Put into perspective, consumer spending is being canceled out by inflation, and the housing market could be bottoming out. Image: CC Mr. T in DC/Flickr

An increase in pending home sales in February was not enough to offset the big slide in contract signings reported in January. A February gain in consumer spending was also neutralized after being adjusted for inflation driven by rising food and energy prices. But the minutely positive data on pending home sales and consumer spending boosted stocks Monday, and some real estate experts think the housing market may have bottomed out.

Inflation and consumer spending

Consumer spending in February increased 0.7 percent compared to the month before, according to the Commerce Department. Consumer spending has risen eight months in a row, but February’s increase, adjusted for inflation, is just 0.3 percent, matching the increase reported in January. Rising food and energy prices pushed up inflation in February. After rising 0.3 percent in January, the Commerce Department said the personal consumption expenditures price index rose 0.4 percent, the fastest rate recorded since June 2009. The increase in the consumption expenditures price index effectively canceled out February’s 0.3 percent increase in personal income. Households have also been dipping into savings to cover rising food and energy prices. Savings dropped from $710.5 billion in January to $676.7 billion in February.

Pending home sales as an economic indicator

Pending home resales increased 2.1 percent in February after dropping 2.8 percent in January, according to the National Association of Realtors. Compared with February 2010, pending home sales fell 9.3 percent. Because they represent signed contracts, pending home sales are considered a leading economic indicator. The number affects existing home sales data a month or two later, when the contracts close. As for February, existing home sales — 95 percent of today’s housing market — dropped 9.6 percent from the month before. The median price for existing homes dropped 5.2 percent from February 2010, erasing all increases in home values since February 2002. New home sales plunged 17 percent in February to the lowest rate ever recorded. The median price for new homes dropped 8.9 percent from February 2010.

Has the housing market bottomed out?

Because home prices continue to fall, the National Association of Realtors expects existing home sales to eventually rise 5 to 10 percent overall in 2011. Very few people are buying despite the fact that housing has become so affordable it should be one of the most attractive investments in the U.S. According to Deutche Bank, it’s now cheaper to pay a mortgage and other major homeownership costs than to rent the same house in 28 out of 54 major markets. Optimistic real estate analysts are betting that this affordability will eventually entice potential homeowners into pulling the trigger. The re-emergence of homebuyers could start raising housing prices in many markets, which could get even more homebuyers off the fence.

Sources

Bloomberg

New York Times

Fortune

Credit standards are loosening as banks compete for loans, consumer spending increases and the lending business returns to normal. Image: CC channelR/Wikimedia Commons

Banks are continuing a trend of loosening credit standards in the U.S. According to a Federal Reserve survey, competition among banks to make loans to large companies is forcing them to ease credit terms. Banks are also making it easier for consumers to get credit cards.

Lending gains momentum

Competition among banks to make loans to prime corporate borrowers is increasing. In response, banks are easing lending standards, a sign that lack of credit will be less of a drag on economic recovery in 2011. Fifty-seven banks responded to the annual Federal Reserve survey, taken between Dec. 22 and Jan. 11, about credit quality. The consensus was that lending gained momentum in the fourth quarter, and there are signs that the trend will continue. About 80 percent of the banks surveyed anticipate an improving market for commercial loans to large and medium-sized firms. About 70 percent anticipate improvements in lending to smaller firms.

Consumer spending re-emerges

The Fed survey reported that 50 percent of banks anticipate improvement in the quality of consumer loans in 2011. At the same time, consumer spending beat forecasts in December, according to the Commerce department. Consumer spending rose 0.7 percent in December after a 0.3 percent bump in November. The Commerce Department also reported that incomes increased 0.4 percent for the second consecutive month. Economists expect the positive trend in consumer spending to continue with the payroll tax holiday and rising incomes. The U.S. economy expanded at a 3.2 percent annual pace in the fourth quarter, up from a 2.6 percent gain in the third quarter.

Credit card limits rise, credit score minimum drops

As the U.S. economy continues to improve, banks are making it easier for consumers to get credit cards. About 13 percent of banks in the Fed survey said approval standards for new credit cards loosened. About 14 percent of banks reduced the minimum credit score necessary to qualify for a credit card. About 11 percent increased credit card limits for consumers, and about 8 percent increased credit limits for businesses. Credit analysts are predicting that more borrowers will make on-time payments in 2011, banks will have fewer losses and the lending business will slowly return to normal.

Sources

Financial Times

MarketWatch

Bloomberg

CreditCards.com

A grain of salt may be needed to swallow the latest news of a "surge" in December new home sales. Image: CC quinn.anya/Flickr

New home sales exceeded analysts’ record-low expectations in December. The rise in December new home sales followed an alarming drop in U.S. home prices in November. A temporary spike in mortgage rates is suspected of driving the numbers, as home prices are expected to continue sliding.

Take new home sales with a grain of salt

New home sales registered a 17.5 percent month-to-month gain in December, according to the Commerce Department. New homes sold at a seasonally adjusted 329,000-unit annual rate in December. But these days even the most minor item of good news in the housing market must be taken with a grain of salt. The number of actual homes in the U.S. that sold in December was just 22,000. The Commerce Department also revised new home sales in November down to 20,000, the worst month ever. December 2010 wins the honor of second-worst month ever. Plus, December new home sales in 2010 were down 7.6 percent from December 2009. Overall new home sales in 2010 fell 14.4 percent to a record low 321,000-unit rate.

Why new home sales ‘surged’

New home sales may have received a bump from rising mortgage rates. The rate on 30-year fixed mortgages moved up more than half a point from the last week of November and into December to reach 5 percent. Potential home buyers sitting on the fence until home prices bottomed out may have interpreted the mortgage rate blip as a signal that it was time to get a home loan before the market turns the corner. However, the rate on 30-year mortgages has since returned below 5 percent. According to Freddie Mac, 30-year fixed mortgage rates averaged 4.99 percent for the week ending Jan. 21, down from 5.06 the week before. Another reason for the surge in new home sales may have been foreclosure moratoriums.

New home sales in 2011

A positive trend in new home sales for 2011 may depend on the behavior of home prices. Choosy shoppers in a buyer’s market continue to drive down home prices with cheap counter offers. The Standard & Poor’s/Case-Shiller home price index released earlier this week reported new lows in home prices for nine major U.S. cities. A wave of foreclosed homes is expected to hit the housing market in 2011, which will further drive down home prices. If it becomes evident to potential home buyers that home prices have bottomed out, many more are expected to visit a mortgage lender.

Sources

Reuters

CNBC

Los Angeles Times

New reports on retail sales and consumer confidence present conflicting data until one reads between the lines. Image: CC Svadifari/Flickr

Retail sales and consumer confidence are key economic indicators closely watched by economists and investors. People often assume retail sales and consumer confidence would rise and fall in tandem. But separate reports released Friday show a strong 2010 retail sales trend followed by declining consumer confidence in January.

Retail sales surge in 2010

Retail sales in the U.S. increased at a greater rate in 2010 than in any year since 1999, according to the Commerce Department. From 2009 to 2010, U.S. retail sales increased 6.8 percent, the strongest growth since an 8.2 percent surge in 1999. December retail sales rose for the sixth month in a row, increasing 0.6 percent to $380.9 billion after rising 0.8 percent in November. Despite the holiday shopping season, December’s gain was less than expected, largely due to harsh winter weather. Department store sales dropped 1.9 percent, the steepest decline in two years. But online sales rose 2.6 percent month-over-month to ensure an overall monthly gain.

Consumer confidence a fickle index

Despite the strong retail sales trend, consumer confidence in January declined unexpectedly. The Thomson Reuters/University of Michigan consumer confidence index for January fell to 72.7 from 74.5 in December. A Bloomberg News survey of economists predicted a bump in the consumer confidence index to 75.5. Analysts are saying rising gas and energy prices, combined with the snail’s pace of job creation are to blame. Unemployment fell to 9.4 percent in December, but at the present rate of economic growth, the labor market will take years to recover. Higher gas prices increased sales at gas stations 1.6 percent last month. Energy prices rose 4.6 percent in December.

Data bode well for consumer spending

Consumer confidence has dropped so far this month, but economists say the consumer expectations index is a more accurate economic indicator. The consumer expectations index looks at how people feel about what their finances will look like six months down the road. The Commerce Department reports that it increased to 68.2, the highest mark since last June. The strengthening consumer expectations index bodes well for consumer spending, the lion’s share of U.S. economic output. Although recent reports offer conflicting information, the trend in retail sales appears strong enough to drive economic recovery, if not employment.

Sources

Bloomberg

Financial Times

Wall Street Journal

U.S. GDP, driven by consumer spending, was higher in the third quarter than first reported, but not high enough to lower the unemployment rate. Image: CC Charlie Brewer/Flickr

U.S. GDP growth in the third quarter has been revised to a higher rate than reported earlier. However, as the economy struggles to get in gear, that’s not saying much. U.S. gross domestic product expanded at a 2.5 percent annual rate from July through September, about half the rate needed to affect the unemployment rate.

Consumer spending drives U.S. GDP

Gross domestic product, the value of goods and services produced in the U.S., is used as a broad measure of economic growth. The 2.5 percent growth of U.S. GDP in the third quarter was driven by consumer spending and increased exports. According to a Commerce Department report, consumer spending was predicted to rise 2.6 percent but increased at a 2.8 percent annualized pace, the strongest result since 2006. Exports were revised upward to 6.3 percent from the 5 percent originally reported. The U.S.economy expanded 3.2 percent in the past four quarters, the strongest year-over-year growth since the first quarter of 2005.

Obstacles to economic growth

The Commerce Department report also revised wages and salaries in the second quarter upward from a $51.1 billion increase to a $97.4 billion increase from the first quarter. The new figures suggest that consumers could have the resources to continue supporting economic growth in the near future. But the increase in consumer spending isn’t expected to be enough to offset the drag of a moribund housing market. Prices remain depressed by anemic sales and a huge inventory of unsold homes and foreclosures. The National Association of Realtors said existing-home sales slipped 2.2 percent in October. The median price for a home sold in October dropped 0.9 percent from a year ago.

High unemployment will persist

Most economists agree that a U.S. GDP annualized growth rate of 2.5 percent does nothing to move the unemployment rate downward. The consensus is that until GDP hits at least 5 percent growth, unemployment will be stuck at 9.6 percent. Growth is forecast at about a 2.3 percent rate for the rest of the year.

Sources

Associated Press

Bloomberg

MarketWatch

The U.S. trade deficit widened by 19 percent in June. Some economists to believe the U.S. economy is headed from recovery toward a double-dip recession. Lauren Manning/Flickr photo.

Wall Street went into a panic Wednesday as the Commerce Department reported a sharp increase in the U.S. trade deficit in June. After narrowing in recent months, the U.S. trade deficit unexpectedly widened in June by a record $7.9 billion. Stocks nose-dived at the news. The trade deficit also led analysts to believe that U.S. economic recovery slowed more than they thought last quarter. Some economists warn that an unsustainable trade deficit will provoke a double-dip recession.

Strong dollar spurs U.S. trade deficit in June

The Commerce Department said the trade deficit ballooned much more than analysts expected in June, after the stronger dollar made it easier for people in the U.S. to buy cheaper exports, particularly from China. The gap widened to $49.9 billion, up from a revised $42.0 billion in May. The Washington Post reports that economists had been expecting a smaller gap after a recent drop in oil prices. Imports in June rose to $200.3 billion, from $194.4 billion in May, as U.S. shoppers bought more consumer products, auto parts and other goods from overseas. Exports fell to $150.5 billion from $152.4 billion. U.S. companies struggled to sell products such as industrial supplies, food and consumer goods to foreign customers.

Trade deficit widens to defy forecasts

The anticipated trade deficit for June was $42.1 billion — the median forecast of 73 economists in a Bloomberg News survey. Instead of a further decline from a $42.3 billion trade deficit in May, the gap increased 19 percent. Bloomberg reports that the June trade deficit adjusted for inflation, which is the figure used to calculate gross domestic product, increased to $54.1 billion, the highest since February 2008 during the worst of the financial crisis. The disappointing numbers prompted some economists to reduce estimates for second-quarter growth to around 1 percent to 1.5 percent.

Some say U.S. unemployment is a bigger problem

Economists don’t agree on whether the trade deficit in June’s sudden and marked increase means the U.S. is in danger of heading into a double-dip recession. The Christian Science Monitor reports that while the unsustainable trade deficit isn’t good, it’s not the locus of the bigger problem of U.S. unemployment. Trade deficits coexisted with domestic job growth for years prior to the recession. The more important issue is reviving domestic consumer demand and business investment.

Others say trade deficit is the root of the U.S. unemployment problem

The Monitor article said some economists think bold efforts to fix the trade deficit could actually hurt economic recovery if they blunt the trend of expanding global commerce. To others, the trade deficit is a critical problem that must be addressed. In a written analysis, University of Maryland economist Peter Morici said oil and consumer goods from China account for nearly the entire trade deficit, and without a dramatic change in energy and trade policies, the U.S. economy faces unemployment around 10 percent indefinitely.

New home sales plunged to a record low in May after the home buyer tax credit expired. Home prices and consumer spending are expected to follow, further hobbling a limping economic recovery. Flickr photo.

New home sales fell to a record low according to a report by the Commerce Department released June 23. A slide in new home sales statistics was expected after the home buyer tax credit expired at the end of April. But the 32.7 percent drop in May was more than expected. Existing home sales also dropped, surprising forecasters who expected them to rise. Unemployment is the main reason the housing market is flagging without the tax credit. Sharp declines in the housing market, a critical component of consumer spending, are threatening the fitful U.S. economic recovery.

New home sales: a new low

New home sales had surged in March and April as homebuyers hurried to buy homes before the April 30 deadline for the tax credit. Homebuyers have until June 30 to close the deals for the home tax credit, but the Senate may vote to push that deadline back to Sept. 30. CNNMoney.com reports that the May decline of 32.7 percent represents a drop to 300,000 homes from 446,000 in April. Sales year-over-year fell 18.3 percent.The Commerce Department said the May figures are the slowest sales pace since it began tracking home sales statistics in 1963. The prior record was set in September 1981, when new homes sold at an annual rate of 338,000.

Consumer spending takes a hit

The decline in new home sales, if it continues,  leads to a decline in housing prices, which leads to a decline consumer spending as well — the biggest threat to economic recovery. Business Week reports that the drop in residential construction will sap consumer spending that accounts for about 70 percent of the U.S. economy. There’s direct correlation between home sales and spending on furniture, appliances and building materials. On June 11 the Commerce Department reported that sales at U.S. retailers fell 1.2 percent in May, the first decline in eight months, led by a record 9.3 percent plunge at building-material stores.

Government wary of new home sales statistics

New home sales fell sharply across the U.S., with sales down more than 50 percent in the West. MarketWatch reports that housing market stats in May were dismal across the board. Housing starts fell 10 percent, building permits fell 5.9 percent, mortgage applications dropped and the home builders’ index fell by five points. The dark cloud’s silver lining was mortgage rates, which stayed very low.  Another glimmer of hope may be that government statisticians have low confidence in the monthly Commerce Department new home sales report, which is subject to major revisions,  sampling flaws and statistical errors. The government says it can take up to four months to establish a statistically significant trend in sales.

U.S. unemployment rate to blame

New home sales are being affected by the anemic U.S. job market. Edward Leamer, an economist at the University of California, Los Angeles, told MarketWatch that unemployment is the main reason housing is weakening without the tax credit to spur demand. The U.S. economy would have to grow at a 5 percent to 6 percent rate to create “significant reductions” in joblessness. “People won’t buy homes when they are worried about their jobs,” he said.

Weak retail sales contrasted with a rising consumer confidence report to narrow trading and reduce stock market volatility on Friday. Flickr photo.

Retail sales dropped in May, and the stock market dropped in step with data delivered by the Commerce Department retail sales report. Stock market volatility has become the new normal. The stock market rose at the end of the day Thursday before reversing direction early Friday when the May retail sales report was released. A schizophrenic market then seesawed throughout the day as conflicted investors weighed the negative retail sales report with an unexpectedly positive analysis of consumer confidence.

Commerce Department retail sales

Retail sales derailed the optimism of a late stock market rally on Thursday. The New York Times reports that Wall Street indexes fell Friday morning after the Commerce Department reported that retail sales decreased 1.2 percent last month, the largest drop since last fall. Five of 13 retail sales figure categories in the report decreased with the largest drop in building materials at 9.3 percent. Excluding sales to commercial fleets (overall auto sales increased in May), retail auto sales were down 1.7 percent.

Stock market volatility week

Despite all the recent stock market volatility, all three major indexes closed higher for the week. Stock prices dove in the last hour Monday (jobless report), rebounded Tuesday (reassuring words from the Federal Reserve), dove again Wednesday (political pressure on BP dividends) and bounced back Thursday (overseas economic reports). The Times reports that Friday’s session, its volatility tempered by the good cop/bad cop consumer confidence and retail sales reports, made the difference for the somewhat happy ending.

Consumer confidence report beats forecast

A few hours after the May retail sales report sent investors out of stocks and into bonds, the Reuters/University of Michigan consumer sentiment index for early June came in higher than expected at 75.5, up from 73.6 at the end of May and better than the 74.5 economists had been expecting. Forbes reports that the disparity between the retail sales and consumer confidence reports signifies that many Americans still feel that their personal finances are under stress while they see the overall economy to be on the mend and hope for better days ahead.

Retail sales silver lining

A deeper analysis of the retail sales report may explain why consumers on Main Street feel better than traders on Wall Street. Frank Ahrens of the Washington Post points out that even though retail sales dropped 1.2 percent from April to May, compared with May 2009 retail sales were actually up 7 percent. Ahrens goes further to say that when excluding negative numbers from bigger pieces of the pie taken by auto sales, building materials and gasoline (down 3.3 percent) overall retail sales actually rose 0.1 percent in May.