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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (53043)	7/5/2006 11:57:54 AM
From: mishedlo	Respond to of 116555

Berson's Weekly Commentary Economic Commentary July 5, 2006 One of these things is not like the others. Here is some recent relevant information from the housing sector: purchase applications from the Mortgage Bankers Association (MBA) fell last week to the lowest level since October 2003 and the monthly average for June was down by nearly 18 percent from a year ago; the housing market index from the National Association of Homebuilders (NAHB) dropped to the lowest level since early 1995 in June; new home sales rose by almost 5 percent in May, the third consecutive increase bringing sales to the highest level of the year; and existing home sales slipped by more than 1 percent in May to a level nearly 7 percent lower than a year ago. It should be clear even to a 5-year old Sesame Street viewer that the recent behavior of new home sales doesn't match other housing data, all of which suggest a downturn in the housing market. Even the large publicly traded builders (whose market share has risen substantially in recent years) report large order declines, so how can the new home sales data show such strength? One answer may be in the way that contract cancellations are handled in the new sales data. When a person signs a contract with a builder to buy a new home, it counts as a new home sale in the month in which the contract is signed. But, if that buyer pulls out of the contract in the following month, there is no corresponding reduction in sales the next month (nor is there a downward revision to the initially reported home sales number). Moreover, if another person signs a sales contract with the builder on the same house in the following month, the house is counted as being sold again. Thus the same house would be counted as sold twice in a two month period -- clearly double counting the actual number of times that house would change hands. Although there are not good publicly available data on contract cancellations, the large builders have reported a significant increase this year. It's difficult to tell if this phenomenon is big enough to cause the strange behavior in the pattern of new home sales in recent months, but it certainly has contributed to it. Even with the increase in new home sales in the past three months, actual new home sales for the first five months of 2006 are almost 11 percent below the same period last year -- so the new home sales market can hardly be viewed as strong, even with the recent sales hikes. Sales dropped very sharply in January and (especially) February, far more than most analysts expected. It may be that the recent increases are simply balancing the unexpected weakness of the early part of the year. For all of 2006 thus far, sales are about where we thought they'd be -- even if the pattern of sales is somewhat different. With purchase applications drifting downward, builders reporting continued cancellations and slower site traffic volumes, and mortgage rates edging upward, it is likely that the recent increases in new home sales will end soon. Our most recent projection for new home sales in 2006 is a decline of nearly 10 percent, about the current drop -- and the corroborating indices are supportive of that view. As a result, even with the recent gains in new home sales, we are not poised to make a major upward revision to our forecast for sales. This will be a busy and important holiday-shortened week for economic data -- highlighted by the June employment report. On Monday, construction spending is projected to rise by 0.2 percent in May -- helped by a rebound in housing starts. Also on Monday, the Institute for Supply Management's (ISM) manufacturing index is expected to edge down to 54.0 in June, reflecting a modest overall slowdown in the economy -- although this is still a level suggesting growth in the manufacturing sector. Additionally on Monday, domestic vehicle sales should rise just a tad to 12.6 million units (annualized rate) for June -- with the pickup concentrated in fuel-efficient autos. On Wednesday, factory orders are expected to increase by 0.1 percent in May -- despite an already reported 0.3 percent decline in durable goods. On Thursday, the ISM non-manufacturing index is projected to slip to a still-strong 59.0 in June -- again, consistent with an overall modest deceleration in economic growth. Also on Thursday, initial unemployment claims should be little changed at around 315, 000 for the week ending July 1st -- a level consistent with moderate job growth. Additionally on Thursday, June chain store sales are expected to increase by a modest 3.0 percent -- as higher energy prices slow other consumer spending. Finally on Friday, payroll employment growth is projected to rebound to 150, 000 for June, with the unemployment rate edging up to 4.7 percent. Average weekly earnings are expected to climb by 0.3 percent, while the average work week should be unchanged at 33.8 hours -- taken together, this will be a modest jobs report for a modestly growing economy. David W. Berson Fannie Mae Economics