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Economic news for the week

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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)

Consumer spending is increasing…slightly.

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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:

PI C

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:

PI PI

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:

PI nonLabor

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

Taxes have dropped in the recession.

PI Tax

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

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

When a glum economy perks up

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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.

Inflation remains low as retail sales and housing starts rise

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IMAGE_3Inflation Remains Subdued. The Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers (CPI-U), a key measure of inflation, rose by 0.1 percent in March. Core CPI-U, which excludes the food and energy categories and is a less volatile measure of inflation, remained unchanged in March relative to February. This follows the general pattern of low inflation that has persisted since the start of the recession, and projections by the Administration, the Federal Reserve, and the Congressional Budget Office all suggest that inflation will remain low at least through 2012. The low inflation reading should allay concerns that the economy is in danger of experiencing high levels of inflation that may cause the Fed to raise the federal funds rate sooner than otherwise expected.

The low inflation reading should allay concerns that the economy is in danger of experiencing high levels of inflation that may cause the Fed to raise the federal funds rate sooner than otherwise expected.  However, many economists remained concerned about the potential impact of oil price rises on inflation and the nascent recovery.

Retail Sales Picking Up. Retail Sales Picking Up. Retail and food service sales rose by 1.6 percent in March, according to advance estimates released by the Census Bureau. The total sales of $363.2 billion in March was 7.6 percent higher than sales were in March 2009. The Census Bureau also revised its February sales growth estimate from 0.3 percent to 0.5 percent. Among the categories of products whose sales grew in March relative to February were motor vehicles and parts (up 7.6 percent), building materials and supplies (up 3.1 percent), and furniture and home furnishings (up 1.6 percent). The sales growth in those last two sectors is consistent with the end of the decline in demand for housing, which seems to have stabilized in the past few months.  Even excluding sales of motor vehicles and parts, retail and food service sales grew by 0.6 percent.

Housing Starts Increase Overall, But Decrease For Single-Family Homes. The number of new housing units started in March increased for the third consecutive month by 1.6 percent.  The annualized number of new housing units started, seasonally adjusted, is now 626,000 units, the highest since November 2008 but well below the peak of 2.3 million housing units started at the height of the housing boom. However, March’s increase in housing starts was driven by new multi-family dwelling units, which are much more volatile than single-family housing units.  The number of multi-family dwelling units started in March increased by 18.8 percent while the number of single-family houses declined by almost 1 percent.  On the housing demand side, home builders are hoping for strong sales in April as the first-time home buyer tax credit is set to expire at the end of the month.

Pent-up demand showing up strong

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From the WSJ today:

U.S. retail sales surged in March, topping expectations and giving a strong sign consumers are growing more confident the economy is improving. Retail sales leaped by 1.6% last month, the Commerce Department said today. Economists surveyed by Dow Jones Newswires had forecast a 1.3% increase. The gain was the biggest in four months.  Robust car sales drove the much of the better-than-expected increase in retail sales. Yet excluding the automotive sector, other retailers were strong as well. Clothing stores, for instance, saw sales jump by 2.3%. The report Wednesday was another suggestion that a pent-up demand from the recession is being unleashed within the recovering U.S. economy.

Here is a nice graph from Mark Perry showing the trend:

Another graph from EconompicData shows the strong building material and garden supplies category:


More signs of mixed, but continuing recovery

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Among the noteworthy news of the week, several  examples of the continuing economic recovery include:

  • Home Depot, the largest U.S. home-improvement retailer, is adding store jobs for the first time in four years in anticipation of a rebound in sales.
  • Carload freight traffic on U.S. railroads is hit its highest level since November 2008 during the week ended March 27, 2010.
  • The ISM Business Activity Index for non-manufacturing industries has now been in expansion (index > 50) for seven out of the last eight months, and for four straight months, both for the first time in almost two years. The last time the Business Activity Index was at 60 or higher was April 2006, almost four years ago.
  • Manufacturing employment has increased for the last three months, the first time in four years of three consecutive monthly increases.
  • The number of temporary help workers increased in March by 40,200 to 2,037,000 employees, the highest level since December 2008.
  • U.S. employers created jobs at the fastest pace in three years in March, but nearly one-third came from temporary hiring for the Census, indicating the labor market has still some way to go to recover.
  • GDP has seen a recent boost due to the slowing of inventory contraction, but a real build in inventories will have an even larger impact on future GDP figures and hiring.
  • The Ten Year treasury yield hit 4.0% this morning for the first time since Oct 2008. Mortgage rates are moving up too and that probably means that refinance activity will decline sharply.
  • Usually housing starts and residential construction employment lead the economy out of a recession, but not this time because of the huge overhang of existing housing units.
  • The recently announced plans for mortgage modification probably won’t help the housing market. What will? Population growth and an improving job market.

2nd straight GDP increase

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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.
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Real personal consumption expenditures increased 2.0 percent in the fourth quarter, compared with an increase of 2.8 percent in the third.
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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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In the aftermath of the Great Recession

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Today’s column by Robert Samuelson emphasizes the role of trade and entrepreneurs in shaping the economic growth of the next decade. He specifically mentions florists as an example. See below.

One insistent question at the start of a new decade involves the lingering effects of the old: What scars will the Great Recession leave? We are already seeing some. Americans are moving less than at any time since World War II, reports demographer William Frey of the Brookings Institution. People are tied to existing homes, can’t get loans for new ones and won’t move without job commitments, Frey says. Only 1.6 percent of Americans are now moving across state lines, half the rate of a decade ago.

With a grim job market, the young also seem more cautious. A new survey by Fidelity Investments found that a quarter of workers ages 22 to 33 want to stay with their present employer until retirement; in 2008, that was only 14 percent. John Irons of the liberal Economic Policy Institute worries that many young Americans, lacking tuition funding, will delay or abandon attending college, lowering their long-term earning power.

So the Great Recession’s nastiest scar could be an era of economic frustration, characterized by slower growth and contentious competition for scarce resources. Stunned by huge wealth losses in stocks and real estate, Americans save more and spend less. Businesses suffer from weak demand. Hiring remains sluggish. Worse, the slowdown coincides with an aging population, which could compound the effect. In 2020, the projected number of Americans 55 and older will reach almost 100 million, 29 percent of the total population. That’s up from 59 million, or 21 percent, in 2000.

“Younger people . . . tend to be more innovative, more willing to take risks, more willing to do things differently,” Stanford University economist Paul Romer says in an interview for the book “From Poverty to Prosperity” by Arnold Kling and Nick Schulz. As noted, today’s turmoil could make even the young more risk-averse. Or older and middle-aged people could increasingly dominate corporate hierarchies and university research grants, as Romer worries. An aging society could become a stand-pat society, protective of the status quo and resistant to change.

Against this glum prospect, the standard rebuttal evokes history. The U.S. economy is amazingly resilient, the argument goes. It has been a consistent job creator: 21 million in the 1970s, 18 million in the 1980s, 17 million in the 1990s, 12 million in the past decade through 2007. (Lower gains reflect slower labor-force growth, not less dynamism.)

A “can-do” culture — combining intense ambition with a flexibility to adapt and an instinct for innovation — ensures that the economy will ultimately rebound strongly. The harsh recession may have actually improved the long-term outlook by purging high-cost firms and forcing efficiencies. Productivity (output per hour worked) has risen 4 percent in the past year. Profits are already up 21 percent from their low; surviving firms will soon expand.

Which vision will prevail?

The answer may hinge on two things: trade and entrepreneurship. Most economists see stronger exports as a substitute for weaker consumer spending. Unfortunately, that depends heavily on economic growth and trade policies abroad. By contrast, entrepreneurship is a sleeper issue that depends on what Americans do.

If you doubt its importance, consider this: All net job creation from 1980 to 2005 came from firms that were five years old or less, according to a study by economists John Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of the Census Bureau. In any one year, that may not be true; but over time, mature firms lose more jobs than they create. “It’s not small firms but young firms that count,” says economist Robert Litan of the Kauffman Foundation, which sponsored the study.

If Americans don’t continue to create firms — not just high-tech start-ups such as Facebook but construction companies, florists, restaurants, dry cleaners, engineering firms — the economy may languish. Beginning a business is a risky, exhausting, chaotic process. Every year, there are roughly 500,000 to 600,000 company “births” and almost as many “deaths.” Half of new firms don’t make it to year five, says Litan.

Some harbingers of growth look unpromising. In 2009, disbursements by “venture capital” firms — investors in start-ups — to first-time recipients hit an all-time low since statistics were begun in 1995. True, VCs support only a tiny fraction of new firms, mostly high-tech start-ups. But “angel investors” — friends and family of entrepreneurs who support many more — have also suffered huge losses in stocks and homes. They, too, have less to invest.

There’s a warning here for the Obama administration: Complex regulations or high taxes may discourage start-ups and job creation. As for broader questions, the answers may remain murky for years. Has the mix of economic trauma and aging made us prudent — or merely fearful? Has economic resilience survived — or given way to a stand-pat society?

Source: Click here