Economic Report Summary: Plunging Home Prices and Consumer Confidence

Falling home prices and plunging consumer confidence, now at multi-decade lows, highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index down 3.0 percent to 1,279 (for a year-to-date total return of –12.3 percent) and the yield of the 10-year U.S. Treasury note declined 17 basis points to 3.99 percent.

New Home Sales: Sales of newly constructed homes declined 2.5 percent last month, from a downwardly revised, seasonally adjusted annual rate of 525,000 units in April to just 512,000 in May.

On a year-over-year basis, sales are currently down a whopping 40.3 percent and, from the peak in July of 2005, sales volume has declined 64 percent.

Aside from the March total of 501,000 two months before, sales levels have not been this low since 1991 when the population of the U.S. was about 50 million less than it is today.

Prices for new homes fell to $231,000, a decline of 5.1 percent from last month and 5.7 percent below last year at this time. Note that the median sales price data for new homes has become increasingly erratic in recent months and, due to continuing cancellations and ever larger builder incentives, this data point contains little or no value for analytical purposes.

The most important piece of information in this report is that sales continue to decline faster than inventory, resulting in an uptick in the "months of supply" statistic, from 10.7 in April to 10.9 months in May. Until there is a significant reduction in inventory relative to sales volume, look for prices to continue to fall.

Durable Goods Orders: As expected, new orders for durable goods were unchanged in May after a downwardly revised decline of 1.0 percent in April. Excluding the always-volatile transportation sector, new orders dropped 0.9 percent following a surge of 1.9 percent the month before. On a year-over-year basis, durable goods orders have declined 1.5 percent, a figure that is not adjusted for inflation. Manufacturing remains in a funk, as corroborated by the many other reports on declining activity and falling employment, and would be even worse if not for the increased demand for exported goods.

Real Gross Domestic Product: The more you look at economic growth as measured by the quarterly change to gross domestic product, the more you realize how much value this data series has lost as an indicator of the health of the economy due to the many and varied contortions that the inflation calculations have undergone through the years.

In the final estimate for the first quarter prior to the annual revision later this year, real economic growth was revised upward from an annualized rate of 0.9 percent to 1.0 percent making Q1 the third quarter in the last five with real GDP of one percent or less.

The price deflator or "chain price index," used to convert "nominal" GDP to "real" GDP, also rose slightly from 2.6 percent to 2.7 percent. Note that if one were to plug a more realistic measure for rising prices into the "real economic growth" calculation, it's easy to see how we could be "mired in a recession" as the term is commonly (but incorrectly) defined - two consecutive quarters of negative economic growth.

Attention will now shift to next month's "advance" estimate for economic growth during the second quarter, to be followed by the "preliminary" estimate and the "final" estimate in subsequent months. Current estimates for the second quarter are for real growth of between one and two percent.

Existing Home Sales: Sales of existing homes rose 2.0 percent in May to a seasonally adjusted, annualized rate of 4.99 million units, 15.9 percent lower than last year at this time. The inventory of unsold homes remains historically high, down slightly from 11.2 months in April to 10.8 months in May.

The national median existing-home price fell to $208,600 in May, down 6.3 percent from a year ago when the median was $222,700. Home prices have fallen most in the West, down 16.0 percent over the last year, followed by a 4.3 percent decline in the Northeast.

Naturally, a few more ill-advised calls were heard last week that the recent data marks a "bottom" in housing. As shown in the chart, it may well be that a bottom in sales is nine months in the making, but prices will continue to decline for some time to come as an increasing number of monthly sales are now foreclosures or short sales.

An astonishing one-third of all existing homes sold last month were reportedly either foreclosure sales or short-sales and this figure likely understates the actual percentage of distressed home sales as some of these properties do not involve realtors and hence, are not included in the monthly data from the realtors' trade group.

The S&P Case-Shiller Home Price Index was also updated last week and year-over-year price declines were reported for all twenty cities in the index, led by 27 percent year-over-year price drops for both Las Vegas and Miami. For the usual colorful chart see this item from last Tuesday.

Consumer Confidence/Sentiment: It just keeps getting worse and worse for consumers as both well-known measures of their mood - the Conference Board's Consumer Confidence Index and the Reuters/University of Michigan Consumer Sentiment Index - plumbed new lows.

Consumer Confidence fell to its fifth worst monthly reading in its 40 year history, down almost 15 percent from 58.2 in May to 50.4 in June with the expectations component at a record low of 41.0.
One year inflation expectations remained at 7.7 percent and, in a bad omen for next week's labor report, the number of respondents saying jobs are hard to get was double those saying they are plentiful - an extremely wide gap of 30.5 percent to 14.1 percent.

The final June reading on consumer sentiment fell to its third lowest reading of all time, this series going all the way back to 1952. The index fell three tenths of a percentage point from 56.7 at mid-month to 56.4, down from May's final reading of 59.8.

Inflation expectations over the next year were unchanged at 3.4 percent and, over five years, the outlook was for 5.1 percent annual inflation. These "inflation expectations" remain at very elevated levels due to soaring food and energy prices that are hitting consumers hard. There have been only a few other times when the mood of the consumer has been this foul.

Personal Income/Spending: Personal income and spending got a big boost from the tax rebate checks that were sent out in May with more to follow in June. Income rose 1.9 percent in May after a 0.3 percent increase in April and spending jumped 0.8 percent after a 0.4 percent increase the month prior. It's hard to get too excited about these increases as this is simply money borrowed by the government going out to consumers, much of which is spent on costlier food and energy.

Summary: While there may be a bottom forming in housing sales, housing prices remain in a virtual free-fall in many parts of the country as huge numbers of distressed properties continue to come onto the market. The housing market is still very, very troubled though you wouldn't know it by looking at the government's measure of economic well-being as understated inflation allowed first quarter GDP to remain positive, coming in at an even one percent.

Meanwhile, both income and spending rose last month but, more than anything else, this was a result of the delivery of half of the government's $100 billion in stimulus money. Look for more "stimulus" later this year.

As seen in the recent data on the mood of the consumer, now at multi-decade lows, Americans are well aware that there is something very seriously wrong with the economy and they don't see things improving anytime soon unless food and energy prices start going down and housing and stock prices go back up.

The Week Ahead: The coming week will be highlighted by reports on ISM Manufacturing on Tuesday and the labor report on Thursday. Also scheduled for release are reports on Chicago area manufacturing on Monday, construction spending on Tuesday, ADP employment on Wednesday, and the ISM nonmanufacturing report on Thursday.

Comments

[ajhough]

I have read the above and found myself thinking, "depression,"... although noone has started using that word, but I just find a reflection of the late 20's and early 30's. Unrestrained markets will bubble and then burst...

[Orforded]

The worst part about all this is that there is no where to look for relief. Where does economic improvement come from in our present situation. The fed is hamstrung between inflation and liquidity issues. If it raises rates liquidity slows and consequently the economy slows even more than it already has. If it lowers or keeps rates the same then inflation is unabated.

With continuing exodus of jobs and capital overseas I am afraid the USA will drift toward becoming a second tier economic power. It may take a few years but if current economic policy doesn't change I don't see how it can be prevented.

Our country has worshipped at the alter of "free market capitalism" since Regan was elected and now the chickens come home to roost.

For the wealthy, no problem they move their capital and eventually their households to economically successful countries but for the rest of us who are actually committed to the USA by choice or constraint things don't look so good.

[ccerenz2]

Orforded I agree with you completely on your first two paragraphs...but then we part ways. The reason we are in this situation is that many issues have been swept under the carpet for decades. For instance...Labor unions. While there were good reasons for their formation decades ago, they have now become their own entity, with their own objectives, acting as a wall between corporation and employee. And yet they are legislated into our country with little chance of removal. Just more failure for our businesses and relocation of wealth to our competitiors. They have helped destroy many of our industries...as a matter of point, name an industry that is thriving right now that is unionized. Autos, airlines, aerospace, healthcare, education, government, general manufacturing, textiles, etc., etc. All are going through a systematic decay as the entities running them have no choice but to follow the law and try to eke out a path to overcome them. The union concept no longer adds value. The corporation loses due to union resistance within the factory and the employee loses as they are held down in a socialistic employement atmosphere. The system is slowly destroying our economy and allowing our competition to obtain a stranglehold in manufacturing.
The next problem, is that we have not insisted that our free trade partners actually conduct free trade with us...and MFN status with China needed more attention to ensure that the table wasn't slanted so far in China's favor. And of course, let's blame ourselves for insisting that Walmart and Costco bring us the cheapest stuff they can get for us. We've encouraged the growth of our competitors through our buying binges. Are we willing to start telling our retail outlets we want to buy our own products even if it costs more?
Next problem, the people of America seem to want to blame someone else for their problems. The real estate debacle is a great example. We sign mortgages that we can't afford, but we blame the mortgage companies. We lie on the applications, but blame the mortgage companies. Our government legislates that the mortgage companies must lend to lower income folks and then blame the mortage companies when those people can't afford to pay the bill. And today, that bill is still a law! Yes, there were some bad apples in the mortgage industry, but when you look at it as a whole, the problem wasn't with the mortgage companies themselves. It was the American people who signed all those documents saying their mortgage was going to adjust to amounts they couldn't pay. Where is the personal responsibility? What happened to admitting we may have made a mistake?
We blame the Federal Reserve and Bush for our falling dollar, but everyone continued to buy gas guzzling vehicles sending $2billion dollars a day to the Middle East. We then say the falling dollar has caused the oil prices to skyrocket. No, it was the billions a day for oil and Chinese goods over the past few decades that have finally built up against the dollar and swamped it. We continue to encourage the Walmarts and Costcos to buy from Asia as we demand cheaper and cheaper items. When do we start to say, it is no longer worth it to buy the cheapest? When do we say it is not right that we are financing Dubai so some left wing enviro types can make themselves feel important?
We the people are willing to sit and listen to politicos on television tell us how we need to go socialist, and pay higher taxes, and take from the rich, and dump all over our oil companies, while they are preventing us from acheiving energy independence, while the unions prevent our workers from being able to achieve and create on the factory floor, while people think that raising taxes will actually help our economy. And so it goes. But hey, let's blame Reagan.
Since 1980, there have been 3 periods of nice GDP growth. Beginning in 1983, 1997, and 2003. The tax cuts occurred in 1982, 1987, and 2003. There has been one period of prolonged slow growth beginning in 1992. The only significant tax increases of this period were passed in 1990 and 1992. It speaks for itself. Tax increases are going to put another nail in our coffin, and the markets know this. For the record, we only enjoyed three years of good economic growth under Clinton. And they were after his cap gains/dividend tax cuts in 1997.
We have the second highest corporate tax rate of any developed country and yet we complain that the big fat cat corporations must pay more taxes.
No "Orforded" you have it wrong. What is up should be down and what is down should be up. Unfortunately too many of us now think as you do and aren't willing to really analyzed what is going on around us.
We need to get back to the basics of finances and hard work. Perhaps we should ask people to come to our country to contribute instead of with a hand out.
Let's finish up with the excessive spending that Congress has continued to conduct while complaining about the deficit. It's a sad period in our country, because so many people think they have the answer as you, and yet the reality is that it is precisely this thinking that has led to our decline and will continue to do so in the future.
Unfortunately, there is no reset button on our country but we need one.

[Griz]

ajhough I think you are correct. It appears as if we are just about due for our next US Depression of which this would actually make #4. Please see this great article:

www.kwaves.com/kond_ov...

Click on the 1st graph to get a lot of detail of pricing, inflation, asset prices, etc. over the past 230 years here in the US...

[LondonCalling]

ccerenz2 - Well said! Increasing taxes, simply increases the overall costs, reduces the money made. The more money companies and consumers have the more money that they spend and invest into the system. The back stop needs to be where they spend it. That money needs to be spent in the USA and into North America with our biggest trade partners. Perhaps its time to bring back a massive "Buy USA" or "Proudly Made in the USA" campaign.

The single greatest power out their is consumer spending. If consumers are unhappy with the economy they need to make better buying decisions. If they can start paying a little more to buy organic, surely they they can squeeze a little more to buy USA.

But the problem I have with my own statements is... what is made in the USA? Other then food, when was the last time you saw a product that did not say "Made in China".

JR

[carey_jim]

ccerenz2, you need to read a good book on the history of unions in the United States. Look into this one when you have time, if only to "know your enemy": The War at Home by Jack Rasmus.

Unions have been decimated during the last 30 years along with the American working middle class. You are probably very young and don't know that from personal experience but at least you can read about it.

Also, the history of free trade in America is not a good one. We have been and continue to be a very protectionist country. Read Ha-Joon Chang's book, Bad Samaritans, if you don't believe me. China is doing, today, what America did in the 19th century. They learned it, in fact, from us. They may be stupid but they aren't dumb.

[Kunst]

ArtfulDodger, the one-trick pony. Going to post the same vacuous comment on every article on this board? Get lost!

[ArnoldCountry]

Tim... your articles are always excellent and this is a perfect example. You hit this one right on the nail head. Housing sales have stabilized, real estate agents can now see the bottom but that is only one least important aspect of the market. Good for agents as most of their competition is off doing something else but absolutely terrible still for buyers/sellers. With the number of resetting option arms increasing to almost 4 times what they are today, the problems of increasing inventory of distressed properties competing against new home sales and the resell market, this market is still on a downward trend in values and increase trend in inventory. Well done!

[ccerenz2]

Jim Carey,
I'm not very young. I'm a careful, patient observer of what is happening around us. Like everyone, I'm a product of my life experiences. During my career, I spent 15 years working for a manufacturing company in the aerospace industry. On my first day of being promoted to Manager, I was paid a visit by the Machinist Union representative. He shook my hand and then proceeded to threaten me on how the union would ruin me if I tried to implement change into the distribution system of this Fortune 500 company. I then went back to my bosses and asked how I could keep going with changes to streamline a very antiquated system...and they told me not to make a move that would upset the union because they were trying to negotiate a couple cent reduction in the labor contract.
I don't need to read your theoretical and idealistic books. It's real life and what I describe is happening right now all over America. Most corporate decision makers have simply given up and moved operations overseas. Until the union system changes, our middle class and working class will continue to decline as everyone clings to a dinosaur that adds zero value to either the corporation or the employee.

[User 151885]

There are bad apples everywhere but corporate america has done an extremely good job of bashing unions. Let's take a look at some basics.
anyone today can lose a million dollars. but to lose billions...nay ...trillions... takes a harvard, wharton or yale education.
And as a bonus you get to destroy the lives of millions of hard working dedicated people who want more in life than to agrandize their own selfish egos!
Unions... absolutely! Let's see how much will be produced by the Chinese worker if they didn't have a gun to the back of their heads.

[ccerenz2]

user 151885,
What we are currently watching is the slow motion decay of our corporations and economy through the legislated insistence of our government to maintain the labor union system. Your loosely worded nonsense about ivy league education provides nothing salient for a person to comprehend your position. But then, there isn't a salient position to advocate unions. Destruction of millions of lives occurs when they are falsely promised things like lifetime pensions when it is impossible for any entitiy to make that promise. At some point, the American worker will realize that their security can only be provided for by themselves. When that happens, this country will return to it's best days of competition and wealth creation. Until then, all the union creates is union dues, and one industry after another that dies on it's own sword. And let's not forget the broken promise left for the union worker. Today, we witness the continued failure of autos. Tomorrow, another wave of airlines. After that, who knows. What's left?
Oh yeah, the government and education.