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Economic Data Are Beginning to Rebound from the Spring Slump

Thursday, 23 Aug 2012 12:08 PM

INDICATOR: July New Home Sales/Weekly Unemployment Claims

KEY DATA: Sales: 372,000 annualized (Up 3.6 percent); Prices (Year-over-Year): Down 2.5 percent; /Unemployment Claims: 372,000 (Up 4,000)

IN A NUTSHELL: “Rising sales and improving builders’ confidence indicate the steady recovery in residential construction should continue to add to growth going forward.”

WHAT IT MEANS: Yesterday we saw that existing home sales rose, and now the Census Bureau has backed that up with a positive report on new home demand.

After easing back in June, new home sales in July rose to the May level, which was the highest level in over two years.

A sharp rebound in the Northeast, from a strangely depressed June level, led the way. There was also a solid rise in the Midwest. However, sales levels eased back in the South and West, though the declines were minimal.

Builders remain extraordinarily cautious, as the number of homes on the market continues to make new historic lows. The lack of inventory might be depressing sales, as buyers don’t have choices and have to wait out the building process.

Prices softened, but I suspect the decline was largely due to the scaling down of the size of the units.

In a separate report, weekly unemployment claims ticked up. That may sound bad, but it is not. The four-week moving average is at a level that points to job gains matching, if not exceeding, the 163,000 increase posted in July.

MARKETS AND FED POLICY IMPLICATIONS: Almost across the board, the economic data are beginning to rebound from the spring slump.

Housing is getting better; however, even though sales are improving, they are hardly where they should be. The rate needs to be more than double before builders will be seeing decent sales and nearly triple before demand would be considered robust. So there is a lot of improvement to be made.

This year, we are on track for a 20 percent or more rise in new home sales, and that is why I continue to believe that growth over the remainder of the year will be better than most other economists forecast.

Indeed, over the next two weeks we get the first revision to second-quarter gross domestic product and that could show that the rise was closer to 2 percent, not the 1.5 percent originally reported. Also, the claims data imply that the payroll gain in August should be in the 175,000 range.

If those two estimates turn out to be accurate, the picture of the economy will change. An improving economic outlook would likely forestall any quantitative easing from the Federal Reserve, which the minutes of the July 31-Aug. 1 meeting seemed to imply was possible.

I don’t believe the Fed wants to ease and will use any excuse to put it off. The recent better numbers provide that cover. Unfortunately for the markets, the Fed’s quantitative easing drug might not be administered and that could affect the outlook for both equities and bonds.

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2012-08-23
Thursday, 23 Aug 2012 12:08 PM
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