvement, the total assets of banks characterized as "problem" institutions fell during the quarter to $403 billion from $431 billion, and the FDIC's insurance fund increased by $5.5 billion during the quarter.
  With all this said, there are still some troubling indicators. Loan balances continued to decline during the second quarter, with net loan and lease balances declining by 1.3 percent. Loans to small businesses and farms fell by 1.8 percent during the quarter.
  
• The U.S. manufacturing sector grew quicker than expected in August, chalking up a 13th straight month of expansion. The Institute for Supply Management said its index of national factory activity rose to 56.3 last month from 55.5 in July.
  Manufacturing has expanded every month since August 2009, though the pace of growth had slowed in recent months amid signs that a broader U.S. economic recovery was faltering.
  
• The Commerce Department said construction spending dropped 1 percent to an annual rate of $805.2 billion, the lowest since July 2000. June's construction outlays were revised down to show a 0.8 percent fall, instead of the previously-reported 0.1 percent gain.
• U.S. mortgage applications for home purchasing and refinancing increased last week as interest rates hit a new low. The Mortgage Bankers Association announced that its seasonally-adjusted index of mortgage applications (which includes both purchase and refinance loans) for the week ended Aug. 27, increased 2.7 percent. The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 5.2 percent.
  Home loan refinancing puts extra cash into consumers' hands that they can save, use to pay off existing debt or funnel into the economy through extra spending. I believe that the volatile bottoming in the housing market will persist for some time, creating a painful U-shaped recovery. Housing construction is at a very depressed level, so I really do not see much more downside, but any recovery will be sluggish.
  
• New claims for U.S. unemployment benefits fell last week but were still too high to signal a change in fortune for the labor market. Initial claims for state unemployment benefits dropped for a second straight week, slipping 6,000 to a seasonally adjusted 472,000 in the week ended Aug. 28, according to the Labor Department. The four-week average of new jobless claims (considered a better measure of underlying labor market trends) fell 2,500 to 485,500.
  We are still at uncomfortably high levels given where we are at this juncture of the recovery, but I am happy to see that we are moving toward 400,000 rather than 500,000, so there is at least some measure of job creation.
  The number of people still receiving benefits after an initial week of aid fell 23,000 to 4.46 million in the week ended Aug. 21, from an upwardly revised 4.48 million the prior week.
  
• Contrary to my expectation for a drop, pending sales of previously-owned U.S. homes rose unexpectedly in July, suggesting a tax credit-related housing market decline is close to bottoming. The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in July, increased 5.2 percent to 79.4 from June. Compared to July last year, pending home sales fell 19.1 percent.
  We will not know that we have found the bottom until we move up from it, and it is my belief that we will not see much in the way of increasing activity until sale prices  and possibly interest rates  begin to rise.
  
• U.S. mortgage rates fell further in the past week as yields on government debt dropped. Interest rates on U.S. 30-year fixed-rate mortgages averaged 4.32 percent for the week ended Sept. 2, down from the previous week's 4.36 percent and its year-ago level of 5.08 percent.
• U.S. employment fell for a third straight month in August, but the drop was far less than expected and private hiring surprised on the upside. The headline number fell by 54,000, as temporary jobs to conduct the decennial census dropped by 114,000, but private sector employers added 67,000 jobs  a figure that was far higher than most had anticipated. An additional boost was seen with revisions to the June and July reports that showed 123,000 fewer jobs lost than previously reported.
  I like these numbers. In as much as they are far below the 200,000 new jobs needed to keep up with natural growth, it indicates that for the time being, fears of weakness in the U.S. economy may be misplaced. The unemployment rate did edge up to 9.6 percent last month as discouraged workers came back into the labor force to hunt for jobs.
  

Quote/Link of the Week

This is an interesting piece sent by one of my readers. I always find Karl Shillers opinions to be thoughtful, and it's nice to see that there are still some of us who remain positive  to one degree or another  on the long-term future of the housing market in this country.

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