October Pending Home Sales Index beats expectations by reaching its highest level in five years.

The October report on Pending Home Sales, released by the National Association of Realtors, was Thursday’s big surprise.  Although economists had been expecting to see a one percent increase in the Pending Home Sales Index, the report indicated a 5.2 percent jump to the highest level since March of 2007.

From the report:

The Pending Home Sales Index,^* a forward-looking indicator based on contract signings, increased 5.2 percent to 104.8 in October from an upwardly revised 99.6 in September and is 13.2 percent above October 2011 when it was 92.6.  The data reflect contracts but not closings.

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The PHSI in the Northeast slipped 0.1 percent to 79.2 in October but is 13.3 percent above a year ago.  In the Midwest the index jumped 15.6 percent to 104.4 in October and is 20.0 percent above October 2011.  Pending home sales in the South rose 5.5 percent to an index of 117.3 in October and are 17.4 percent higher than a year ago.  In the West the index declined 1.1 percent in October to 105.7, but is 0.9 percent above October 2011.

The Commerce Department’s Bureau of Economic Analysis released its Second Estimate of Third Quarter GDP on Thursday.  Although the GDP increase was upwardly-revised from 2.0 percent in the preliminary estimate, to 2.7 percent expansion in the Second Estimate, economists had been expecting 2.8 percent.  More important was the fact that personal consumption expenditures (PCE) increased at an annualized rate of 1.4 percent.  This was a downward-revision from the 2.0 percent increase reported in the preliminary estimate.  This signals weaker consumer demand than initially assumed.  Because the United States’ economy is seventy percent consumer-driven, this is a significant disappointment.

From the report:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.7 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the “second” estimate released by the Bureau of Economic Analysis.  In the second quarter, real GDP increased 1.3 percent.

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The acceleration in real GDP in the third quarter primarily reflected upturns in private inventory investment and in federal government spending, a deceleration in imports, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by a downturn in nonresidential fixed investment and decelerations in exports and in PCE.

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Real personal consumption expenditures increased 1.4 percent in the third quarter, compared with an increase of 1.5 percent in the second.  Durable goods increased 8.7 percent, in contrast to a decrease of 0.2 percent.  Nondurable goods increased 1.1 percent, compared with an increase of 0.6 percent.  Services increased 0.3 percent, compared with an increase of 2.1 percent.

The Department of Labor’s weekly report on initial unemployment claims was expected to indicate a decrease to 390,000 from the previous week’s advance figure of 410,000.  Nevertheless, the previous week’s figure was upwardly-revised to 416,000 and the advance figure for the week ending November 24 was 393,000.  Ultimately, the weekly decrease was 23,000 claims – compared with the anticipated decrease by 20,000 claims.  Q3 GDP Revised Up – Jobless Claims Down

The Kansas City Fed’s Regional Manufacturing Survey for November was a disappointment.  Economists had been expecting to see a reading of negative one, which would have been an improvement from October’s negative 4.  Unfortunately, the composite index sank to negative 6 for November.  Home Builders Could Be Affected By the Fiscal Cliff

The major ETFs expected to respond to the Thursday’s economic reports are:

Industrial Select Sector SPDR ETF (NYSEARCA:XLI)  +0.57%

iShares US Real Estate ETF (NYSEARCA:IYR) +0.67% Learn More About iShares ETFs

iShares Dow Jones Home Construction ETF (NYSEARCA:ITB)  +0.29%

iShares Dow Jones US Industrial ETF (NYSEARCA:IYJ)  +0.62%

SPDR KBW Mortgage Finance ETF (NYSEARCA:KME)  +1.03%

Bottom line:  The return of the Pending Home Sales Index to its highest level since March of 2007 – when the index also reached 104.8 – is important news for the troubled housing market, which has been at the center of the economic crisis.

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About John Nyaradi (http://www.wallstreetsectorselector.com) John Nyaradi is Publisher of Wall Street Sector Selector: Your Home For ETF Investing! John writes a weekly guest column, John Nyaradi’s ETF Edge for MarketWatch.com and his investment articles have appeared in many online publications including Trading Markets, Money Show, Yahoo Finance, Investors Insight, Fidelity, ETF Daily News, iStock Analyst , among many others. His book, Super Sectors: How to Outsmart the Market Using Sector Rotation and ETFs, is published by John Wiley and Sons and included among the Years Top Investment Books in the 2011 Stock Trader’s Almanac.