Initial unemployment claims inch down; continued claims continue to rise

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance today. Initial claims were at 425,000 for the week ending August 23rd up from the previous week's revised figure of 435,000. The four week average of initial claims, which is not as volatile, was at 440,250 down from the previous week's mark of 446,250.

Continued claims for unemployment insurance increased to 3,423,000 for the week ending August 16th up from the previous week's number of 3,359,000. This is the highest it has been since November, 2003. The four week average for continued claims was also up to 3,336,500 from 3,329,250.

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Case-Shiller Home Price Index continues to slide

The S&P Case-Shiller home price index for June 2008 was released today by Standard and Poors. The composite-10 declined 0.61% from May 2008 and declined by 17.00% from June 2007. The composite-10 is now down 20.29% from its peak. All 20 individual markets are still down year over year with Las Vegas and Miami down the most at -28.55% and -28.32% respectively. Charlotte and Dallas are down the least year over year at -1.04% and -3.23% respectively. 10 markets were up in June compared to the previous month (Denver, Chicago, Boston, New York, Atlanta, Detroit, Minneapolis, Charlotte, Cleveland, and Dallas). The markets with the biggest declines from the peak are also declining the fastest; markets that declined the least are starting to rise.  There are 11 markets that were down less than 15% year over year. 9 of those 11 markets were up in June compared to May 2008 and those 11 averaged a monthly gain of +0.52%.  The other 2 markets were slightly down (Seattle and Portland). Of the 9 markets that are down over 15% year over year, 8 were down compared to last month (Detroit eeked out a minor gain) and the 9 markets averaged a monthly decline in value of -1.40% in June.  The composite-10 is now down -20.29% from its peak. 8 markets have now dropped over 25% from their peak.

You can click on the images for a larger view.

The CME futures market is pricing in a further drop of -11.89% by next June for the composite-10. It is encouraging that some markets are posting month over month gains. The month to month change in the composite-10 has also improved from February when it declined by 2.80% in one month to a 0.61% decline last month over the previous month. However, the home price index is not seasonally adjusted. In the last 20 years, home prices have averaged appreciation of 5.29% a year. March through August are typically the strongest months for appreciation and home prices have on average appreciated by 4.40% during that 6 month period. September through February are the weakest months; home prices have on average appreciated by only 0.89% during that 6 month period. In 2007, the declines were moderate in the first half of the year and started rapidly declining in August.

The CME futures market is pricing in that housing will bottom at 150 in March 2010.  This is a 16.8% further drop from June 2008's mark of 180.38.  The CME futures are pricing in that the home price index will recover to 156 by September 2012.  However, adjusted for inflation, real prices would still be declining (assuming that CPI-U drops to 3%).

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Existing home sales rise; inventory rises faster

The National Association of Realtors released the existing home sales figures for July 2008 today. Sales increased to a seasonally adjusted annual rate of 5.000 million units in June, up 3.09% from June 2008 and down 13.19% from July 2007. The median sales price was $212,400 in July down from $215,100 in June 2008 (down 1.26%) and down from $228,600 in June 2007 (down 7.09%). The inventory of existing homes grew to 4.669 million units up from 4.495 million in June 2008. This is the largest amount of inventory on record.  Month's supply grew to 11.2.   While sales rose in July, the inventory rose even faster.

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U.S. Leading Index declines by 0.7% in July

The Conference Board announced that their U.S. Leading index decreased by 0.7% in July. Building permits, stock prices, average weekly initial claims for unemployment insurance (inverted), real money supply, and manufacturers’ new orders for consumer goods and materials had negative contributions to the index.  The interest rate spread, index of consumer expectations, and manufacturers’ new orders for nondefense capital goods had positive contributions.  Average weekly manufacturing hours and the index of supplier deliveries (vendor performance) were flat for the month.

Here are charts of 5 of the 10 components:

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Sales and Use Tax Collection improves slightly but is still declining

Sales and use tax collection continues to decline after adjustments for inflation. Using a weighted composite for the four largest states (California, Texas, New York, and Florida), the decline in real growth improved slightly to an annual decline rate of -2.13% in July up from a rate of -2.20% in June. Texas grew at a rate of 4.49% in July after adjustments for inflation which is down from the hot pace of 8.37% it averaged for 2007. New York's growth was flat at 0.04%. California's decline was at -4.88% in July, the same as it was in June.  California declined on average of -2.03% in 2007. Florida continued its steady fall, declining -8.46% in July. The growth rate in Florida has been lower than the previous month for 21 months straight.  Florida averaged a decline of -2.70% in 2007.

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New Home Permits at lowest level since 1982

The U.S. Census Bureau and the HUD Department announced the new homes construction stats for July 2008 today. Total building permits were at a seasonally adjusted annual rate of 937,000 which was 17.7% below June 2008 and was down 32.4% from a year ago.  Most of the dropoff from the previous month was due to the new construction code in New York City that went into effect on July 1.  1 unit permits were at a seasonally adjusted annual rate of 584,000 which was down 5.2% from last month and down 41.4% from a year ago. 1 unit permits are at their lowest annual rate since August 1982.

Total housing starts were at a seasonally adjusted annual rate of 965,000 which was down 11.0% from the previous month, and down 29.6% below July 2007.  1 unit starts were at 641,000 which is down 2.9% from June 2008 and down 39.2% from a year ago. Housing completions were at a seasonally adjusted annual rate of 1,035,000 (1 units were at 791,000) which was 8.7% below the previous month, and 31.7% below June 2007.  The amount of new homes being built is starting to equal demand.  However, there still remains a large amount of inventory.

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Update on the TED Spread

Here is an update on the TED Spread - the difference between the 3 month treasury and the 3 month Eurodollar rate. This measures the amount of perceived risk to lend to a banking counterparty. From 2002 to 2006 the spread averaged .288. Currently it is at 1.14 (as of 8/15/08).

The spreads reached very high levels in the 70s and early 80s when inflation was running rampant. The spread reached a high of 5.97 in July of 1974, and the Eurodollar rate was 13.52%. This next chart shows the spread as a percentage of the Eurodollar. This allows for comparison of the TED Spread during periods of high inflation and lower inflation. Using this matrix, the current spreads are at historic highs. The chart also shows the year over year change in the S&P 500.

The following chart shows the daily fluctuations of the TED Spread. Looking at the TED Spread, it looks like the current credit crisis has gone through 4 waves where the TED Spread has gone over 1.5.

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Inflation at 17 year high

The U.S. Department of Labor reported the inflation numbers for July today. Before seasonal adjustments, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.53% in July over June and was 5.60% higher than July 2007.  The year over year rate of CPI is the highest since January 1991. Core CPI (CPI less food and energy) before seasonal adjustments was up by 0.23% compared to May and up 2.51% compared to a year ago. Seasonally adjusted, CPI-U rose 0.82% over June, twice as much as expected, and core CPI rose 0.33% instead of 0.2% expected by economists. The surge in CPI-U was driven by energy prices. Energy increased 4.0% in July over June.  Crude Oil futures have come down recently so this should alleviate some of the inflation pressures.

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Retail Sales decline by 0.12% last month

The U.S. Census Bureau announced today that retail and food services sales for July 2008 with seasonal adjustments was down 0.12% from June and up 2.63% compared to a year ago. Retail sales without including autos (excluding autos makes the data less volatile) was up 0.38% compared to the previous month and up 5.84% compared to the previous year.

Retail sales adjusted for inflation declined by 3.27% in July compared to the previous year.  The decline in Retail Sales over the last 6 months has been the worst 6 month span since 1992.  The the decline in retail sales is causing havoc for many retailers as is reflected in the amount of retailers and restaurants going bankrupt recently.

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Trade Deficit declines to $56.77 billion

The Department of Commerce announced that the goods and services deficit in June declined to $56.77 billion down from the revised figure of $59.20 billion in May. This is down from when the trade deficit peaked in 2006 averaging $62.77 a month. Exports of goods increased by $5.7 billion while imports of goods increased by $5.7 billion. The goods deficit increased $2.1 billion from May to $70.0 billion and the services surplus increased by $0.4 billion to $13.3 billion.

The deficits with our biggest trade partners all increased last month. China was up to a $21.4 billion deficit (from $21.0 billion in May), OPEC was $18.1 ($17.9), the European Union $8.2 ($7.9), Canada $7.2 ($5.4), and Japan $6.1 ($5.0).

Adjusted for inflation, the trade deficit for the last twelve months ending in June declined slightly from the deficit for the one year period ending in May. The trade deficit peaked in August of 2006. The annual change in Personal Income adjusted for inflation in June was positive but this year Personal Income has been down sharply compared to last year. Before 2000, Personal Income was growing faster than the Trade Deficit. At that time an argument could be made that we were investing in the future. Since 2000, the trade deficit has ballooned while personal income growth has fallen. We are now borrowing from the future to fund our current lifestyle.

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Pending Home Sales Index up 5.3% from previous month; down 12.1% versus last year

The Pending Home Sales Index for contracts signed in June 2008 on a seasonally adjusted basis was at 89.0 up 5.3% from 84.5 in May 2008 but was down 12.2% compared to June 2007's figure of 101.4. Without seasonal adjustments, the index was down 12.1% compared to June 2007.

2001 was previously the slowest year for pending home sales on record. June 2008 was 6.6% below June 2001's sales pace. May 2008 was 17.5% below the 2001 level.

The NAR raised their 2008 median home sales price forecast to $206,700 from $205,300. The NAR is forecasting 2009 median home sales prices to be at $215,800. In June they had dropped their 2008 forecast by 4.1% from $213,700 to $205,000. According to Lawrence Yun, NAR chief economist, sales have been in a pattern of rising and falling within a fairly narrow range. Yun said “The vacillation of data from one month to the next indicates a housing market in transition.” It does appear that home sales has bottomed out. We may be transitioning from declining home prices and sales to rising home sales with declining prices.

I don't expect home prices to bottom until supply and demand are in equilibrium. Currently there is 11.1 months supply of existing homes. 6 months is where supply and demand are considered balanced.

April, May and June are the three biggest months for Pending Home Sales. Afterwards, sales quickly taper off. Pending Home Sales for June indicates that the July and August existing sales may pick up a little bit. Last year existing sales plummeted in the Fall. This Fall will be the big test for existing sales.

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Growth in Withheld Taxes slows in July

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending July 31, 2008 was 1.71% higher than a year ago after being adjusted for inflation. This is down from June's rate of 2.27%.

Through the last cycle, the year over year growth rate of withheld taxes closely mirrored the stock market. The real growth rate turned negative just as the recession ended. It wasn't until the end of 2002 and the beginning of 2003 that the growth rate bottomed and started to improve. The stock market also started growing at the same time. Currently real withheld taxes is growing year over year, but the trend is downward.

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Non-Manufacturing Index (NMI) is at 49.525

The Institute for Supply Management released their July 2008 Non-Manufacturing ISM Report on Business today. The Non-Manufacturing Index (NMI) came in at 49.525%.  50% is the breakpoint for growth. NMI had plunged to 44.6% in January 2008 but has been between 48%-52% for the last 6 months.

NMI is made up of four components: business activity, employment, new orders, and supplier deliveries. Business activity was at 49.6% in July down from 49.9% in June; employment was at 47.1% up from 43.8%; new orders were at 47.9% down from 48.6%; and supplier deliveries were at 53.5% up from 50.5%.

Here is what some of the respondents were saying:

• "Our business remains at about the same level as the previous month, with continued focus on cost reduction." (Finance & Insurance)
• "The general state of the home-building industry has not changed since last month; however, with the commodity and code changes going into 2009, we face much higher construction costs and reduced margins across the entire supply chain." (Construction)
• "Continue to see slowdown in local economy." (Health Care & Social Assistance)
• "While still positive, the overall outlook for 2008 for our company is not as high as earlier in the year." (Wholesale Trade)
• "Governmental spending for services is up this period." (Professional, Scientific & Technical Services)

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Personal Income increases by 0.06% in June

The Bureau of Economic Analysis released the Personal income figures for June 2008 today. Personal income increased by 0.06% compared to May 2008. May 2008 had a large increase of 1.82% compared to April 2008 due to the 2008 tax rebates. Disposable income decreased by 1.89% in June compared to May 2008. The charts below show per capita Real Personal Income, which increased by 0.60% in June 2008 compared to June 2007.

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