Sunday, August 28, 2005

Economic Week in Review

ECRI Weekly Leading Index 135.40 -.07%

Existing Home Sales for July fell to 7.16M versus estimates of 7.25M and 7.35M in June. US sales of previously owned homes slowed in July, leaving the rate of purchases at the third-highest on record as low interest rates and growing employment supported demand, Bloomberg reported. The median price of an existing home rose .5% to $218,000 in July. The median price is 14% above year-ago levels. Re-sales fell 7.5% in the West, 3.3% in the Northeast and 1.8% in the Midwest. The South was unchanged. The supply of homes for sale increased to 4.6 months’ worth, the highest since November 2003, from 4.4 months’ worth in June. “The economy is good, jobs are being created, interest rates are still at historic lows, demographics are overwhelming, which should drive demand,” said James Gillespie, CEO of Coldwell Banker Real Estate.

Durable Goods Orders for July fell 4.9% versus estimates of a 1.5% decrease and an upwardly revised 1.9% gain in June. Durables Ex Transportation for July fell 3.2% versus estimates of a .8% fall and an upwardly revised 3.6% gain in June. US orders for durable goods declined more than forecast in July after a three-month surge, reflecting less demand for aircraft, computers and communications equipment, Bloomberg reported. Orders for non-defense capital goods excluding aircraft, a proxy for future corporate investment, declined 3.7% last month, the largest amount since October 2004. “New orders have been much stronger than shipments recently, suggesting that capital spending is likely to accelerate during the second half of the year despite this month’s weakness,” said Steven Wood, chief economist at Insight Economics.

New Home Sales for July rose to 1410K versus estimates of 1328K and 1324K in June. US new home sales unexpectedly rose to a another all-time high last month as mortgage rates below 6% and steady employment gains sent American streaming into the housing market, Bloomberg said. The median price of a new home fell to $203,800, the lowest since December 2003. New Home Sales rose 36% in the West and 10.1% in the Northeast. However, they fell 13.5% in the Midwest and 3.5% in the South. Finally, the supply of new homes for sale at the current pace fell to 4 months from 4.1 months in June. “Today’s report is another very robust signal for the housing market,” said Dean Maki, chief US economist at Barclays Capital.

Initial Jobless Claims for last week fell to 315K versus estimates of 315K and 319K the prior week. Continuing Claims fell to 2578K versus estimates of 2575K and 2587K prior. The number of Americans filing first-time claims for jobless benefits fell to 315,000 last week as companies held on to workers in an expanding economy, Bloomberg reported. The four-week moving-average rose to 315,000 from 313,750. However, the four-week moving-average of continuing claims was the lowest since March 2001. The insured employment rate, which tends to track the US unemployment rate, was unchanged at 2.0%. “This data supports the idea that payrolls will be strong again in August,” said Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi Ltd.

Final Univ. of Mich. Consumer Confidence for August fell to 89.1 versus estimates of 92.5 and a prior estimate of 92.7. US consumer confidence fell for the first time in three months in August as Americans paid record prices at the gas pump, Bloomberg reported. The average retail price of a gallon of regular gas increased to $2.61 this week. The current conditions component of the index, which measures whether or not consumers feel it’s a good time to buy big-ticket items, fell to 108.2 from 113.5 in July. The expectations component of the index fell to 76.9 from 85.5 the prior month. “Up until now, we haven’t seen any backlash to record prices at the pump from consumers, but now the story is changing,” said Richard Yamarone, chief economist at Argus Research.

BOTTOM LINE: Overall, last week's economic data were mixed. I continue to believe the rate of home price appreciation will slow over the coming months, not plunge. I do not believe a slowing from record levels to more healthy sustainable rates will have a meaningfully negative impact on the economy. The decline in Durable Goods Orders is not likely the beginning of a trend. I expect orders to bounce back next month. Recent jobless claims figures point to healthy employment gains of about 200,000 in the upcoming employment report. I continue to believe consumer sentiment will make new cycle highs over the coming months as employment prospects continue to improve slowly, energy prices fall, inflation decelerates, interest rates remain relatively low, the housing market stays strong by historic standards and the stock market rallies further. I expect the US economy to grow a robust 4%+ during the second half of the year. Finally, the ECRI Weekly Leading Index fell .07% to 135.40 and is forecasting stable healthy growth.

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