The New Economy
Has the housing market hit a snag? A run of lackluster housing numbers this week has analysts wondering if the housing market recovery has lost momentum. Home prices rose in June, but at a slower pace, according to the S&P Case-Shiller Home Price indices. The 10-city composite index rose 1.1 percent in June; the 20-city index rose 0.9 percent. Year over year, the 10- and 20-city composites have risen 11.9 percent and 12.1 percent since June 2012, respectively. Wednesday, the National Association of Realtors (NAR) reported that pending home sales fell for the second straight month. Mortgage applications, too, continued their downward trend, with the four-week moving average hitting its lowest level since May 2011.
“The softness [in pending home sales] is likely to raise fears about whether the recovery in US housing will prove durable to the rise in mortgage rates observed since early May," Barclays Research economist Michael Gapen wrote in an e-mailed analysis. "Our view has been that the recovery in housing may slow due to the sizable fiscal drag in place during 2013 and higher mortgage rates, but that housing fundamentals were strong enough to prevent a sharp correction in activity”
Personal income and spending lag: Personal income ticked up 0.1 percent in July, but wages fell 0.3 percent, according to the US Bureau of Economic Analysis (BEA). Spending remained flat from June. “Wages took a hit in July, while spending hardly grew and the saving rate remained unchanged,” IHS Global Insight economist Chris Christopher wrote via e-mailed analysis. “It is becoming very evident that even though the housing market is gaining some traction and auto sales are looking up, there is not a tremendous amount of income support to keep consumer spending ... growing at very robust rates.” ( Continue… )
Microsoft CEO to retire, market cheers: When Microsoft CEO Steven Ballmer announced Friday that he will retire within the next 12 months, or as soon as a replacement is found, Microsoft stock shot up as much as 9 percent. Wall Street has not been enamored with Microsoft since Mr. Ballmer succeeded founder Bill Gates as CEO in 2000. The software company's value has fallen by more than half in that time – from $601 billion to $270 billion. And while some of that decline can be attributed to the popping of the dot-com bubble, it's also true that Microsoft has fallen behind in key areas of high-tech growth, including Internet search, smartphones, and social media.
Analysts blame Ballmer for underestimating the competitive threats from the likes of Apple and Google. The company is now having to play catchup with the Windows phone and Bing, which have failed to gain much traction in the marketplace. Even the newest iteration of its flagship software, Windows 8, has met with underwhelming sales, forcing the company to rework the interface in an update due out Oct. 17.
"There is never a perfect time for this type of transition, but now is the right time," Mr. Ballmer said of his upcoming retirement in a statement. He did not groom a successor. The company's search committee, which will include Mr. Gates, will look for the struggling company's next leader.
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Fed minutes released: The Federal Reserve released the minutes from its July meeting, as investors and financial markets looked for clues that the Fed would ease up on its bond purchases in the near future. The minutes gave little signal either way, but reiterated, “If economic conditions [improve] broadly as expected, the Committee [will] moderate the pace of its securities purchases later this year.” But the Fed will continue its support for the moment, buying approximately $40 billion in mortgage-backed securities and $45 billion in Treasury securities each month. For more on the Fed minutes, read Monitor reporter Mark Trumbull’s Wednesday story. ( Continue… )
Sales of new single-family homes took a big slide in July, according to the US Census Bureau. Sales dropped 13.4 percent from June to a 394,000 annualized pace, their lowest level in nine months. The figure was well below analysts’ expectations of a 490,000 pace.
The dip casts a pall over the US housing recovery following a recent spate of encouraging data. June’s new home sales numbers, which had hit a five-year high, were revised sharply downward (along with May's). Earlier this week, July’s existing home sales report was impressive, surging 6.5 percent from June and 17.2 percent from a year ago. Year over year, new home sales were still up 6.8 percent from July 2012.
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Why the huge monthly drop? Favorite culprits of many analysts are accelerating prices, surging mortgage rates, and a gulf between reported homebuilder optimism and actual construction activity.
“The reported plunge in July, combined with downward revision to earlier data, stand in stark contrast to the recent strong gains in the homebuilder survey,” says Joshua Shapiro, chief US economist with MFR, Inc., in an e-mailed analysis. “While the July result might prove to be an outlier, it is certainly a warning signal that conditions in the housing market are nowhere near as rosy as homebuilders, real estate agents, and their enablers in the media are so keen to represent.”
Prices for new homes also slid slightly, edging down to an average $257,200 in July from $258,500 in June. Still, that’s up from $237,400 in July 2012 – an indication that the market for new homes is still growing, albeit more slowly than anticipated.
It's too early to tell if July is just a negative blip in an otherwise positive trend. If August numbers confirm the slowdown, then analysts will begin focusing more intently on the potential effects of the bounce in mortgage rates and a possible pullback (or "tapering") in the US Federal Reserve's program to keep interest rates low.
“Data from the Mortgage Bankers Association show that mortgage applications for home purchase have weakened in recent months, suggesting that higher interest rates are having an impact on individual demand for homes, and also highlighting the fact that speculative demand continues to be the main driver of the existing home market,” Mr. Shapiro writes.
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The housing recovery continues to speed along, and last month, a key indicator came up big. But can it last?
Existing home sales surged 6.5 percent to a 5.39 million annualized rate in July compared with June, according to the latest data released by the National Association of Realtors (NAR). That’s the highest level since November 2009, when a home buyer’s tax credit was first introduced to boost sales. Last month's gains were felt in all four regions. Single-family home sales jumped 6.2 percent. The multifamily home category, which is traditionally more volatile and includes co-ops and condominiums, increased by 8.6 percent. Total existing home sales are up 17.2 percent since a year ago.
The possible reason? The inventory squeeze that real estate agents have been pointing to as hampering the sales pace in some regions may be starting to ease up.
“We viewed lean inventories as the main factor slowing the pace of sales in recent months,” Michael Gapen, an analyst at Barclays Research, wrote via e-mailed analysis. “Inventories of existing homes were below 2 [months’ supply] for five consecutive months between November and March, a streak not seen in the US in more than a decade. In recent months, however, inventory levels have begun to normalize as new supply has come onto the market, although the level of inventories still remains lean by historical standards. We continue to expect that existing home sales will gradually improve as labor markets heal and housing demand firms.”
The months’ supply of homes stayed at 5.1 months in July, and the median amount of time a home sat on the market was 42 days – up from 37 days in June.
There were more hopeful signs in the makeup of the July sales figures. The proportion of foreclosures is decreasing, making up 15 percent of home sales in July. And the role of investors (as opposed to buyers looking for homes to live in) is diminishing. Investment sales made up 16 percent of sales in July, a drop from a 17 percent share in June and a 22 percent share in February. “Demand for homes to live in was even stronger than the headline number suggests since investors played a smaller role than they have in the past,” IHS Global Insight economist Patrick Newport wrote in an e-mail analysis.
But despite July’s robust numbers, there are a few things that concern analysts going forward. Mortgage applications have been falling sharply since June, which could portend a drop-off in sales next month. Some analysts, including economist Lawrence Yun at the NAR, argue that rising interest rates and accelerating prices could "diminish the pool of eligible buyers.” And it’s still unclear how much a rapid rise in interest rates (which are still low by historical standards) would affect the market.
However, the bottom line is still cautiously optimistic. “The housing market remains in a recovery phase, albeit one that could be tempered by higher mortgage rates and worsening affordability,” Mr. Gapen wrote. “Low inventories had been cutting two ways, supporting home price appreciation and home building, but reducing the pace of existing home sales. We believe the recovery in housing will prove resilient to any broader slowing in the economy and the recent rise in mortgage interest rates to date, but we will be watching for any signs of weakness or fragility as a result of the significant rise in real interest rates over the past several months."
Newspaper starts up, online news pioneer cuts back: Long Beach Register gathered staff to begin producing at least 16 pages of content for the first edition, due Monday. The newspaper, owned by the Orange County Register, reflects the owner's optimism that print journalism can prosper in the 21st century. The Register faces stiff competition from the port city's existing paper, the Long Beach Press-Telegram, which has an average weekday circulation of some 55,000. The upstart paper expects to distribute 10,000 copies a day, wrapped around the Orange County Register.
AOL, meanwhile, is cutting 500 jobs over the weekend from Patch, its network of hyperlocal news websites. The layoffs started Friday, with 350 of the division’s 1,000 total workers receiving pink slips. AOL employs 5,500 total workers; the Patch layoffs would mean a 9 percent cut of the workforce.
AOL is also planning to shutter or consolidate 150 out of 900 local Patch sites. The company may attempt to find corporate buyers for some of the sites.
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Consumer sentiment surprises, in a bad way: The University of Michigan’s consumer sentiment index fell to 80.0 in its preliminary August reading, far below analysts’ expectations of an 85.0 reading. Consumers were pessimistic about both their present and future financial situations, and 38 percent of those surveyed reported they were worse off financially than they were a year ago (the highest percentage since January of this year). ( Continue… )
At first glance, July’s retail sales numbers, released Tuesday by the US Commerce Department, aren’t particularly impressive. But the actual breakdown tells a different story.
Retail sales rose a combined 0.2 percent in July, after climbing 0.6 percent in June. That would seem like a setback, and indeed, analysts expected a bigger gain (about 0.3 percent). But core retail sales, a closely watched measure that excludes autos and gasoline, increased 0.5 percent after going flat in June. The report heartened economists, who take it as a promising sign of accelerating consumer spending.
“This is a relatively good report,” Chris Christopher, an economist with IHS Global Insight, wrote via e-mailed analysis. “Consumers made a comeback in July. The gains in clothing, sporting, department, general merchandise and restaurants in July after a poor showing in June are pointing to renewed strength on the back-to-school shopping season and consumer spending for the third quarter. In addition, both grocery stores and restaurants posted significant gains.“
One notable drag came from auto sales, which dropped 1 percent in July on the heels of a very strong June. Barclays economist Peter Newland characterized the drop as “partial payback for strong gains in May and June,” rather than a weakening of the industry.
Strong gains in grocery stores, sporting goods, and other "core" categories are seen as a reliable reflection of longer-term spending trends, so many analysts take such gains as a promising sign for further economic growth. Gasoline also fared well, with a 0.9 percent increase.
The biggest losses came in furniture sales, which fell 1.4 percent. Electronics and building materials also slid, by 0.1 percent and 0.4 percent, respectively.
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Critics want to blame the system itself. They point out how it will run through its surplus funds by 2033 – and how, after that, it will only have enough to provide 75 percent of promised benefits. They depict Social Security as one more failed government program or, as Texas Gov. Rick Perry once put it, a Ponzi scheme.
But compared with Washington’s budget processes, Social Security is a model of fiscal rectitude. While Congress has failed to rein in spending and engaged in expensive off-budget wars at the same time that it was cutting taxes for the rich, Social Security has operated under a 30-year bipartisan agreement that not only fully funded existing benefits but also built up a $2.6 trillion surplus in anticipation of today's retiree bulge.
How has Washington rewarded that fiscal prudence? Congress and various administrations have raided these surplus monies in order to make their overspending appear less egregious in the budget books. ( Continue… )
Obama addresses options for Fed chairman: The priority for the central bank must be unemployment, President Obama said in a press conference Friday. In picking the next chairman of the Federal Reserve, the main objective is to find someone who will support the Fed's dual mandate of fighting inflation while pushing for full employment, he said. Those policies are often at odds. At the moment, the focus should be on job creation, Mr. Obama addes. "Right now, if you look at the biggest challenge we have, the challenge is not inflation. The challenge is we've still got too many people out of work, too many long-term unemployed."
The president mentioned two leading candidates by name – former Treasury Secretary Lawrence Summers and current Fed Vice Chairman Janet Yellen – but added that he was also considering other highly qualified people. He said he'd make a decision this fall. Obama went to some length to dispel the notion that Mr. Summers has the inside track, saying that in earlier comments he was simply defending his former Treasury secretary from preemptive attacks. If the president is strongly inclined to have the Fed boost employment despite risks of inflation, Ms. Yellen would seem the more natural choice, since she is considered more dovish than Summers and would be likely to keep interest rates low for a longer period of time. However, the president seemed less familiar with her, referring to her at one point as "Mr. Yellen" before correcting himself.
The term for current chairman Ben Bernanke ends in January.
JOLTS Improve, but hiring weakens: 3.96 million job openings were available in June, according the the US Labor Department’s monthly Job Openings and Labor Turnover Survey (JOLTS). That was above the 3.85 million analysts expected, and layoffs declined by 215,000. But hiring continued to lag, falling by 289,000, its sharpest drop in three years. “As a result, the hiring rate (hiring as a percentage of total employment) was down by two-tenths to 3.1 percent and has barely recovered since the early stages of the recovery,” Barclays Research economist Peter Newland wrote in an e-mailed analysis. “We believe that this divergence between openings and hiring is consistent with our view that some of the loss of employment during the recession was structural, rather than purely cyclical, in nature.”
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Credit card debt falls, but student loan and auto debt swell: According to June’s consumer credit report, US households paid down credit card debt from May but accumulated more in student and auto loans. Excluding mortgages, total consumer credit increased $13.8 billion to $2.85 trillion in June. Revolving credit (debt with non-fixed payments like credit cards) fell by $2.7 billion after increasing $6.4 billion in May. Non-revolving credit, meanwhile, had its largest increase since February, jumping $16.5 billion to $1.99 trillion. Analysts predict that revolving credit will pick up in the coming weeks as back to school shopping gets under way. ( Continue… )
Republicans and Democrats don't see eye to eye when it comes to the economy, but in one area, at least, they've reached broad agreement: Fannie Mae and Freddie Mac, the mortgage finance giants bailed out by the government in the wake of the housing crash, have to go.
President Obama nudged the idea forward this week in a speech in Phoenix, one of the areas hardest hit by foreclosures and depressed housing prices in the aftermath of the real estate bubble.
Reform should "lay a rock-solid foundation to make sure the kind of crisis we went through never happens again. And one of the key things to make sure it doesn't happen again is to wind down these companies that are not really government, but not really private sector; they're known as Freddie Mac and Fannie Mae," Mr. Obama said. “For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag," he said, referring to the firms’ implicit government backing that inculcated them from risk in case loans went sour. "It was ‘heads we win, tails you lose.’ ”
But in pushing to eliminate Fannie and Freddie, reformers face a problem: Whatever they do is likely to raise mortgage interest rates, especially for lower income Americans, which would be politically unpopular.
“In almost all of these [proposals] because there is no government guarantee, it’s likely that mortgage rates will be higher,” says David Berson, an economist with insurance company Nationwide and former chief economist for Fannie Mae. “That means there will be some creditworthy people who will have to pay more, or may not get a mortgage a all. That makes it harder for lower income buyers.” ( Continue… )
The recovery in America's labor market is so slow it's like a party where no one celebrates, except maybe Wall Street. Every time the labor market starts to show sustained momentum, along comes new evidence that even expected lackluster growth is sometimes too much to hope for.
Take Friday's jobs report. It showed the US economy created 162,000 jobs in July, fewer than expected, and that employees worked slightly fewer hours and for slightly less pay. If it weren't for the auto industry's dynamic recovery and strong gains in the wholesale and retail trade sector, the numbers would have been even worse.
The unemployment rate fell from 7.6 percent in June to 7.4 percent in July, but part of that improvement came because people were dropping out of the labor force.
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In one encouraging sign for the employment market, Amazon.com announced this week that it would be adding 7,000 jobs at its warehouses around the nation. The announcement came a day before President Obama visited an Amazon.com warehouse to deliver a major speech on how to accelerate economic growth. ( Continue… )