Sales of New Homes in October: New Low for Current Cycle
Sales of new single-family homes fell 5.3% to an annual rate of 433,000 in October, which is close to the 401,000 cycle low of the 1990-91 recession. Purchases of new homes dropped in the South (6.0%) and West (-18%) but advanced in the Northeast (+22.6%) and Midwest (+6.0%).
The median price of a single-family home declined to $218,300 in October, down 7.0% from a year ago. The median price of a new single-family home has fallen 17% from the peak in March 2007, which is twice the size of the decline seen in across business cycles since 1969 (median decline in 8.6%).
At the October sales pace, new single-family homes would take 11.1 months to sell if inventories have to be reduced completely. The record high mark is 11.6 month supply in the 1980 recession (see chart 3). Once again, the elevated level of inventories presents a problem, implying that additional price declines should be expected.
Weakness in Consumer Spending Most Likely to Persist
Nominal consumer spending fell 1.0% in October, while inflation adjusted consumer spending dropped 0.5%. Real purchases of durables and non-durables dropped 3.8% and 0.6%, respectively, in October. Real service outlays moved up 0.2% during October, matching the gain seen in September. Inflation adjusted consumer spending has declined for five straight months, the longest string of declines since the 1981-82 recession. Based on October data and conservative assumptions about November and December, consumer spending is most likely to post a 4.0% drop in the fourth quarter after a 3.7% decline in the third quarter.
The 0.3% increase in personal income during October follows a 0.1% gain in September that was affected by hurricanes. Personal saving as a percent of disposable income was 2.4% in October compared with 1.0% in September. A small upward drift in personal saving is emerging.
A significant moderation of both overall and core inflation is visible in October. On a year-to-year basis, the personal consumption expenditure price index rose 3.2% in October, down from 4.13% in September and a cycle high of 4.50% in July 2008. The core personal consumption expenditure price index moved up 2.08% from a year ago compared with a 2.43% cycle high mark in August (see chart 6). A more significant moderation of inflation is likely in the months ahead given projections of weak economic conditions.
Durable Goods Orders Show Widespread Weakness
The 6.2% drop in orders of durable goods reflects widespread weakness in bookings of durable factory goods. In October, with the exception of the communications component (+7.7%), all major categories of durable goods orders posted declines. Defense (-31%), aircraft (-4.7%), general machinery (-6.8%), motor vehicle (-4.5%) and electronics and computers (-2.4%) were some of the declining components.
Shipments of durable goods declined 2.4% in October, inclusive of a 2.4% drop in shipments of non-defense capital goods excluding aircraft. The weakness in shipments of non-defense capital goods excluding aircraft is indicative of a significant drop in capital spending in the fourth quarter which should exceed the 5.7% annualized decline in the third quarter.
Jobless Claims Could Soon Match the High Seen in the 1981 Recession
Initial jobless claims fell 14,000 to 529,000 in the week ended November 21. Continuing claims, which exceed initial claims by one week, fell 54,000 to 3.962 million. The 4-week moving average of continuing claims (see chart 9) is at the highest level since the 1981-82 recession. Readings of the current cycle could soon match the level seen in the 1981-82 recession (see chart 9).
China: Getting Serious About The Slowing Economy
The People’s Bank of China (PBoC) slashed its benchmark one-year loan and deposit rates by 108 basis points apiece today, reducing them to 5.58% and 2.52%, respectively (see Chart 10). This dramatic move comes well after the industrialized economies coordinated a major monetary easing – most central banks have already turned their attention toward liquidity concerns and an eventual global recession. Only three months ago, Beijing had a proactive mindset, thinking about economic stimulus to compensate for the post-Games lull and a general slowdown in global production. The first question that comes to our mind is why does the government suddenly seem to be lagging in its response?
One fact worth noting is that the immediate economic impact on the Chinese economy has not been as clear-cut as in the industrialized countries. The Olympic Games threw in plenty of distractions and had widespread effects on economic indicators. Retail sales were positively impacted from the many tourists flooding into the country, but conversely, industrial production fell off as many factories closed in response to temporary anti-pollution measures. The conclusion of numerous infrastructure projects shifted flows of goods and inputs, and plenty of other one-off factors added a lot of noise to China’s economic statistics. Only after the Games passed and some of those factors fell from the calculations did a clearer picture emerge, and the trends are not promising. Industrial production continues to fall, and monthly export growth is showing signs of weakness (see Chart 11).
To be fair, the PBoC issued minor rate cuts over the past three months, and the government did offer a supplementary fiscal stimulus package (although the latter used a rather fast and loose interpretation of ‘stimulative’ measures). Today’s more dramatic move suggests that PBoC officials are now firmly convinced that China will be joining the rest of the world in a significant economic slowdown. Some forecasts recently suggested that after GDP growth of nearly 12% in 2007, the economy could slow to below 10% this year and perhaps 7.5% in 2009. While the growth rate itself is still enviable, officials in Beijing realize all too well that a deceleration of over four percentage points will not go unnoticed, and they will likely be taking more action before the year is up.
