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CNB Weekly Economic Commentary: Oct 26Date: Oct 26, 09 To: Everyone From: Gregory S. MacKay, Senior Vice President & Chief Economist Date: 10/23/09
If you read only the news headlines this week, you might think the economy is sour. “Building permits down 30% year-to-year”… “Housing starts down 29% from a year ago… “Home prices fell .3% from July to August”… There just doesn’t seem to be any good news about the new home market. However, if you look a little deeper into the data, an entirely different picture emerges. While building permits are 30% lower than a year ago, they are flat with December 2008 levels and are up 15% from April’s levels. The same with starts… down 29% year-to-year but level with December 2008, and up 23% since April. New housing has turned. A monthly survey by the Federal Housing Finance Agency (regulates FNMA, FHLMC, and FHLB) showed housing prices down .3% for the month and down 3.6% for the year. Deeper in the release, it was stated that home prices have risen 3.8% annually since January 1991, and 4.0% annually since January 2000. Simply put, like many economic “bubbles”, given time, items with reasonable values find balance in the marketplaces. Nationwide, houses have traditionally risen 3-4% annually over longer periods, and continue to do so, even while including the most recent recession. Existing home sales figures for September were also quite positive, even after the usual lament that inventory levels are too high. Sales jumped 9% in September to an annualized rate of 5.6 million, a level not seen since 2007. Prices have fluctuated a bit, but are essentially flat since December 2008. With prices firming and sales up sharply, it’s hard to argue that existing home sales are in trouble.
We dug a little deeper into the new homes data to get a better feel for economic strength. Take a look (all data annualized in millions):
Year Completions Sales Units for sale
August 1994 1.4 .672 .322
August 2001 1.5 .898 .307
August 2005 2.0 1.27 .477
August 2008 1.1 .444 .412
August 2009 .693 .429 .262
Spot checking various years, it appears that combined sales and units available for sale are approximately 70-80% of completions each year except for 2009, where they are equal. It suggests that the supply of new homes has hit an abnormal low this year, and if normal sales volumes return, there will be some shortages coming. It is hard to believe in a housing shortage, but both new and existing inventories have had sharp declines from their highs. While existing inventories are still above historic averages, available new homes for sale are approaching levels 20% below normal.
The other gilt-edged indicator this week is the Conference Board’s Leading Economic Indicators, which rose for the sixth straight month, and is now climbing at an 11.8% rate, strongly indicating an improving economy. The Board’s other indicators (Coincident and Lagging) both also suggested an improving economy. As has been widely reported and commented upon, only indicators dealing with bank loans and employment levels have yet to improve.
Employment data was mixed this week. While initial claims rose 11,000 to 531,000, the four week average was steady at 532,750… gaining ground, but slowly.
Last week’s muted consumer inflation was matched by wholesale numbers this week. The Producer Price Index fell .6% in September, and wholesale prices fell .1% without food and energy costs. Wholesale prices fell almost 4.8% in the past year, but as some of my colleagues have mentioned, it sure doesn’t seem like things are cheaper.
Stock prices were generally higher during the week as more good than bad news was coming from corporate earnings reports. With some Friday slippage, it was a benign week. At 2:15 pm, for the week and year:
Treasury bond yields rose slightly, as some money moved from their safety over to the stock markets. Intermediate municipals continued their slow yield climb, and again offer a small premium to inflation expectations.
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