December 5, 2011
Mixed-to-slightly-positive messages on the U.S. economy
Chief Economist, CanaData
The latest figures on U.S. existing home sales have added to the recent string of better news on the overall economy.
According to the National Association of Realtors (NAR), completed sales transactions for single-family, townhome, condo and co-op housing rose 1.4% in October versus September.
While the month-to-month change was noteworthy, it was the 13.5% climb year over year that was most impressive. The level of existing home sales in the latest month was slightly shy of five million units, seasonally adjusted and annualized.
The number-of-months of unsold inventory declined to 8.0 in October. In September, the stockpile divided by the coinciding monthly sales rate was 8.3. The market is gradually tightening.
The NAR press release spotlights job creation, rising rent and exceptional affordability as reasons for the improvement in the market.
At the same time, it emphasizes sales would be much better were it not for several roadblocks and speed bumps that have made it harder to finalize sales.
For prospective home purchasers, these have included: (1) mortgage application denials; (2) rejection on the basis of appraised values coming in lower than negotiated prices; (3) home inspection problems; and (4) last-minute loss of employment.
As a result of the more difficult approvals process, “contract failures” shot up to 33% of attempted deals in October versus 18% in September and only 8% in October of last year.
With respect to affordability, Freddie Mac has calculated the 30-year conventional fixed-rate mortgage to be at a record low of only 4.07% in the month.
In truth, mortgage rates on offer have been low for years. The figure last October wasn’t much higher at 4.23%.
The Federal Reserve dropped its key policy-setting federal funds rate to a range of 0.00% to 0.25% in late 2008. Furthermore, the ten-year bond yield of the Treasury Department remains firmly under wraps.
That’s despite the abject failure of the supposed super-committee to reach an agreement on $1.2 trillion in deficit cuts.
The escalating problems in Europe have continued to take the pressure off the U.S. debt market.
The interest charges on the bonds of nearly every nation on the continent have risen. Germany has been the chief exception, even though the outlook for that nation’s economy has been scaled back to a flirting-with-recession possibility in the short term at least.
The interest charge isn’t the only problem. The costs to insure lenders against the chance of borrowers failing to repay their notes upon maturity — so-called credit default swaps — have risen to a record high.
While noting that some of the more recent numbers on the U.S. economy have been looking up, it should also be reported that second quarter “real” (i.e., after inflation) gross domestic product (GDP) growth has been revised back from +2.5% to +2.0%.
It’s been known for some time that the July-to-September period was weak not just for the U.S., but for much of the rest of the world as well. Encompassed in that time frame were a worsening of the European debt crisis and S&P’s downgrade of U.S. public notes.
Reduced business and consumer confidence caused a moderation in spending activity. In the business sector, new orders were often fulfilled out of inventory, as firms waited to see which way the economic “winds” were blowing.
Looking forward, the inventory draw-downs in Q3 mean good news for Q4. With the economy performing better than expected, inventory rebuilding will become an important part of overall business strategy.
Adjusted initial jobless claims in the latest week (ending on Wednesday rather than the usual Thursday due to Thanksgiving) were 393,000. In the 18 weeks since mid-July, the initial jobless claims figure has averaged 407,000.
Such a level lies on the cusp of being very good news. A number consistently below 400,000 will lead to significant progress in lowering the unemployment rate.
At the same time, however, there are noteworthy pockets of ongoing worker pain.
For example, Bloomberg News has recently calculated the global loss of employment in financial services to be 200,000. That’s a higher job-loss figure in the sector than occurred in 2009.
While there has been little in the way of legal action against higher-ups in the banking industry, former Wall Street occupiers may take solace from the fact there certainly has been carnage in the community it finds so abhorrent.
Approximately half of the dismissals have occurred in Europe, with more cuts almost assuredly in the cards.
The extent of the sector’s job trimming in North America has been 50,000 according to Bloomberg. While not stated, it might be presumed most of that has occurred in the U.S.
The North American figure looks better when placed in a historical perspective. It falls well short of the -175,000 devastation that occurred in 2008.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com
