The Weekend Economic Wrap Up

By July 1, 2007Economy

Business is UpA slew of economic releases came out this past week. And most of them suggest that the economy has yet to break out of the state of sluggish growth that it has been stuck in for the past half year.

Last Monday, the National Association of Realtors reported the existing home sales declined by 0.3 percent in May compared to April (and over a 10 percent decline from May of 2006). This cements this spring as one of the weakest housing in recent memory.

The realtors report also showed that home prices are down 2.1 percent compared to a year ago. One of the reasons for this may be an increase in the supply of homes on the market, as sellers are testing the waters: The report showed that ” Total housing inventory rose 5.0 percent at the end of May to 4.43 million existing homes available for sale, which represents an 8.9-month supply at the current sales pace, up from an 8.4-month supply in April.”

This sour news was then followed by Tuesday’s Commerce Department report that new home sales in May slipped 1.6 percent in May to 915,000 annualized units. On a year-ago basis, sales are down by 15.8 percent. The median and average prices of new homoes did rise in May, but this was because there was a smaller number of lower-priced houses being sold. This is partley due to the fact that banks and other types of lenders are tightening their lending standards in responce to problems in the sub-prime mortgage market.

The final piece of news on the housing front came out last Friday. The Census Bureau reported that new construction spending actually rose by 0.9 percent in May. This was the fourth consecutive monthly increase and the largest monthly gain since February of last year.

While this is encouraging, there is no sign of a rebound on the residental front. The gain in May was all in busines spending. While residential construction spendinding fell by 0.8 percent in May, nonresidential construction spending surged 2.7 percent– the 8th consecutive monthly increase. Over the past year business construction spending has risen by 19 percent…mirroring the 18 percent decline in residential construction.

So while the on-going downturn in housing has shown no signs of recovery, the good news is that business construction spending remains robust, and will offset some of the decline on the residential side, even though housing is nearly twice (87%) as large as business structures investment.

Adding to the sour news was the downturn in consumer confidence in June. The survey of consumer confidence showed that consumer confidence fell by 4.2 percent last month. Lynn Franco, Director of The Conference Board Consumer Research Center stated taht “A perceived softening in present-day business and employment conditions are the major reasons behind this month’s pull-back in confidence. In fact, the Present Situation Index now stands at levels not seen since the final quarter of last year. Looking ahead, consumers remain rather subdued about short-term economic prospects. All in all, the glass remains half empty and half full.”

Last thursday, the Commere Department reported that real personal disposable income fell in May by 0.1 percent. After an 0.6 percent decline in April, the subsequent drop off in May is a troubling sign that income growth is not keeping up with inflation. As a consequense, consumer spending is slowing. The report showed that real consumption expenditures edged up just 0.1 percent in May. Following modest growth over the prior two months, it is clear that consumer spending is slowing.

On Thursday, the Commerce Department reported that new orders for durable manufactured goods fell by 2.8 percent in May. Following very strong growth rates during the previous months, the drop in May should not be seen as a sign that business spending is slowing. Instead, this is likely a 1-time correction following two very strong months.

Also on Thursday, the Commerce Department reported that the economy increased by 0.7 percent in the first quarter of the year. This was little changed from the 0.6 percent preliminary estimate put out last month. A 15.8 percent drop in residential investment as well as a large increae in peotroleum imports offset solid growth in consumer spending. The big surprise in the first quarter was the stagnant growth in exports. Solid growth abroad combined with a more favorable dollar against most currencies should help boost export growth, which it has over the past several years. Look for this component to bounce back in coming quarters.

Amid all this news, the Federal Reserve decided to keep interest rates unchanged at its June 27/28 meeting. In its statement, the Fed expects that the pace of economic growth will continue to be moderate in the second half of the year. And while core inflation has eased a little in recent months, the Fed remains conserned on the inflation front, stating that “a sustained moderation in inflation pressures has yet to be convincingly demonstrated.” Continuing the Federal Reserve statement reads ” In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”

From this statement it seems clear that the Fed continues to have its eye on inflation, rather than slowing growth prospects. Therefore, it seems unlikely that the Fed will lower interest rates in the near term.

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