U.S. Economy Mending Faster than Expected

In the first quarter, the US economy shrank by a revised 5.5%, lower than the 6.3% in the last quarter of last year, and the 5.7% that was estimated earlier. Of note is the fact that real personal consumption expenditures increased 1.4 percent in the first quarter, in contrast to a decrease of 4.3 percent in the fourth.

Business investment, in contrast, contracted sharply. Real nonresidential fixed investment decreased 37.3 percent, nonresidential structures decreased 42.9 percent, equipment and software decreased 33.7 percent, real residential fixed investment decreased 38.8 percent. Interestingly, corporate profit before tax increased $157.2 billion in the first quarter, in contrast to a decrease of $499.2 billion in the fourth.

All this suggested that business sentiments were overly pessimistic.

Many observers were worried by the much bigger job losses reported for June. 467,000 jobs were lost in June compared to an expectation of only 350,000 job losses. The market took a plunge. But this is no cause for alarm. It should be remembered that prior to May, 600,000 job losses were routine.

A big relief is that the housing market is stabilizing faster than most observers think. Even the Case-Shiller Index for 20 cities in April was almost identical to that in March, at 139.18, as compared with 139.97 in March. The National Association of Realtors existing home price indices showed increases every month this year except April. The jump in May is quite big too, with the median price rising from $166,600 to $173,000 and the average price rising from $208,800 to $215,600. Transactions are also rising.

I have been most worried about further declines in the housing market, because it could trigger problems in our banks and potentially could stifle credit expansion that is so crucial to the recovery.

Another piece of positive news is the strong showing in May factory orders. The jump of 1.2% was the largest in nearly a year. The back-to-back increases in April and May were the first consecutive gains in nearly a year.

I do not worry about US consumers closing their purses indefinitely. The chances are high that the “echo” of the postwar baby boom will lend support to the housing market and that stronger housing prices will boost consumption spending—although I do not expect and do not wish to see US savings rates to decline to their earlier unhealthy levels.

Comments

[nobby73:]

No it isn't.

Jul 06 04:38 AM

[Steven Hansen:]

very few think the economy will keep sinking forever, and most like myself see a true bottom before the end of the year. the exact timing is getting harder to estimate because the economy has been weakened considerably. upward pressure is weak even though our decline was rapid (we normally have strong drivers for rebound in this event).

you cannot claim the housing market is coming back quicker than expected based on case-shiller when the volumes are so low. there is no indication yet that housing volumes are rising. also, the mix of home sales has changed enough that higher value homes were selling in higher proportion.

i wish you would hyperlink where you take your data from as may 2009 usa industrial production is down 1% according to the chicago fed. i suspect you are using the change in some survey's values.

Jul 06 05:12 AM

[LilBob:]

I think the real issue with housing hinges around that average price. From my own observations, it appears that sales of homes priced below that 215k threshhold-many of those homes were priced at over 300 to 400 thousand at the height of the boom-are seeing significant market activity. An oversupply of McMansions are the major problem right now. For homes over $450,000, aside from historic properties in prime locations sales seem to be pretty much dead. If you've got an historic home in the Thousand Islands for half a million, chances are you'll be able to sell it. If you're trying to sell a 500,000 McMansion in a development, you might as well forget it.

Jul 06 07:06 AM

[CautiousInv...:]

I am not quite as optimistic as the author that the economy is about to bottom.

There have been improvements in the housing market but these may prove ephemeral as lending standards tighten, interest edge upwards, mortgage foreclosures continue, unemployment continues to deteriorate and imminent mortgage resets take effect. And if you use SAAR, homes prices in April fell at an annual rate of close to 19%......hardly anything to celebrate.

Contrary to media reports, banks remain fragile and will remain so until the core issue of toxic assets is addressed; PPIP was to address this highly critical issue but it arrived dead at birth. Other challenges include unemployment which is likely to creep up to the 10% to 11% range, linger and then recede. And with the consumer delevering, there is no reason to believe there will be a jump in consumer spending.

After we hit bottom, we will then learn the nature of the recovery and the course it will take. Because of structural issues, including persistent budget deficits, slow employment growth, higher savings and reduced trade, some believe there will be a new normal in which economic growth is contained with growth rates in the 2% range.

Jul 06 08:28 AM

[CautiousInv...:]

I am not quite as optimistic as the author that the economy is about to bottom.

There have been improvements in the housing market but these may prove ephemeral as lending standards tighten, interest edge upwards, mortgage foreclosures continue, unemployment continues to deteriorate and imminent mortgage resets take effect. And if you use SAAR, homes prices in April fell at an annual rate of close to 19%......hardly anything to celebrate.

Contrary to media reports, banks remain fragile and will remain so until the core issue of toxic assets is addressed; PPIP was to address this highly critical issue but it arrived dead at birth. Other challenges include unemployment which is likely to creep up to the 10% to 11% range, linger and then recede. And with the consumer delevering, there is no reason to believe there will be a jump in consumer spending.

After we hit bottom, we will then learn the nature of the recovery and the course it will take. Because of structural issues, including persistent budget deficits, slow employment growth, higher savings and reduced trade, some believe there will be a new normal in which economic growth is contained with growth rates in the 2% range.

Jul 06 08:29 AM

[Lok Sang Ho:]

I am talking about factory orders, not industrial production.


On Jul 06 05:12 AM Steven Hansen wrote:

> very few think the economy will keep sinking forever, and most like
> myself see a true bottom before the end of the year. the exact timing
> is getting harder to estimate because the economy has been weakened
> considerably. upward pressure is weak even though our decline was
> rapid (we normally have strong drivers for rebound in this event).
>
>
> you cannot claim the housing market is coming back quicker than expected
> based on case-shiller when the volumes are so low. there is no indication
> yet that housing volumes are rising. also, the mix of home sales
> has changed enough that higher value homes were selling in higher
> proportion.
>
> i wish you would hyperlink where you take your data from as may 2009
> usa industrial production is down 1% according to the chicago fed.
> i suspect you are using the change in some survey's values.

Jul 06 08:34 AM

[Ted Hurlbut:]

Even though housing led us into this recession, housing will not lead us out. Continued weakness in the housing markets will be a drag on recovery and resumed growth, and the imbalances will take a while to work out. When the economy does bottom, likely sometime this quarter, we'll then have a pretty good idea of the level where housing prices are likely to bottom, and that will lend some stability to that market.

Jul 06 10:36 AM

[Moon Kil Woong:]

Wow, first the weak upsurge in housing is 100% seasonal and even then weak. As for factory orders, I guess there can be a needle in a haystack after all. Most all other data is quite negative. I suppose this swing up can be moistly attributed to an upsurge in commodities prices. I seriously doubt the trend will be a long lasting one or a lot more factories will be declaring bankruptcy this year.

Last note is, electronics and consumer orders for semiconductors especially rose during that time period which is positive and pertinent. However, it is very hard for electronics to lead the way out of a continued collapse in the employment picture. I would suggest people keep track of fundamentals. Loss of wages (deflationary) and government moetization and profligate spending (inflationary) are the critical factors. Sadly neither of them translate into sustainable growth or recovery. Rather they often lead to more problems down the line.

Jul 06 10:47 AM

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Jul 06 12:28 PM

[Ferdinand E...:]

You could be right, author. After all, some of the smartest men in the US are trying to discover a cure for this mess. And who knows, they might find it.

Jul 06 02:29 PM

[Gregman2:]

While it is true that many homes are being snapped up very soon after they hit the market, there are more indicators to consider that may have more relevance to any recovery, namely personal levels of debt relative to real earnings. The unemployment number itself is misleading (even U6) because it doesn't indicate the broader impact on the real wages of those still employed. The key is what's actually happening to buying power. Maybe this would be a good research topic for your next post.

Jul 06 03:33 PM

[Brian Bober:]

Thanks for cherry picking the good data; I feel better.

Jul 06 06:52 PM

[User 441870:]

Thanks for article. As you point out there are definitly positive signs showing up. And there are some that still are stubornly negative such as total hrs worked. Is it better than expected? That depends on what was expected. It is clearly better than it could have been and better that many feared. There is a long way to go but it is great to see some positive second derivatives of trends such as todays' ISM non-manufacturing numbers.

Jul 06 08:02 PM

[Lok Sang Ho:]

Case Shiller is based on repeated sales. This means there is no bias due to more expensive homes being traded.


On Jul 06 05:12 AM Steven Hansen wrote:

> very few think the economy will keep sinking forever, and most like
> myself see a true bottom before the end of the year. the exact timing
> is getting harder to estimate because the economy has been weakened
> considerably. upward pressure is weak even though our decline was
> rapid (we normally have strong drivers for rebound in this event).
>
>
> you cannot claim the housing market is coming back quicker than expected
> based on case-shiller when the volumes are so low. there is no indication
> yet that housing volumes are rising. also, the mix of home sales
> has changed enough that higher value homes were selling in higher
> proportion.
>
> i wish you would hyperlink where you take your data from as may 2009
> usa industrial production is down 1% according to the chicago fed.
> i suspect you are using the change in some survey's values.

Jul 10 09:09 PM

[Caveat M. Tor:]

As you note, Case Shiller, being based on repeated sales, wouldn't be biased by a change in the mix of homes being sold. However, it doesn't account for upgrades and additions to existing homes before resale. In recent years, such upgrades (hot tubs, granite kitchen counters, sunroom additions, lavish landscaping, etc.) have become increasingly common.

Jul 11 12:54 AM