Tag Archives: implications

October Housing Starts/Weekly Unemployment Claims

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NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: October Housing Starts/Weekly Unemployment Claims
KEY DATA: Starts: -0.3%; 1-Family: +3.9%; Permits: +0.9%; 1-Family: +5.1%; Unemployment Claims: 388,000

IN A NUTSHELL: “Housing is firming and some improvement may be in the cards, adding to the view that this recovery is becoming broader based.”

WHAT IT MEANS: The housing sector is a long way away from being healthy but maybe it is starting to get strong enough to move out of the ICU to the recovery room. Housing starts eased a touch in October and on the surface that does not look to be anything positive. However, there was a sharp increase in September and the modest decline indicates the sector managed to sustain that upturn. There was a nice increase in single-family activity but that was offset by a larger drop in the volatile multifamily segment. With the demand for rental housing rising, I expect the multifamily component to keep rising going forward – it just may be in fits and starts. Indeed, with permit requests jumping, improving starts numbers should be seen in the November or December data. Builders are quickly taking those permits and turning them into starts as can be seen in the further decline in the permits authorized but not started pace as well as the increase in the homes under construction rate. As for the labor market, there was a nice drop in new claims for unemployment insurance and it wasn’t just a one week wonder. These data can and do bounce around and the more stable four-week moving average fell below the critical 400,000 level, signifying the likelihood of future declines in the unemployment rate.

MARKETS AND FED POLICY IMPLICATIONS: Another day of pretty good numbers. Don’t expect housing to add lots of jobs or power the economic comeback, but it sure looks like it will be adding to growth going forward. Indeed, the Home Builders Associations confidence measure has jumped two consecutive months as developers seem to be seeing clearly improving conditions. Housing has typically been the first stage of the recovery rocket and its failure to ignite has been a key factor in the sluggish expansion. That the sector may finally be adding jobs is a positive sign. When added to the drop in the claims numbers, you can see that economic conditions are moving upward at an accelerating pace. However, and there is always a however, two major roadblocks stand in the way of solid growth: Rising oil prices and European debt issues. While a European collapse would cause the most problems, I believe that is not likely. If we get what most economists believe will be a mild to moderate European recession, the recovery will be slowed but not killed. But with oil above $100 a barrel, the prospects of $4.00 a gallon of gasoline is of major concern. Worse, the combination of a European downturn and high gasoline prices could move us back to where we were in the spring when the economy was making minimal headway. So, while I like what I see in the economic data, I recognize that we are not out of the woods by any means. That is something the Fed members are quite cognizant of and why Mr. Bernanke is so willing to stick his neck out and say he will keep rates low until mid-2013. As for investors, it remains Europe, Europe, Europe and it will stay that way for a long time.
Re/Max Connection Realtors disclaimer:
Re/Max Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. Re/Max Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
Re/Max Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

September Employment Situation

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NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: September Employment Situation
KEY DATA: Payrolls: 103,000; Private Sector: 137,000; Government: -34,000; Unemployment Rate: 9.1% (unchanged)

IN A NUTSHELL: “Better than expected is nice but we need employment gains to grow a lot faster if the unemployment rate is to come down.”

WHAT IT MEANS: Well, the sky is not falling just yet. Businesses continue to add workers and it is hard to see how we could be in recession if payrolls are growing. Still, the job gains in September were not great. The private sector’s increase was bloated by a return of about 45,000 striking communications workers. They were considered off the rolls in August. A strong gain was posted in the construction sector as nonresidential activity picked up solidly. Let’s wait to see if this is a trend. Retail, telecommunications, health care and professional services all were up. On the other hand, manufacturers became more conservative and cut their workforces a touch. The uncertainty about the world economy seems to be trumping solid order growth. Finance, transportation and wholesaling were also off. But the big negative was government workers, especially local education. Meanwhile, state governments added workers. And I thought it was the state governments that were having fiscal problems. The number of people finding positions was not enough to lower the unemployment rate, which remained at a way too high 9.1%. A rise in the labor force, which I have noted in the past is a sign of growing confidence, offset a rise in employment. The trend in job growth may be changing. Both the July and August numbers were revised upward, by a total of almost 100,000, and that may indicate there is some acceleration in hiring going on. Also, hours worked and wages rose so income gains have improved.

MARKETS AND FED POLICY IMPLICATIONS: It’s incredible how low our sights have been set. The idea that 103,000 workers being added in one month is good and should buoy investors is depressing. We need to be seeing job gains in the 200,000 range. But to get there the public sector has play its part, or at least stop getting so much in the way. In past recoveries, we might have had 25,000 jobs added, a swing of about 60,000 in the September total. In addition, home construction, a huge driver of job gains, needs to improve. With construction weak and government negative, the chances of getting back to strong payroll growth in the near future are not great. I see that happening, but closer to next spring when government layoffs should ease and construction may be somewhat better. Still, the markets should like this number, if investors can see past Greece and the downgrades of European banks. This is not a report that will tell the Fed that Operation Twist (the Fed calls it a “maturity extension program”) is unnecessary. Indeed, it only reinforces the view that with government cutting back, monetary policy is the only tool left to bolster growth.
Re/Max Connection Realtors disclaimer:
Re/Max Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. Re/Max Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
Re/Max Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

August New Home Sales

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NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: August New Home Sales
KEY DATA: Sales: 295,000 unit annualized (down 2.3%): Median Prices (8 ’10-8 ’11): -7.7%

IN A NUTSHELL: “Builders are not building, supply is falling, distressed homes are too cheaply priced and it is difficult to get a mortgage and people are surprised that housing sales are going nowhere?”

WHAT IT MEANS: It would be nice if housing sales pick up but it didn’t happen in August, at least for new homes. Exiting house sales did improve and that is indeed the issue for builders. With so many distressed houses on the market selling for such low costs, frequently below replacement cost, it is extremely difficult for developers to compete. To do that, they have to down sell and that is what is happening. Forty seven percent of the newly built homes sold went for less than $200,000. The sales decline in August was propelled by a sharp cut back in the Northeast and West and a more moderate decline in the South. The Midwest posted a solid increase. Prices are falling but that probably reflects the need to build smaller, less luxurious and less costly homes in order to match the homes that are on the market.

MARKETS AND FED POLICY IMPLICATIONS: The new home market is in the dumps and there is little reason to think it can right itself anytime soon. The problems are huge: Distressed houses are selling for prices that are at times impossible to match, appraisals are difficult because comparables are often distressed houses, many households don’t have much or equity any left in their homes so they cannot trade up or down to a new house and financial institutions are cautious in their lending, partly due to regulatory issues. We are going to have to get used to a slowly improving market at best. That does not bode well for the economy or jobs as this sector generates so many new positions. Indeed, the housing and credit issues seen here are a clear indicator of why this recovery always was going to be and for a while will continue to be disappointing. Anyone who says we can have a strong recovery without housing is missing the point. But we can have a recovery anyway; it’s just that it will not live up to hopes or expectations. Since it is doubtful the overhang of distressed houses will be alleviated anytime soon and housing construction will not soar until that happens, we need to get used to what the economy is capable of and that, unfortunately, is only moderate growth.
Re/Max Connection Realtors disclaimer:
Re/Max Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. Re/Max Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
Re/Max Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

July New Home Sales

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NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: July New Home Sales
KEY DATA: Sales: 298,000 units annualized (down 0.7%); Median Prices (Year-over-Year): +4.7%

IN A NUTSHELL: “With all the uncertainty about the debt ceiling and the economy, it is not surprising that buyers shied away from signing on the bottom line to buy new homes.”

WHAT IT MEANS: New home sales edged down once again as buyers just don’t want to commit to anything right now. The level of sales is pitiful, being only slightly above the all-time low set last summer. Thus, while the year-over-year increase of nearly 7% might look good, it is simply coming off the lowest of lows. Regionally, the sales numbers are totally bizarre and reflect the limited size of the market. In the Northeast, purchases doubled. Of course there were almost no homes sold in June so the increase only brought demand back to more “normal” levels. There was a small increase in the Midwest but moderate declines in the South and West. Builders recognize their plight and they are basically doing no speculative building. The number of homes for sale fell. You probably have to go back to Colonial times to see the number of houses on the market this low (okay, that’s a small exaggeration but you get the picture). As for prices, they were up fairly solidly over July 2010 levels. A somewhat larger percentage of the homes selling for over $500,000 pulled up prices.

MARKETS AND FED POLICY IMPLICATIONS: This report reminds us that the recovery cannot count on the housing sector adding much to growth. That is hardly a surprise. The pressures facing home builders do not end with the economy as they also have to face the reality of price cutting in the distressed home segment of the market. Worse, the level is so low that even strong increases in sales and housing starts will not add that much to growth. But as long as residential activity does add a little to growth, which it is likely to do, we are okay. With the Fed going on its “camping trip” to Jackson Hole this week, everyone is waiting to see what, if anything, Mr. Bernanke has up his sleeve this year. I suspect he will simply lay out the tool box and make it clear that the FOMC is “locked and loaded” and ready to pull the trigger on any and all the policy tools it has available. Whether those policies constitute treason, I leave up to the reader, but with the Fed the only game in town, the pressure is on to make sure the slow recovery does not fail. Mr. Bernanke is an expert on the Great Depression and he knows policy missteps cut short the attempts at recovery. While moving to restrictive fiscal policy may be the same mistake made in the 1930s, the Fed will reiterate that it will pump as much into the economy as it can. Whether lower rates can do anything is another story.
Re/Max Connection Realtors disclaimer:
Re/Max Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. Re/Max Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
Re/Max Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

July Existing Home Sales

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NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: July Existing Home Sales
KEY DATA: Sales: -3.5%; July ’10-July ’11: +21%

IN A NUTSHELL: “”Housing continues to wander aimlessly along despite historically low mortgage rates.”

WHAT IT MEANS: The housing market is still not showing any signs that it is gaining traction. The National Association of Realtors reported that existing home sales fell in July as a large decline in the West offset modest increases in demand in the Northeast and Midwest. There was a small drop in the South. Condo sales are holding up but the stressed out, foreclosure dominated single-family segment continues to drop. Prices are easing as well but some of that may be the continued impact of distressed homes rather than the give and take of buyers and sellers for non-distressed homes. Sellers are recognizing the problems in moving homes by holding houses off the market and the inventory is falling.

MARKETS AND FED POLICY IMPLICATIONS: The Realtors commented, as have most observers of the market, that the appraisal process is causing negotiated deals to fail. If the contract price is not supported by appraisals, which may be affected by distressed homes and limited realistic comparisons, the mortgage will not be written. Only the best borrowers are getting mortgages and that is not enough to drive the market forward. Anyone who has tried to refinance lately, and I am one of those people, know how ridiculous the appraisal process can be. During the bubble, every home seemed to meet the appraisal standard and that ebullience help inflate the bubble. Now we have the opposite where it is frequently impossible for sellers to get a reasonable price even when buyers are willing to pay that price. And with banks so worried about loans failing, the conservative nature of the lending process is and will continue to limit the ability of the housing market to recover. This report, coupled with a rise in inflation, a jump in unemployment claims and a sharp drop in the Philadelphia Fed’s regional survey is only adding to the worries about Europe. European growth is faltering as the cure for their debt and deficits issues is killing growth. But that is no surprise. In the short term, budget cuts reduce economic growth and that is happening with a vengeance in a number of European nations. So why are so many people surprised when European growth numbers are weak? Got me. But that slowdown has implications for the rest of the world, especially if some European banks run into trouble. U.S. banks are linked to European banks and that creates worries that the financial sector will be hit again. That hurts confidence about future U.S. growth. Still, a double-dip recession is hardly baked in the cake and I will remind people that Wall Street and Main Street are not one and the same anymore.
Re/Max Connection Realtors disclaimer:
Re/Max Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. Re/Max Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
Re/Max Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

July Consumer Price Index

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NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: July Consumer Price Index
KEY DATA: CPI: +0.5%; Excluding Food and Energy: +0.2%

IN A NUTSHELL: “There is no rest for the consumer as prices are rising for a wide variety of goods and services.”

WHAT IT MEANS: Once again, the consumer was pushed to the wall by rising retail costs. The Consumer Price Index jumped in July and the increases were pretty much across the board. Gasoline was a major component of the gain but that is unwinding big-time in August. However, food costs just keep increasing. Over the year, food expenses are up in excess of 4% and that is not making the weekly trip to the supermarket very pleasant. Housing rose moderately but we are beginning to see the impact of rent increases. Educational establishments remain in their own world as tuition continues to skyrocket. I cannot wait until my son finally graduates, even if he winds up moving back home. But the strangest situation is in clothing. There was a third consecutive 1% or more monthly increase and over the past three months prices have surged at a 16.4% annualized rate. Apparel has been a moderating influence on overall inflation for years and if we are entering a period of rising prices inflation will be elevated for quite some time. We did see the usual declines in communications and computers while medical care expenses continue to rise at a surprisingly moderate pace.

MARKETS AND FED POLICY IMPLICATIONS: The rise in consumer costs is distressing. It’s bad enough that workers are not getting any pay increases but the surge in retail prices is cutting into spendable income. Inflation-adjusted weekly earnings fell in July and are down by 1% over the year. That is one big reason that consumption is so sluggish. The choice is to spend less or save less and in these uncertain times we know which direction households are going. As for the Fed, the core index, which removes food and energy, is nearing the upper bound of its desired range and is likely to be breached in the fall. Worse, the situation with food is not transitory. There is little reason to think food costs will ease sharply and in the long run as millions of people move into the middle class in the developing nations, the outlook for food is for higher than average inflation. The Fed should keep food in its core index and only exclude energy. The Fed’s bet on low inflation looks like a loser even if the top line number comes way down over the next few months due to the falling energy costs. Core prices are on the rise. But Mr. Bernanke has wedded himself to a two year process so inflation over the next few months is not likely to have any impact on Fed policy. In the long run, though, we are likely to be in for a bought of higher than desired inflation, something the inflation hawks will be chirping about and rightfully so. As for investors, right now it’s all about Europe though and report cannot ease any fears.

Re/Max Connection Realtors disclaimer:
Re/Max Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. Re/Max Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
Re/Max Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

July Housing Starts and Permits

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NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: July Housing Starts and Permits
KEY DATA: Starts: -1.5%; 5+ Units: +6.3%; Permits: -3.2%;

IN A NUTSHELL: “Home construction may not be the leader of the pack but it no longer looks like it will hold things back.”

WHAT IT MEANS: Housing activity is a key factor in the sluggish recovery and there are no great expectations that the sector will return to being robust for quite a while. Given that reality, what I have been looking for is the sector to move forward at a pace which will actually add to growth and that may be happening. After a solid rise in June, there was a modest decline in construction in July. To me, this represents not a backward movement but a solidification of the gains that were made. Housing starts are also up nearly 10% from July 2010, so maybe the improvement is really underway. The multifamily segment rose strongly and since rental housing looks to be the place to be given the inability to buy new homes, this is a good sign that the market is working. Improvement was seen in the East and West. However, a large decline in the Midwest largely created the drop in housing starts. Was weather a factor? That is not clear but a nearly 23% fall off seems to point to a special circumstance not a trend. There was a much more moderate decline in the South. Looking forward, permit requests also eased back but again they are up compared to last year. The number of homes under construction continues to drop, which is disturbing as it implies payrolls are not rising. This is due to the large number of houses that have been completed recently.

MARKETS AND FED POLICY IMPLICATIONS: Housing is coming back slowly but it is coming back. We too often forget that most of the problems arose in just a handful of major construction regions. A large part of the country did not participate in the housing bubble at nearly the same pace and are now beginning to come back. Don’t expect to see strong levels of construction anytime soon as the areas where so much of the construction used to take place are where the excess supply due to the distressed housing inventory exists. But if we see housing starts rise in other areas, which is most of the rest of the nation, then we know the sector is healing. I think that process has begun and I am buoyed by that. As for investors, the world is now the worry, especially Europe even as it appears the U.S. economy is beginning to show that it remains quite resilient. Watch August vehicle sales. With demand up in July, a good sales pace would signal the consumer is spending better than expected and with construction in the positive column, we could see third quarter growth better than the weak pace most economists now project.
Re/Max Connection Realtors disclaimer:
Re/Max Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. Re/Max Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
Re/Max Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

July Employment Report

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NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: July Employment Report
KEY DATA: Payrolls: 117,000; Private Sector: 154,000; State and Local Governments: -39,000; Unemployment Rate: 9.1% (down 0.1 percentage point)

IN A NUTSHELL: “You can tell how worried people are when 117,000 new jobs actually look like a good report.”

WHAT IT MEANS: The reports of the death of the recovery appear to be quite a bit premature. The private sector added jobs at a decent pace in July. Okay, the level is clearly not enough to get the unemployment rate to fall very much despite the decline posted in July. Though down is good, we need better job gains in the months ahead to really make a dent in the way too high unemployment rate. This report, though, does hold out hope that that could happen. The increases were widespread with just about every sector from manufacturing through retail and services showing gains in payrolls. There was even some hiring by construction firms. Once again, we learned that there is no such thing as a free budget cut. State and local governments sliced another 39,000 more people from their rolls and are now down by nearly 350,000 jobs over the past year. In contrast, the private sector added 1.7 million workers during the past twelve months. In normal recoveries, the public sector adds workers. If the public sector simply stayed flat, there would have been over two million jobs added, a moderate not weak recovery. Even a small public sector rise would have led to the July gains being at or above 200,000 and few people would have been worrying about job growth if that were the case. Weekly hours worked and earnings were up solidly and that points to good income growth. Wage and salary income has been lagging and it is hard to get consumers to spend more if they don’t have the money to spend. Maybe that is changing a little.

MARKETS AND FED POLICY IMPLICATIONS: This report points to the simple fact that the economy is not in recession. Hopefully, that buoys fearful investors. There is no arguing that conditions are good but there is a difference between the stock markets and the real economy. Wall Street and Main Street have become delinked. So don’t assume a stock panic means the economy has suddenly nose dived. I stand by my forecast that the economy is not likely to go into another recession and indeed if the decline in oil prices holds up, falling gasoline costs should lead to better growth as we move through the fall. There are implications in this report for Fed policy. The public sector job cut backs are a real drag on growth and the debt ceiling agreement makes it clear that belt tightening will continue to restrain activity for a long time. Monetary policy will have to lean against that headwind and that means the FOMC could signal next week that it is prepared to keep rates low for a longer period of time than had been expected.
Re/Max Connection Realtors disclaimer:
Re/Max Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. Re/Max Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
Re/Max Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

June Consumer Spending and Income

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NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: June Consumer Spending and Income
KEY DATA: Consumption: -0.2%; Disposable Income: +0.1%

IN A NUTSHELL: “With gasoline prices high, incomes not growing and the craziness in Washington creating uncertainty, is it any surprise that people stopped spending?”

WHAT IT MEANS: If the recovery is ever going to gain speed, it will have to come from households deciding they want to spend money again. That will trigger the spending of the $2 trillion sitting on the books of businesses. Well, in June households didn’t hit the malls or vehicle dealers very hard at all. Consumer spending slowed, especially for big-ticket items. There was some increase in soft good items but nothing to write home about. Meanwhile, the services segment, which is nearly two-thirds of all spending, continues to go nowhere. This part of the economy normally grows solidly and consistently and the failure to do so is a clear sign that people are still extremely cautious. Of course, to be able to spend a lot of money you need to make a lot of money and income growth is extremely weak. Wage and salary income was actually down in June. As for inflation, the declining gasoline prices led to a drop in costs.

MARKETS AND FED POLICY IMPLICATIONS: It’s tough to say anything positive about a report that points to consumers spending less money and wage and salary income falling. The spring data have been pretty distressing but we already know that given the weak GDP report. The question, as usual, is where we go from here. What worries me is that businesses are deriving their strong earnings growth through productivity gains, limited wage increases and foreign activities. While that may be good for an individual firm, when most companies do that, income gains become so limited that spending and ultimately growth fades. That is the problem we are now facing. Firms are generating robust earnings but Wall Street is delinked from Main Street and those profits are not creating lots of jobs. Until that changes, there is little reason to expect a strong rebound in growth, especially given the brakes being applied by the weak housing market and the cautious financial sector. At least the debt ceiling bill didn’t cut too much spending in the short term. If there were large spending reductions and/or tax increases, the outlook for growth would be even dimmer than it is currently. Indeed, while almost no economists are marking their short-term forecasts up, the downgrades are minimal. Which raises the question I am hearing a lot today: If a budget agreement was needed to improve growth, why aren’t people more optimistic about growth now that we have an agreement?

Re/Max Connection Realtors disclaimer:
Re/Max Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. Re/Max Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
Re/Max Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

April Retail Sales

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NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: April Retail Sales
KEY DATA: Sales: +0.5%; Excluding Gasoline: +0.2%; Excluding Gasoline and Food: 0.0%

IN A NUTSHELL: “Money is flowing out of consumers’ pockets but an awful lot is being pumped into gasoline tanks.”

WHAT IT MEANS: The economy continues to grow but the overriding question is: “How will the surge in gasoline prices affect the sales of other goods?” We got some insight into that with the April retail sales numbers and the initial returns are not great. While overall demand rose solidly, over sixty percent of the rise came from the increase in gasoline purchases. The other source of pain for consumers, food costs, also played a role with purchases increasing sharply as well. Indeed, when you exclude food and gasoline sales, where the rise was largely price driven, total retail sales were largely flat. People did buy more vehicles, which we knew from the unit sales numbers. Clothing and general merchandise stores did okay but the only winner was online companies. In contrast, furniture, electronics and appliances, sporting goods, restaurants and health care products were all off. The best news was an upward revision to the March numbers which could offset some of the negative from the wider trade deficit.

MARKETS AND FED POLICY IMPLICATIONS: This was a disappointing but not surprising report. Wage and salary income is not growing strongly so for most people, the higher gas prices are a constraint on their budget. But the commodity bubble (yes traders, it was a bubble and there was speculation) has at least started to deflate if not burst so going forward, we should see lower gasoline prices. The issues being created by the Mississippi flooding should only be short term. Look for the negative effects of the oil price spike to be unwound as we move through June (prices go up quickly but for some strange reason they fall more slowly). Thus, second quarter consumption should be soft but it could rebound sharply in the summer. If that sounds like a rationalization for my robust second half of the year forecast, so be it. But I am sticking to that forecast. This report has so much noise due to gasoline that I doubt the Fed will think much about it. But traders may get a bit concerned. What troubles me is that while gasoline prices may fall, food costs continue to rise as we saw in today’s wholesale price data. That could keep spending from really breaking loose. Nevertheless, retail sales should improve during the second half of the year.

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