New and Existing Home Sales Drop in May, After Expiration of Homebuyers’ Tax Credit.

New home sales fell to a record low in May, with sales of new single-family houses dropping 32.7 percent from April to a seasonally adjusted annual rate of 300,000, the lowest annual rate of sales since the Commerce Department started tracking the data in 1963 (read more here; see chart).

Excluding Transportation, Durable Goods Orders Rise.

Durable goods orders, excluding transportation, rose by  0.9 percent in May to $145.1 billion, the U.S. Census Bureau reported.  Year-over-year, durable goods, excluding transportation, increased 17.6 percent. Transportation orders fell 6.9 percent to $46.9 billion, driven by a $3.0 billion decline (29.6 percent) in nondefense aircraft and parts (read more here).

First Quarter GDP Growth Revised Downward.

The economy grew more slowly in the first quarter of 2010 than previously estimated, according to the  final  real GDP estimate from the Bureau of Economic Analysis.   GDP growth was revised to 2.7 percent, down from the second estimate of 3.0 percent, primarily reflecting a downward revision in personal consumption expenditures and net exports (read more here).

Personal Income Increases

Personal income in May 2010 increased 0.4% from April 2010.Real personal consumption expenditures (PCE) increased 0.3% and real disposable personal income (DPI) rose 0.5%.The personal savings rate as a percentage of DPI was 4.0% in May.

Consumer Confidence Rises

Consumer sentiment rose in June to its highest since January 2008 while reports of job losses were down sharply from a year ago, a survey showed on Friday. A gauge of current economic conditions also rose to its highest since January 2008, according to the Thomson Reuters/University of Michigan’s Surveys of Consumers. NEW YORK (Reuters)

In his latest issue of the Businomics Newsletter, Bill Conerly displayed this chart, which shows that consumer spending has fully regained the pre-recession peak:

This has led several people to ask where the consumers have gotten the income to spend.  After all, employment is still well beneath its previous peak.  So let’s go through the process, using data available from the U.S. Bureau of Economic Analysis.  (He uses data not adjusted for inflation, but the inflation adjustment is relatively small these days.)

Here’s total personal income:

It has not regained its prior peak, but it’s not as weak as employment, thanks to the non-labor income component of personal income:

The big gainer within this category is transfer payments, primarily social security and unemployment insurance.

Taxes have dropped in the recession.

As a result, disposable income (income minus tax payments) has indeed risen:

It’s not a huge gain, but neither is the increase in consumer spending he was trying to explain.

The latest from Bill Conerly:

Source:

Bill Conerly

When things were going well, it was said that the United States enjoyed a Goldilocks Economy. Growth was fast enough to produce jobs and higher incomes but not so fast as to generate inflation. In the same vein, it might be said that today we have an Oscar-the-Grouch Economy. Good news is discounted. Pessimism is trendy. Growth is considered too feeble to help real people. But there is some genuine good news — and it deserves attention.

It’s most obvious in the labor market. The increase of 162,000 payroll jobs in March was the largest in three years. Layoffs have subsided to pre-recession levels. Job openings have ended their precipitous decline. Surveys suggest more gains. A poll of the corporate chief executives in the Business Roundtable found that 29 percent expect to increase jobs over the next six months, and only 21 percent expect to cut; not since the fall of 2008 have more CEOs expected to hire than fire. In March, the National Federation of Independent Business, a trade group for small firms, found no net job cuts — the first time that’s happened since April 2008.

What’s also encouraging is that the recession’s severity has left much pent-up demand. Mark Zandi of Moody’s Economy.com reckons that the underlying need for housing (new households, destruction of older homes) totals about 1.85 million units a year. Meanwhile, home and apartment construction is running at only about 600,000 a year. “We’re working down a high inventory of unsold homes,” says Zandi, “but housing will come back.” The same logic applies to cars and trucks: Sales collapsed from 16.2 million in 2007 to 10.4 million in 2007 to 10.4 million in 2009. They’re bound to rise.

A final favorable omen is corporate America’s strong cash position, reflecting deep cuts in jobs and capital spending, says economist Nariman Behravesh of IHS Global Insight, a forecasting firm. In 2009, business cash flow equaled 11 percent of gross domestic product, the highest in at least half a century. As companies gain confidence that the worst is past, they have the cash “to make a bet on recovery” by restarting canceled investment projects, says Behravesh. IHS Global Insight expects business spending on machinery, computers and software to increase 9.6 percent in 2010.

One cause of pessimism is that the U.S. economy is undergoing a fundamental change — and it’s unclear how successful the transition will be. Beginning in the 1980s, American prosperity depended increasingly on a debt-financed expansion of consumer spending and housing, as the Economist’s Greg Ip notes in a recent survey of the economy. In 1991, consumer spending and housing accounted for 70 percent of GDP; by 2005, their share was 76 percent. That boost has ended, because many families overborrowed, overspent and undersaved.

As Americans repay debt and shore up savings, consumer spending and housing weaken. In 2009, their share of GDP had already dropped to 73 percent. So the U.S. economy needs another growth engine. Exports and related investment are obvious candidates. This includes both expensive equipment (Caterpillar bulldozers, Intel chips) and sophisticated services (architectural designs, oil and gas drilling). But no one knows how well exports will do. Protectionism could flourish if, as Ip notes, “every country [looks] to exports to lead its recovery.” The deeper source of pessimism is the trauma inflicted by the economic slump. Unlike other post-World War II recessions, upper-income families shared the fear, as their stocks and housing wealth collapsed and their jobs vanished or seemed threatened. Overall payroll job losses of 8.4 million have been devastating in magnitude and duration. Among the unemployed, 44 percent have been without work half a year or more; the previous peak for comparable joblessness was 26 percent in June 1983. About half of unemployed workers 45 to 64 have been out of work for six months or more; for a third, unemployment has lasted more than a year. Almost any mature worker who’s lost a job has struggled to find a replacement.

Life plans have unraveled. The Wall Street Journal recently profiled a six-figure investment manager who’d been laid off by General Electric, couldn’t find a new job and worried about how to send his youngest daughter to college. Public psychology has darkened, because most upsets were unanticipated. People and companies have become more cautious, hedging against what they don’t know. If the unexpected happened once, it could happen again.

The concerns aren’t unrealistic, especially considering America’s long-term problems (budget deficits, an aging society, weak state and local governments). Still, the glumness may be overdone, just as the optimism of the Goldilocks Economy was overdone. Public mood swings move the economy. The irony of today’s pervasive pessimism is that, as people’s worst fears are not realized, it could begin to lift and give the economy a surprising forward shove.

Source: Robert Samuelson, Washington Post.

The latest from Bill Conerly:
Source: http://www.ConerlyConsulting.com
Charts are in pdf at http://www.ConerlyConsulting.com/charts.php

From the BEA report this week:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the Bureau of Economic Analysis.
…
The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the fourth quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and an upturn in nonresidential fixed investment that were partly offset by decelerations in federal government spending and in PCE.
…
Real personal consumption expenditures increased 2.0 percent in the fourth quarter, compared with an increase of 2.8 percent in the third.
…
Real nonresidential fixed investment increased 2.9 percent in the fourth quarter, in contrast to a decrease of 5.9 percent in the third. Nonresidential structures decreased 15.4 percent, compared with a decrease of 18.4 percent. Equipment and software increased 13.3 percent, compared with an increase of 1.5 percent. Real residential fixed investment increased 5.7 percent, compared with an increase of 18.9 percent.

Any analysis of the Q4 GDP report has to start with the change in private inventories. This change contributed a majority of the increase in GDP, and annualized Q4 GDP growth would have been 2.3% without the transitory increase from inventory changes. Unfortunately – although expected – the two leading sectors, residential investment (RI) and personal consumption expenditures (PCE), both slowed in Q4. PCE slowed from 2.8% annualized growth in Q3 to 2.0% in Q4. RI slowed from 18.9% in Q3 to just 5.7% in Q4. It is not a surprise that both key leading sectors are struggling. The personal saving rate increased slightly to 4.6% in Q4, and I expect the saving rate to increase over the next year or two to around 8% – as households repair their balance sheets – and that will be a constant drag on PCE. And there is no reason to expect a sustained increase in RI until the excess housing inventory is absorbed. In fact, based on recent reports of housing starts and new home sales, there is a good chance that residential investment will be a slight drag on GDP in Q1 2010. (Source: Calculated Risk)

Most economists reaction: It’s too soon to declare recovery accomplished. Click here.
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