Archive for March, 2011

Feb New Home Sales

Thursday, March 31st, 2011

The U.S. Census Bureau and the Department of Housing and Urban Development reported new home sales hit the skids in February.  The number of homes sold, at 250,000, represents a month-over-month decrease of 16.9 percent! The year-over-year result is a decline of 28 percent relative to February 2010 when we saw a new home sales figure of 347,000.

Units sold was not the only number in the report to fall drastically during the month.  The median and average home prices fell 13.9 percent and 7.2 percent respectively. The median home price was $202,100 versus $234,800 in January.  The average price went to $246,000 from $265,300 a month earlier.  All the while, inventories climbed to 8.9 months of supply or 186,000 new homes for sale.  Remarkably, the current supply of new homes in absolute terms is close to record lows, running at roughly half the norm.

Of the two housing indicators Atlas writes about, this is the more forward looking.  It has to do with when a sale is tallied.  When a contract is signed, the new home sale is counted, as opposed to existing home sales which wait until the purchase is complete. If this report is any indication on how the larger existing home sales market will look in the coming months, the housing market is headed for a period (no telling how long) of dismal performance. This may ultimately be exacerbated by a market which is about to lose some of its backing from the Federal Reserve as the latter ends its interest rate support in the summer by shuttering their QE2 program.  Meanwhile FHA wants to take a smaller role in loan guarantees (see our posting on existing home sales).  All this, combined with the sorry state of employment and a steady deterioration in home prices dishes up a bitter cocktail indeed.   In the constant struggle between supply and demand, it is remarkable that the latter appears disinterested despite the shrinking absolute total of the former.

What’s “Working”

Wednesday, March 30th, 2011

In a recent blog we pointed out that the headline unemployment rate has been dropping lately.  Dr. John from Georgia replied, “The #’s may be improving (good) but I believe the (out of work) # is much higher than they are reporting!”  Here is our reply.

Your point about the questionable veracity of U.S. unemployment statistics is spot on.  When I look at the “participation rate” figures–which omits those people not considered part of the labor pool and therefore not officially unemployed–the picture seems quite different.  Despite a continuous, substantial increase in young folks just entering the labor pool after graduation, we see participation dropping.  The decline can’t be laid off entirely to retiring Baby Boomers; they aren’t retiring at such a rapid clip.  There remains a group working part time who want more hours or full-time positions.  Yet another group has become discouraged, putting its job search on temporary hiatus, or not looking for work altogether, waiting for the general situation to improve.  In the parlance of our Labor Department these folks are affectionately referred to as the “marginally attached” component of U-6.

Our low interest rate environment and quantitative easing programs seems to have boosted the fortunes of the country’s top 20% as measured by earnings (roughly $75,000 per year and up).  They show up in opinion polls as quite optimistic regarding the future.  The balance remains despondent at best, very discouraged, even angry, at the margin.  These folks do not consult their stock portfolio before budgeting expenditures for food, energy, shelter and medication, and their numbers could well be growing under the surface, out of sight.  If and when they come into view, I suspect we will face some very serious challenges.  Dust ups like the recent flap in Wisconsin will look like a cake walk should that occur.

February Existing Home Sales

Tuesday, March 29th, 2011

The National Association of Realtors (NAR) released February’s existing home sales report, and it was not encouraging. The annualized rate of sales fell 9.6 percent to 4.88 million units after January’s figure was revised up slightly to 5.4 million from an initial reading of 5.36 million dwellings.

The country’s inventory was getting closer to a healthy six month supply in January as the stock of homes was at 7.5 months.  February saw a move in the wrong direction.  The nation now has 3.49 million homes for sale (up from 3.38 million in January) which equates to 8.6 months worth of abodes at its current sales pace.  The median price for homes fell 5.2 percent year-over-year to $156,100.  Distressed homes, those sold in foreclosure or in a short sale, accounted for 39 percent of the existing home sales.

While 30-year fixed mortgage rates remain reasonable, they did increase a little to 4.95 percent from 4.76 percent in January. Low rates and the ability to procure a loan are not working in tandem.  The president of NAR Ron Phipps in quoted as saying, “Despite very affordable mortgage interest rates, credit remains a challenge.”   The difficulty finding financing may become greater as the primary guarantor of mortgages, FHA, takes steps to reduce its pledging role in the mortgage market. They are currently insuring about one-third of new mortgages up from a 4 percent role at the peak of the housing boom and the longer-term average of 10-15 percent according to the February 16, 2011 testimony of David H. Stevens, Assistant Secretary of Housing, to the House financial subcommittee on insurance, housing, and community. This segment of our economy continues to be in poor shape.  The indicator is currently at the worst position, 6 o’clock, and is likely to remain there for the foreseeable future.

February Industrial Production

Monday, March 28th, 2011

In February, per the Federal Reserve, America’s Industrial Production (IP) fell 0.1%.  This matched the original January report which has now been revised to show a 0.3% increase instead.  The current decline was again led by the weather as unseasonably warm temperatures resulted in a 4.2% drop in output from utilities.  While mining output rose 0.8%, it wasn’t enough to compensate for that drop.

Manufacturing, the third component of this IP report tried to come to the rescue but managed just a 0.4% gain, well short of the 0.9% (revised from 0.3% in the original report) rise it delivered in January.  Output totals for both motor vehicles and parts counted for most of the gain in this segment.

Capacity utilization, one way to measure just how hard our manufacturing base is working, makes up another part of this same report.  For February it fell just 0.1%, now running at the 76.3% level.

All in all this release shows our country’s economy continues its healthy upward trajectory with little danger of inflationary pressure induced by constraints in capital resources or labor showing up to ruin the party anytime soon.  That it still remains well below the more typical low 80s level after emerging from an official recession more than two years ago shows we still have a ways to go.  I would have said it shows we have more work to do, but that is precisely the problem.  We first must find more work to do.

Round Up

Friday, March 25th, 2011

Recently I watched the evening news as each night it paraded a stream of Libyan teenagers armed with an eclectic collection of weaponry excitedly driving their Peugeots and Kias helter-skelter down dusty roads to confront similarly equipped members of a competing tribe.  They clutched ominous looking automatic weapons, hand grenades, even rocket launchers.  Some were seated in anti-aircraft guns, hosing off rounds of large caliber shells seemingly at random.  I saw one guy driving a tank in circles.  I don’t think he knew how to steer it.  Nobody is in uniform.  Where did these kids get all these weapons?

A recently released Reuter’s news report suggests one reliable supplier would be Russia.  That country’s export agency just said exports of weaponry totaled $8.6 billion in 2010.  While this was a new personal best, they were a little disappointed at having missed their goal of $10 billion.  No wonder I keep seeing kids clutching Kalashnikovs in what we call “trouble spots” all over the world.  Trouble spots, like we’re discussing some kind of universal acne instead of the harsh reality faced by millions every day.

Face it, bullets are good business.  Like cigarettes, use one once and they’re done.  The Russians know this, having accounted for 23% of all arms exported from 2005 to 2008.  That earns them a silver medal.  Germany, with an 11% share, took the bronze.  But our own Yankee ingenuity still carried the day; we ran off with the gold, holding a 30% share.

Back in 1961, in his farewell address, General Dwight D. Eisenhower said, “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.”  As one of those teenagers somewhere today may wonder, “Are we there yet?”

February NABE Outlook

Thursday, March 24th, 2011

The National Association for Business Economics released their Outlook for 2011, a consensus macroeconomic forecast by a panel of members who specialize in such opinion making using survey data from some of their 2,300 participants.  It is an attempt to form a business-centric expectation of economic conditions looking forward through the balance of this year and into 2012.  The conclusions reached have a welcome, though still slight, positive slant.

Some 40% of survey respondents feel the current recovery will continue, albeit at a moderate pace.  Another third see things picking up enough to get past present problems until they begin resembling a normal business-cycle expansion.  Just 11% see things resuming a below average growth rate, quite a drop from the 40% so inclined just last November.  The upshot of all this leads them to forecast our nation’s GDP will grow by 3.3% this year, a substantial revision to November’s more dour 2.6% expectations.  For 2012 they expect real GDP to edge up just a tad more to plus 3.4% year over year.

Also encouraging is the report’s view of labor conditions.  Hiring is expected to rise all year long, averaging 178,000 new jobs each month, but accelerating so that we’ll see 210,000 workers landing positions by December.  This momentum is also expected to continue climbing into 2012, hitting some 215,000 monthly next year.  Unfortunately, this will not be enough to cover fully their projected swelling of the labor force, resulting in a rather high unemployment factor of 9% by year’s end, gradually decreasing to 8.2% at the end of 2012.  This figure will still likely present problems our economy must find a way to overcome if consumption and housing are to ever regain their historic averages.

March 2011 U.S. Dollar

Wednesday, March 23rd, 2011

There is a daily tug-of-war between currencies issued by all the nations of the world which measures each one’s value relative to all the others.  We can monitor this contest by comparing one currency against another, determining, for example, what one of our dollars could purchase in Canadian dollars.  We can also measure one against an index, a basket if you will, of many currencies.  The latter method finds its most common expression when valuing the dollar against a basket which trades under variations of the symbol DXY.  It is currently calculated using the daily exchange rate of a mix of currencies as follows: 57.6% Euro, 13.6% Japanese Yen, 11.9% British Pound, 9.1% Canadian Dollar, 3.6% Swiss Franc, and 4.2% Swedish Krona.

After a grinding decline which lasted for years, our dollar experienced a rapid recovery in 2008 when concerns about global liquidity began to surface surrounding the collapse of Bear Stearns.  The trend reversed suddenly in late 2008, regained strength as Lehman fell apart, and climbed to slightly newer highs as the world banking system followed suit by March of 2009.  It then began a ragged but steady decline once more, again reversed quickly toward the end of that year as serious questions were raised concerning the stability, even viability, of the European currency.  With DXY so heavily weighted toward the Euro, it was no surprise to see our dollar soar in value relative to this index.  What does surprise is the fall since then despite no concrete resolution to the European dilemma.  Our currency is now hitting lows for the year.

This index is obviously volatile.  No doubt we will someday discover what underlies the current weakness, what is driving the Euro, Pound, even the Yen upward relative to our dollar.  We are setting our gauge for this indicator at 6, although there is still the possibility of a further decline.  Of particular interest to us is the Canadian currency which is now trading above par to the U.S. dollar.  Given other positive factors, it is possible our neighbors to the north could one day be viewed as North America’s Swiss equivalent.

The Dollar Index (DXY) comprises six of the currencies most traded against the U.S. dollar, which represent the majority of global volume. Indices are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index.