Saturday, November 27, 2004

Economic Week in Review

ECRI Weekly Leading Index 132.70 +.08%

Existing Home Sales for October were 6.75M versus estimates of 6.72M and 6.76M in September. "With low interest rates and an improving job market we're seeing some extraordinary numbers in housing," said the CEO of Foxtons North America, a real estate brokerage firm. October's sales were the fourth-highest ever, Bloomberg said. The median selling price of an existing home was $187,000 last month, up 8.8% from the same month last year. "As long as mortgage rates stay at about the 6-6.5% level, I think the housing market should be strong," said Bruce Harting, a senior analyst who covers mortgage companies at Lehman Brothers. Re-sales were the strongest in the South and West, rising 3.7% and 3.6% for the month respectively. While prices have increased, America's homeowners are not over-leveraged, according to the Homeownership Alliance. The latest Federal Reserve data show that mortgage payments accounted for 9.87% of disposable incomes in the second quarter of this year, down from over 10% in 1990-1992, Bloomberg said.

Durable Goods Orders for October fell .4% versus estimates of a .5% rise and an upwardly revised .9% gain in September. Durable Goods Orders Less Transportation for October fell .7% versus estimates of a .2% fall and an upwardly revised 2.8% increase in September. After the September revisions, the October dollar volume was close to estimates, Bloomberg reported. Shipments, which the government uses to calculate quarterly GDP, rose 3.1%, the biggest rise since March, Bloomberg said.

Initial Jobless Claims for last week were 323K versus estimates of 335K and 335K the prior week. Continuing Claims were 2755K versus estimates of 2795K and 2784K prior. The four-week moving average of claims dropped to a four-year low of 332,000. "Labor markets are improving, and we expect to see that reflected in payroll gains for November," said Gary Bigg, an economist at Banc of America Securities. A survey by the National Assoc. of Business Economists released on Nov. 22 showed economists expect the labor market to give a boost to the economy next year, with the unemployment rate falling to 5.2%, from its current 5.5%, Bloomberg reported. Moreover, economists project 2.2 million jobs will be created in 2005.

The Final Univ. of Mich. Consumer Confidence reading for November was 92.8 versus estimates of 96.0 and a prior forecast of 95.5. "With the election over, energy prices declining, and the labor market improving, we would have expected a more significant boost to attitudes," said Stephen Stanley, chief economist at RBS Greenwich Capital. However, the University's current conditions index, which reflects Americans' perception of their financial situation and whether it's a good time to buy big-ticket items, rose to 104.7 from 104 in October, Bloomberg said. As well, the expectations index, based on optimism about the next one to five years, rose to 85.2 from 83.8 last month. "Based on the positive momentum over the past three weeks, Visa maintains an optimistic outlook for the holiday shopping season," said Wayne Best, senior vice president of strategic and economic analysis at Visa USA. Finally, the National Retail Federation is now projecting a fairly strong 4.5% gain in retail sales during the holiday season.

New Home Sales for October rose to 1226K versus estimates of 1200K and 1224K in September. This was the third fastest rate on record, Bloomberg said. The median price jumped to $221,800, up 14% from a year ago. The U.S. gained the most jobs in seven months during October and mortgage rates remain within a percentage point of an all-time low, helping boost sales, Bloomberg reported. "We are still seeing extremely strong traffic and demand," said Alan Levan, CEO of Levitt, a homebuilder based in Fort Lauderdale, Florida. Sales of new and existing homes will reach an all-time record this year, according to a forecast from the National Assoc. of Realtors. Sales were the strongest in the Northeast and West, rising 20% and 13% respectively.

Bottom Line: Overall, last week's economic data were mildly positive. The Weekly Leading Index has now risen 4 consecutive weeks since the election. Housing remains a pillar of strength for the U.S. economy and will remain so, barring an unexpected substantial rise in interest rates. The decline is Durable Goods Orders was a result of the significant upward revision to the prior month and is not of concern. The better jobless claims readings over the past few weeks suggest another good month for employment is in the offing. This should definitely result in better consumer confidence in the very near future, notwithstanding high energy prices. As well, stock market gains, less negativity by politicians and a strong housing market should also boost sentiment going forward. I continue to expect U.S. economic growth to surprise on the upside over the next few months. Data in December should confirm this view.

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