Economic Week in Review

ECRI Weekly Leading Index 131.10 -.08%

Existing Home Sales for June rose to 6.95M versus estimates of 6.65M and an upwardly revised 6.81M in May. The median selling price rose 9.6% year-over-year to a record $191,800. "When you combine the fact that more people are working and we have low mortgage rates, you get a healthy housing market," said Tom Kunz, CEO of Century 21. The U.S. economy so far this year has had the strongest six months of job growth since the stock market bubble burst and the economy began to plunge into recession in 2000, Bloomberg reported. Moreover, the average rate on a 30-year fixed mortgage is still only about a percentage point above an all-time low. The supply of homes available for sale, another gauge of housing demand, dropped to 4.1 months' worth in June, the lowest since December 2001, Bloomberg said. Finally, mortgage purchase applications suggest sales will remain robust. June purchase applications were 12% higher on average than in 2003, the Mortgage Bankers Association said.

The Conference Board's Consumer Confidence for July was 106.1, a two-year high, versus estimates of 102.0 and an upwardly revised reading of 102.8 in June. Confidence was boosted by an improving job market that also helped keep home sales at record levels, Bloomberg said. FactCheck.org, an arm of the Annenberg Public Policy Center of the Univ. of Pennsylvania, recently said employment "has increased by 1.3 million jobs this year in categories that on average paid above the median earnings of $541 a week," Bloomberg reported. "U.S. households are continuing to display tremendous confidence in future economic conditions by their willingness to enter into the housing market," said John Ryding, chief U.S. economist at Bear Stearns. The Conference Board also said the percentage of Americans who consider jobs hard to find is now the lowest since 2000.

New Home Sales for June were 1326K versus estimates of 1272K and a downwardly revised 1337K in May. The median selling price increased 11.7% to $209,900 from June of last year. More jobs and higher wages are giving buyers the wherewithal to purchase as interest rates rise, Bloomberg said. The upward turn in interest rates is also dragging "fence-sitters" into the housing market. A total of 1.17 million new homes will probably be sold this year, besting the all-time record sold last year by 7.4%, according to a forecast from the National Association of Home Builders. "One thing that is very difficult to accomplish is to sell a home to an unemployed individual," said Donald Tomnitz, CEO of D.R. Horton. The economy is doing much better, creating jobs, which is the best thing that can happen to our industry he said.

Durable Goods Orders for June rose .7% versus estimates of a 1.5% rise and an upwardly revised decrease of .9% in May. "We went through somewhat of a rough patch in the second quarter and maybe business investment is starting to pick up again," said Bill Natcher, an economist at National City Corp. "Things are still looking good for the second half." Business spending on new equipment and software is likely to grow at an average 16% annual pace in the second half of the year after expanding at an average 10% rate from January to June, according to a forecast by economists at Barclays Capital. Tax cuts approved last year included a greater allowance for depreciating investments in equipment, giving companies incentive to accelerate spending this year before they expire.

Initial Jobless Claims for last week were 345K versus estimates of 340K and 341K the prior week. Continuing Claims were 2960K versus estimates of 2875K and 2786K prior. Claims tend to fall when hiring increases, and weekly claims of about 340,000 corresponds with the monthly creation of roughly 200,000 jobs, according to many economists. The rise in claims is "all due to the temporary auto plant shutdowns," said Joseph LaVorgna, an economist at Deutsche Bank Securities. "The labor market continues to be robust."

The advance Gross Domestic Product reading for 2Q was 3.0% versus estimates of 3.7% and an upwardly revised 4.5% in 1Q. Personal Consumption rose 1.0% versus estimates of a 2.0% rise and an upwardly revised 4.1% increase in 1Q. The GDP Price Deflator for 2Q rose 3.2% versus estimates of a 3.0% gain and a downwardly revised increase of 2.7% in 1Q. The core personal consumption expenditure index, Greenspan's favorite inflation gauge, rose 1.8% at an annual rate in the second quarter after a 2.1% pace in the prior quarter, Bloomberg reported. Nominal GDP rose 6.3% in the second quarter after rising 7.4% in the first quarter, Bloomberg said. "Nominal demand growth remains very robust and this report should in no way discourage the Fed from raising rates a quarter of a point on Aug. 10," said John Ryding of Bear Stearns. Today's report also contained the government's annual revisions for GDP since 1Q of 2001. The revisions show that the monetary and fiscal stimuli implemented during the recession led to the fastest recovery on record, Bloomberg reported. The recession officially ended in November 2001, Bloomberg said.

The Chicago Purchasing Manager Index for July rose to 64.7 versus estimates of 60.0 and a reading of 56.4 in June. After falling in June, the Index surged back near its 16-year high reached in May. Factories are boosting production to reduce building backlogs. The rebound bolsters expectations growth is reaccelerating after slowing in the second quarter, Bloomberg reported. Moreover, the group's index of prices paid for raw materials fell, suggesting inflation is decelerating, Bloomberg said.

Bottom Line: Overall, last week's data were mixed, with signs of improvement. Home sales continue to defy the bears and pundits. There is not a glut of homes as demand continues to outstrip supply. Furthermore, interest rates remain low by historic standards. Home sales should remain strong as job growth continues. As well, American's net worth continues to reach all-time high levels as their homes appreciate in value. Better job opportunities and increasing wealth are leading most Americans to feel more confident about the economy as some consumer confidence readings reach levels not seen since before the stock market crashed and the economy headed towards recession in 2000. Moreover, the big picture in Iraq continues to improve and the media's obsession with negatively has led it to focus on other subjects. Corporate spending should accelerate in the second-half of the year as companies take advantage of tax relief that was passed to alleviate the massive overcapacity of technology equipment produced during the bubble. This relief is scheduled to expire at the end of the year. 2Q GDP came in .7 percentage points below expectations, however 1Q growth was revised higher by .6 percentage points. Recent data continue to suggest that the slowdown seen in the second quarter was temporary. Third quarter growth should exceed 4.0% once again.