weakening economic stats, housing starts & sales, & other notes on the week ending june 23rd

ISM PMIit’s been another week with additional confirmations of weakening economic conditions both in this country & worldwide.. in europe, the Markit index of euro-region manufacturing fell to 44.8 from 45.1 in May, where below 50 indicates contraction, as output shrank at the fastest pace in three years; a similar index of chinese manufacturing, the HSBC Flash PMI (purchasing managers’ index) fell from 48.4 in May to 48.1 in June – the steepest contraction in 7 months; their subindexes were even worse, as they saw their sharpest decline in new export orders since 2009, while only inventories of finished goods showed an increase…in the US, there were two jobs-related reports released this week that highlight that the new difficulties are spreading to the labor market; the first, from the BLS, was the Job Openings and Labor Turnover Summary for April; this “JOLTS” survey is one report we dont often look at, because it lags the BLS employment report by a month and hence the results are normally captured in the earlier monthly report, but this week it showed the greatest decline in job openings in nearly 4 years and the 6th largest drop in job openings in history, confirming the weakness we saw in the April and May unemployment reports (the JOLTS survey is for the last weekday of april, while the establishment & household employment surveys are conducted during the week of the 12th in each month)…what JOLTS showed was that there were only 3.416 million jobs openings on the last business day of April, down 325,000 from the seasonally adjusted 3.741 million jobs open at the end of March; obviously, as we did not see anything like this level of job creation in the employment reports, this fall in openings is indicative of employers withdrawing openings and reducing their hiring plans…this survey also showed that both hiring and separations were at 3.1% of the labor force, essentially unchanged from the month before, and also has data broken down by industry & region if you want more detail…the other report this week that was worse than expected was the weekly figure for first time unemployment claims from the Dept of Labor; on a seasonally adjusted basis, there were 387,000 workers who filed for unemployment comp for the first time last week, up from the 386,000 reported the prior week, which itself was revised up to 389,000, which brought the closely watched 4 week moving average up to 386,250, the highest level of layoffs this year…taking in the recent bad news, the NYT’s weekly jobs tracker, based on forecasts from Moody’s Analytics, now shows a projected employment gain of only 125,000 jobs in June, down from their forecast of 150,000 last week…another release this week that came in unexpectedly lousy was the Philly Fed’s Business Outlook Survey for June, which covers manufacturing business conditions in the mid-atlantic region; the general index fell 10.8 points to a negative 16.6 in June, after falling 14.3 points and turning from positive to negative 5.8 in May, where negative numbers represent contraction; separate indicators for general activity, new orders, shipments, and average work hours were also all negative, while economists surveyed by bloomberg had been expecting improvement…this follows on the heels of a similar regional report from the NY Fed, wherein their June manufacturing index dropped 15 points but remained barely positive at 2.3…as these two regional Fed surveys tend to forecast the trend for the other Fed regional surveys, which in turn set the stage for the national PMI from the ISM (Institute of Supply Management), bill mcbride at calculated risk produces a chart (above) which shows how these indexes have tracked historically; the dashed green line is an average of the NY Fed & Philly Fed indexes through June; the blue is a graph of an average of all Fed regional surveys through May, and graphed in red is the ISM PMI through May; note that other than during a recession (the vertical blue bars) the only other time the average of these two Fed surveys fell below zero was last summer, when the economic activity slumped in the face of supply disruptions resulting from the japanese tsunami, european contraction, and uncertainly caused by congressional gridlock over the debt ceiling…

there have been reports that uncertainty caused by congressional inaction of the combination of expiring tax cuts & mandated spending cuts known as the “fiscal cliff” is causing companies to pull back again this year; as we’ve pointed out, forecasts are that the laws already in place could knock 3% to 5% off GDP in 2013 should congress do nothing by year endin addition to the expiring tax cuts, which would take money out of the broad economy, government contractors are already planning their 2013 budgets contingent on the spending cuts sequestered by the budget control act kicking in; defense contractors, for instance, stand to lose $50 billion in contracts, but no one knows which of the the approximately $530 billion the government spends each year will be cut…since state laws mandate that an employee be given 60 or 90 days notice before a layoff, contractors facing that uncertainty will be obliged to send out around 3 million layoff notices in the fall, which wont bode well for consumer demand going into the holidays…another cloud hanging over companies is uncertainty resulting from the pending Supreme Court ruling on the health care reform act (obamacare), which is expected this week – our coverage is here, if you want to review what outcomes might result…

the Senate did manage to pass a $969 billion, 1000 page farm bill this week, with it’s usual collection of add-on amendments; rather than lower payments for crop insurance, they voted to cut $4.5 billion out of the food stamp program for those who are also on any of the 14 state heat-and-eat initiatives, where those getting utility assistance had automatically been enrolled in the food stamp programs…those cut off will lose an average of $90 a month in food assistance…however, indications are that eric cantor will hold that bill hostage to other demands from the House teaparty contingent…also, as of Friday there had been no definitive action taken on either of the bills that deal with programs that expire on July 1st; there is bipartisan consensus that student loan interest rates should not be allowed to double to 6.8%, as current law has it; the problem is how to “pay for it”…a democratic proposal would change how employer’s private pension contributions are calculated, resulting in lower business tax deductions…and it also appears there will be no surface transportation bill passed in time, which means that highway projects with federal participation will be halted, and the 18-cent a gallon federal gas tax would go uncollected…this expiring transport bill was passed April 1st and was the ninth in a series of stop-gap measuresas we’ve discussed, infrastructure projects require long-term planning, and not much gets done when only 3 months of funding can be assured

Total Housing Starts and Single Family Housing Starts there were several housing related reports this week….the first one we saw was Permits, Starts and Completions for May from the census bureau, which is mostly watched for the new housing starts, which were at a seasonally adjusted annual rate of 708,000, down 4.8% (±12.7%) from the revised April estimate of 744,000, yet still 28.5% (±10.7%) above the May 2011 annual rate of 551,000 starts; building permits, meanwhile, were issued in May at an adjusted annual rate of 780,000, 7.9% above the april rate…there are a few caveats on the apparent weak starts; first, since new housing starts in april had first been reported at 717,000, almost the entire fall in May starts were as a result of the upward revision to april’s numbers; so may’s seasonally adjusted number is still higher than the revised March estimate of 699,000, when seasonal adjustment had already been skewed by unseasonably warm weather; the other factor was that single family starts at 516,000 were still up from april’s 500,000 by 3.2%, so the decline was just in the rather volatile multi-family sector…but starts of both single family and multi-family units continue to run well below historical rates, as you can see on the above 45 year chart from calculated risk (single family starts in blue, total starts in red); with the population continuing to increase, one would expect housing starts to be above the trend; however, a new report from the census bureau showed that the number of households that have doubled up in the face of economic hardship increased by 2.25 million from 2007 to 2010, and that such residence sharing accounted for 22 million households in 2010 — or 18.7% of all U.S. households, and that those between the ages of 25 and 34 made up two-thirds of that increase…so it appears both housing & rentals will continue to suffer until those young people are financially capable of starting their own households…

   another housing report from this past week was from the Nat’l Assoc of Realtors, on sales of previously owned homes in May (“existing homes” in NAR parlance); on a seasonally adjusted basis, these home sales of 4.55 million were down 1.5% from the 4.62 million annual sales rate in April; the NAR blamed the decline on “limited supply of housing inventory”, which they listed at “2.49 million existing homes available for sale”, which would be a 6.6 month supply at May’s annual sales rate; listed inventory was 20.4% below that of a year ago, when there was a 9.1 month supply at last years sales rate of 4.15 million units….shortages of homes for sale in the lower price ranges were reported in the West, and especially in Florida, where you might recall that 11.9% of homes with mortgages were still stuck in the foreclosure process; with the shortage of low priced homes, the median sales price rose 7.9% to $182,600 in May from a year ago, the third consecutive month of year over year price increases; distressed properties accounted for 25% of sales, down from 28% in april and 31% in May of last year; 34% of homes sold in May were bought by first time buyers, compared with 35% in april & 36% a year ago; all cash buyers accounted for 28% of transactions, down slightly from the 30% all cash sales last year, and investors, who accounted for the majority of all-cash buys, bought 17% of the homes sold in May, down from 20% in april and 19% from a year ago…this report includes a period when mortgage interest rates were hitting new all time lows weekly (which they did again this week, with the 30 year at 3.66% and the 15 year at 2.95%), so if there had been pent up demand for housing, it should have been brought to the fore by what would be a record low cost of ownership; instead, what we see here is a housing market treading water, with demand outstripping supply only for the lowest priced properties….

  this week also saw the “first look” at the LPS mortgage monitor for May; LPS reported that delinquent loans increased to 3,542,000, or 7.20% of all mortgages in May, up from the 7.12% that were delinquent in April; this is the second consecutive month that delinquencies have increased, yet no one is giving a possible reason that more people would stop paying on their mortgages at this time…LPS also shows 2,027,000 properties still in the foreclosure process, or 4.12% of loans outstanding, which has remained fairly steady at that level…barry ritholtz, in writing for the washington post, notes that foreclosure starts nationwide have increased on an annual basis after 27 consecutive months of year-over-year declines, but repossessions are still down 18% year over year…he also quotes housing analyst Laurie Goodman noting that 2.8 million Americans are 12 months or more behind on their mortgages, and since 2007, 19% of all borrowers, or almost 1 in 5, have at one time been over 90 days delinquent on their home mortgages; obviously, that percentage includes those who’ve already been through foreclosure & already have had their house taken…

(the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was mostly selected from my weekly blog post on the global glass onion, and also includes other links of interest…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me…)

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