GLOBAL ECONOMIC REPORTER

The U.S. Census Bureau reported today that the advance estimate of new orders for manufactured durable goods decreased $4.1 billion or 2.5% in June. The decline followed increases in the previous two months. New orders in May and April rose 1.3% and 1.4%, respectively. The decline in June was largely fueled by the transportation equipment industry, specifically the non-defense aircraft and parts industry, where new orders in June fell 2.46 billion or 38.5%.

Inventories of manufactured durable goods continued to decline in June for 6 consecutive months. June inventories fell $3.0 billion or 0.9% to $318.8 billion. When inventory level reaches sufficiently low level, manufacturing activities are expected to pick up in anticipation of rising consumer demand.

A Closer Look:

• Industries with highest percentage increase in new orders: Defense aircraft and parts (30.1%), primary metals (8.9%), and Machinery (4.4%).
• Industries with highest percentage decrease in new orders: Non-defense aircraft and parts (-38.5%), and communications equipment (-10.8%).

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The latest data on U.S. housing market suggest that prices are stablizing after sharp decreases in 2008 and the first quarter of 2009. The S&P/Case-Schiller Home Price Index was 140.05 in May for the largest 20 metropolitan areas in the U.S. (composite-20), a decrease of 0.16% from the previous month after seasonal adjustment. The unadjusted index showed slight increase from the previous month. This stands in sharp contrast to the average monthly decline of 1.09% since June of 2006, when the composite-20 index started to decrease, and even sharper contrast to the average monthly decline of 1.72% since the recession was officially underway in January 2008.

Reports from other sources also point to a stablizing U.S. housing market. Sales of new and existing homes rose in June according to the U.S. Census Bureau and the National Association of Realtors. Mortgage applications have been increasing consistently for the month of July.

A Closer Look:

• Top 3 metro areas with the largest increases in home prices in May: Cleveland, OH (2.78%), Dallas, TX (1.13%), and San Francisco, CA (0.69%).
• Bottom 3 metro areas with the largest decreases in home prices in May: Las Vegas, NV (-3.08%), Phoenix, AZ (-1.73%), and Miami, FL (-1.12%).
  

The U.S. Census Bureau and the Department of Housing and Urban Development reported today that sales of new one-family houses in June were estimated to be 384,000 units, rising 11.0% from May. The sales estimate was 21.3% lower than last June’s estimate, however.

Median sales price for new single-family houses was $206,200. May’s median price was $221,600. Estimated 281,000 units of new houses were up for sales at the end of June, representing a supply of 8.8 months at the current sales rate.

This data report together with the data release by the National Association of Realtors on existing home sales is certainly a welcome news that suggests the U.S. housing market is reversing the decling trends for the past several months and is gradually warming up. The degree of recovery will largely depend on the macroeconomy and particuarly on the labor market.

The National Association of Realtors reported that an estimate of 4.89 millioin existing homes were sold in June, a 3.6% increase from the previous month after seasonal adjustment.  All regions recorded positive gains in exisiting home sales.  The largest monthly percentage increase occurred in the West where existing home sales rose 6.4%.  The South region registered 4.0% gain, followed by the Northeast (2.5%) and the Midwest (0.9%). 

The June figures for all regions except the West were lower than June of last year.  The year-to-year percentage change in the West was 11.5%.    

Existing home prices rose along with volume in all census regions when compared to May of 2009.  The prices were all lower than a year ago, however.  The year-to-year percentage change in home prices for the whole nation was -15.4% in June.  The largest year-to-year change occurred in the West, where prices fell 24.9% compared to a year ago.  The South experienced 11.9% decline in existing home prices over the year, followed by the Midwest (-9.1%) and the Northeast (-5.9%).

Existing Home Sales (100,000s)

Data source: National Association of Realtors

The Mortgage Bankers Association (MBA) reported mortgage activities increased in the week ending July 17.  The Market Composite Index, a measure of mortgage loan application volume increased 2.8% after seasonal adjustment to 528.9 from 514.4 a week ago.  The index increased 6.6% compared with the same week one year earlier.

Other Highlights:

• More people are refinancing and buying homes: The Refinance Index rose 4.0% and the Purchase Index rose 1.3%. 
• Interest rates rose: The average rate for 30-year fixed-rate mortgages increased to 5.31% from 5.05%.  The average rate for 15-year fixed-rate mortgages rose to 4.80% from 4.59%.  The average rate for 1-year adjustable rate mortgages (ARMs) rose to 6.50% from 6.47%. 

The Chicago Fed National Activity Index (CFNAI) improved in June.  The index is a weighted average of 85 indicators of national economic activity.  The 3-month moving average of CFNAI was -2.12 in June, up 0.53 points from May reading of -2.65.  While the negative readings show the U.S. economy is running below its historic trends, the index has improved steadily since January of 2009.  The consistently improving readings for the past few months suggest the U.S. economy has started recovering from the current recession, which is in its 19th consecutive month. 

Other Signs of Recovery: 

• Improving leading economic indicators: [1] The Conference Board Leading Economic Index increased 0.7% in June.  The index has been rising since April.  [2] The Economic Cycle Research Insistute (ECRI) Weekly Leading Index has also been improving since March.   
• Business Surveys Indicate Favorable Outlook: Surveys by the New York Fed and the Philadelphia Fed to businesses in their respective regions show continuously improving business outlook for the next 6 months. 
• Housing Market Shows Signs of Improvement: [1] Privately-owned housing starts have been increasing since January of 2009 (Census Bureau).  [2] Mortgage applications have seen consistent increases since the end of June (Mortgage Bankers Association).  [3] Existing home sales were up since March (National Association of Realtors).  [4] Average home prices in largest U.S. metro areas have fallen to levels last seen in 2003 but the rate of decline appeared to be stablizing (S&P Case-Schiller).
• U.S. Economic Fundamentals Steadily Improve: [1] New orders for manufactured durable goods as of May have been increasing for 3 consecutive months (Census Bereau).  [2] U.S. trade deficits have been consistently decreasing since July 2008 as imports decclined at a faster rate than exports (Census Bureau).  [3] Price levels have been rising for the past 3 months according to the Bureau of Labor Statistics and business surveys by the New York Fed and the Philadelphia Fed.  Inflation rate remains very much subdued and is not a major concern in the short term.  [4] Energy remains relatively affordable.  The crude oil prices are expected to hover around $60 per barrel through the remainder of 2009 (Energy Information Administration). 
• Financial Sector Shows Signs of Revival: Goldman Sachs reported $3.4 billion second-quarter profit even as the firm repaid $10 billion in federal bailout money in June.  Major stock indices have all been making their way up since March.

Some Cautionary Notes:

• Unemployment to Rise Further: Unemployment is expected to rise further in the next few months as companies on average are still laying off more workers than they are hiring, though the pace of layoffs has been slowing since January of 2009.  The restructuring of the U.S. auto industry will exert further downward pressure on employment as the economy gradually absorbes the surplus labor.
• Consumer Spending Still Anemic: U.S. consumers remain uncertain about the future and continue to restrain from major spendings.  Real personal consumption expenditures have been falling since Q2 of 2008 and personal saving as a percentage of disposable personal income jumped to 4.3% in Q1 of 2009, the highest level since 1998 (Bureau of Economic Analysis).  University of Michgan’s Consumer Sentiment has been slowly improving since February of 2009, but the Conference Board’s Consumer Confidence Index retreated in June after rising since February.  The poor labor market conditions continue to inject pessimism into consumer confidence even as other aspects of the economy show improvement.  One positive note, however: the higher saving rate will benefit the U.S. economy in the long-run in the form of more and better investment, higher productivity, and higher living standards. 
• Dangerously High Level of Government Budget Deficits: The Director of the Congressional Budget Office (CBO), Douglas Elmendorf, has repeatedly warned that the federal budget is not sustainable under current law.  The Federal Reserve Chairman, Ben Bernanked, also sounded similar alarm in June.  According to CBO estimates, the federal government will record its larget deficit as a share of GDP in fiscal years 2009 and 2010 since after WWII.  The amount of federal debt held by the public (both U.S. nationals and foreign nationals) will soar from the current level of 41% of GDP to 60% at the end of fiscal year 2010.  Interest payment on the debt alone is expected to rise to 2.5% of GDP in 2020 under current law.  Large budget decifits pose at least the following threats to the economy: [1] Lower national saving and less domestic investment which hurts future growth; [2] Attempt to reduce the deficits in the future amounts to either sharply increasing taxes, drastically cutting back spendings, or both, none of which are pleasant and have potentially large negative impact on the economy; [3] U.S. dollar could plummet if global investors lose confidence in the ability of the U.S. government to rein in its deficits and maintain the value of the dollar.  China, among other major holders of US government debt, has raised the concern and signaled willingness to support proposals that would replace the U.S. dollar as the reserve currency.         

The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) released an update on the cost esimtates of the America’s Affordable Health Choices Act of 2009, as introduced by the House Democrats.  The report shows the bill is expected to cost $1,042 billion over the next 10 years while bringing in $803 billion in additional tax revenues and savings, resulting in a net increase in the federal budget deficit of $239 billion over the 2010-2019 period.

In 2019, the provisions proposed in the bill are expected to add $202 billion to the federal deficit that could be partially offset by savings and additional revenues worth $137 billion, leading to a net increase in deficit of $65 billion for that year.         

Previous estimates by CBO and JCT on the Senate version of the bill put the net increase in the federal budget deficit over the next 10 years in the $597 billion range. 

Click here to view the report.

The U.S. Census Bureau and the Department of Housing and Urban Development reported that privately-owned housing starts in June were 582,000 after seasonal adjustment, a 3.6% increase from May estimate of 562,000.  It is nonetheless 46% lower than June 2008 rate of 1,078,000.  The rate of housing starts has been rising for the last two months, and the estimate in June represents 58.3% increase from the start of the year, though it is still to early to call if a sustained recovery in the U.S. housing market is underway.  Expected higher unemployment in the coming months will exert continuing downward pressure in the housing market. 

A Closer Look:

• Single-family housing starts in June increased 14.4% from May.
• Building permits also increased in June.  Privately-owned housing units authorized were 563,000, a 8.7% increase from May. 
• Year-to-date percent change ranking by census region: South(26.7%), Midwest(11.8%), West(11.8%), and Northeast(8.0%).

U.S. Housing Starts (10,000s)

Data source: Census Bureau & the H.U.D.

Click here for the press release.

The manufacturing firms surveyed by the Federal Reserve Bank of Philadelphia reported weaker current business conditions than June but outlook for the next 6 months remains positive.  The Current Activity Diffusion Index, which measures the overall business conditions for manufacturing firms in the region, decreased to -7.5 from -2.2 in June.  The index has been negative for 19 of the past 20 months.  The Future General Activity Index, which measure the firms’ outlook for the next 6 months, decreased to 51.9 from 60.1 in June but remained positive.  July marks the 7th consecutive month of positive reading of future outlook index. 

A Closer Look:

• New orders for manufacturing firms in the region continue to increase.  The New Orders Index moved up 4 points to -2.2, the highest reading in 10 months.
• More firms reporting laying off workers.  The Current Employment Index fell 3.5 percentage point to -25.3 from June’s reading of -21.8.  30% of firms reported declines in employment while only 5% reported increases.  The Future Employment Index remained virtually unchanged. 
• Input prices fell at a slower rate.  The Prices Paid Index for the month of July was -3.5, an increase of nearly 10 points from June.  Output prices fell at a faster rate, however.  The Prices Received Index declined 5 points from June to -21.5. 

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The U.S. Employment and Training Administration of the Department of Labor reported in the week ending July 11, the advance seasonally-adjusted estimate for initial claims of unemployment insurance (U.I.) was 522,000, a decrease of 8.26% from the previous week’s revised number of 569,000.   The average weekly initial claims during the last non-recessionary period (2002 - 2007) was 373,000. 

The unemployment rate, which measures the proportion of workers able and willing to work but can not find jobs, is expected to increase further when the Bureau of Labor Statistics releases the lastest figure on July 29, though the rate of increase should be much slower than the beginning of the year.   The initial unemployment insurance claims peaked in the week ending March 28 when 674,000 laid-off workers were seeking benefits. 

A Closer Look:

• As of July 4, more than 6.27 million people were receiving unemployment insurance. 
• States with largest decrease in initial claims: New Jersey (-5,030), California (-4,293), North Carolina (-3,983), and Kansas (-3,544)
• States with largest increase in initial claims: Michigan (+12,144), New York (8,913), Indiana (+5,430), and Ohio (+4,240)

Click here to view the press release.