Economic Week in Review

ECRI Weekly Leading Index 131.40 -.23%

Existing Home Sales for July were 6.72 million versus estimates of 6.81 million and 6.92 million in June. The 2.9% decline from June's record-high was the first drop in seven months, Bloomberg reported. The median sales price was $191,300, up 8.7% from July of last year. Economists attributed the higher prices to tight supply. Ted Wieseman, an economist at Morgan Stanley, said that a six month supply of houses is required for a balanced market, compared with the 4.3 months of supply NAR reported for July. "I've been looking for these numbers to fade for several months now, because they've been so incredibly high," said Joel Naroff, chief economist at Naroff Economic Advisors. Re-sales account for 85% of the residential real estate market. New home sales, which had their best months ever in May and June, account for the rest, Bloomberg reported.

Durable Goods Orders for July rose 1.7% versus estimates of a 1.0% rise and an increase of 1.1% in June. Durable Goods Less Transportation rose .1% in July versus estimates of a 1.3% increase and a .3% decline in June. The report showed bookings surged for commercial aircraft and demand increased for business equipment. Businesses, flush with profits amid rising sales, are using the cash to replace aging equipment and replenish inventories, Bloomberg reported. Orders waiting to be filled rose the most since March. Excluding defense hardware, which fell 16.2% last month, orders increased 2.7%, the biggest rise since March, as well. "We are very confident going forward," said Michael Splinter, CEO of Applied Materials.

New Home Sales for July were 1.13 million versus estimates of 1.3 million and 1.21 million in June. "Mortgage rates have been much lower recently, and I wouldn't write off the housing market until we see a clear turn," said Michael Englund, chief economist at Action Economics. The median selling price of new homes increased 9% from July of last year. The inventory of new homes for sale rose to a 4.2 month supply, Bloomberg reported.

Initial Jobless Claims for last week rose to 343K versus estimates of 335K and 333K the prior week. Continuing Claims rose to 2897K versus estimates of 2885K and 2892K prior. This was the first time claims rose in four weeks, boosted by more filings related to Hurricane Charley, Bloomberg said. "We may see some additional upward pressure for another two weeks," from job losses related to the hurricane, said Henry Willmore, chief U.S. economist at Barclays Capital. Hurricane recovery efforts are expected to create more jobs in Southwest Florida than are lost over the longer-run, Bloomberg reported.

Preliminary 2Q GDP rose 2.8% versus expectations of a 2.7% increase and a prior estimate of 3.0%. Preliminary 2Q Personal Consumption rose 1.6% versus estimates of a 1.3% rise and a prior estimate of 1.3%. Preliminary GDP Price Deflator rose 3.2% versus estimates of a 3.2% increase and a prior estimate of 3.2%. Corporate profits after taxes for the quarter rose 17.9% in the 12 months ended in June, Bloomberg said. Business investment in equipment and software was revised up in the quarter to the strongest pace since the third quarter of last year. The core personal consumption expenditures index, the Fed's favorite measure of inflation, rose 1.7% at an annual rate in the second quarter after a 1.8% rise initially reported and a 2.1% pace in the first three months of the year. Nominal GDP rose at a 6.1% annual rate for the second quarter after rising at a 7.4% pace in the first quarter, Bloomberg reported.

The final reading from the University of Michigan's Consumer Confidence Index came in at 95.9 versus estimates of 94.0 and a prior estimate of 94.0. "Confidence is relatively high because we're in the middle of an expansion with fairly rapid growth in the economy and low interest rates," Mike Englund, chief economist at Action Economics. Job gains typically contribute to optimism, and the median forecast of economists suggests that payrolls expanded at a faster pace this month after slowing in July, Bloomberg reported.

Bottom Line: Overall, last week's economic data was mildly negative. While home sales have slowed from their blistering pace earlier in the year, the market remains very healthy. Supply is still low relative to demand. Mortgage rates averaged 6.29% in June when properties closed for the July readings. Since then, rates have fallen 47 basis points to an average mortgage rate of 5.82%. Durable Goods Orders should continue to remain robust through year-end as companies take advantage of tax incentives that are set to expire at the end of the year. Hurricane Charley is currently disrupting readings on jobless claims in a negative way. The hurricane is likely affecting other economic readings, as well. As rebuilding takes hold, the economy should benefit. U.S. GDP has recently slowed as a result of anti-business political rhetoric, less tax-cut stimulus, terrorism fears, higher commodities prices, the slowing Chinese economy, unseasonably wet weather and higher interest rates. Most of these problems are currently diminishing or reversing themselves which should lead to a substantial acceleration in GDP growth during the fourth quarter. Moreover, most of the trouble with the current slowdown is due to inflation, as nominal GDP grew 6.1% in the second quarter. Commodities prices have been the main source of inflation. Most commodities have now entered intermediate-term downtrends, which bodes well for future inflation readings and thus future GDP reports. Consumer confidence remains relatively strong and should rise with improvements in Iraq, subsiding terrorism fears, falling interest rates, declining energy prices and a pick-up in hiring.