Fortunately during recessions, the federal government usually will step in and provide emergency extended benefits. However this recession has gone on for so long, and we have so many long-term unemployed, that millions were in danger of losing even those extended benefits. Fortunately the Senate finally got around to extending those benefits for up to another 20 weeks (depending on the overall level of unemployment in that state). Still, unemployment benefits only replace a fraction of what people were earning before they lost their jobs. This means that as soon as people get their pink slips, they will reduce their spending. However, depending on how long they expect to be out of work, they do not bring their spending levels down all the way to their new unemployment insurance income level. There are all sorts of spending categories that are at least semi fixed. If you think you will get a new job soon, you don't cancel little Jimmy's ballet lessons, or Betty's karate lessons. Instead you draw down your savings and use your American Express (AXP) card more.

However, as the weeks go by and you get no response from all the resumes you sent out, more and more things start to go by the wayside. But still does it make sense to quit the country club and lose the $20,000 initiation fee you paid, especially now that you actually have time to use it? Well after a few months you have to bite that bullet too. In the meantime, your non-retirement savings are probably about gone. Going into this recession the savings rate had been close to zero, so it is a pretty safe bet that most people did not have a lot of savings outside their 401-ks or IRAs. You have probably run up your balance on your credit card, but the card companies are getting wise to that and are starting to cut back the available credit limits for millions of accounts. That is a wise move on their part individually, but collectively for the economy, it acts to reduce overall demand.

Oh, and since a big factor in your credit rating is how much credit card debt you have relative to your available limit, both increasing your balance and the bank cutting back your maximum availability will conspire to knock off more than a hundred points from your FICO score. In past downturns, especially recent ones, if the unemployed person were a homeowner, he could tap the equity in the house. Now with millions and millions of homes worth less than the amount of the mortgage, or at least very close to it, that option is not open. Indeed this time around it seems that people are more likely to go in the other direction.

To survive, they are simply not paying on their mortgage and waiting for the sheriff to show up at the door to kick them out. Given the huge numbers of people who are falling behind on their mortgages, and to political efforts to slow the rate of foreclosures, this is actually a very rational strategy. In many parts of the country it has been possible to live rent and mortgage free for well over a year before actually getting kicked out of the house. That can free up a lot of cash to spend on other things. However, it is very bad news for the banks that lent the money like Bank of America (BAC) and Wells Fargo (WFC). It is also going to become a serious issue for the Federal Reserve since it is in the process of buying $1.25 trillion worth of mortgaged backed paper. True, the paper is guaranteed by Fannie (FNM) and Freddie (FRE), but since the taxpayers own 80% of both of them, what is the difference? People have to start tapping their 401-ks and IRAs. While the stock market has recovered nicely, it is still far below its peak, making that option even more painful, along with the 10% penalty imposed if you start to withdraw money from those accounts before retirement age.

By the time people have been out of work for six months or more, they have usually depleted their financial resources. Remember that on average, someone who is out of work has been out of work for 26.9 weeks now, and half of all the unemployed have been looking for work for more than 18.7 weeks. That smashes any record prior to this downturn. At the worst point in the Reagan recession, half of all the unemployed were out of work for more than 12.3 weeks. In fact, since the median duration started being tracked at the beginning of 1967, the median duration has only been in the double digits for 36 of those 502 months, and 14 of those have been during his downturn.

To those who say the stimulus bill has not helped, tell that to the almost 5.6 million people who have been out of work for more than six months. If not for the emergency benefits in that bill, they would be left with no income as soon as they passed that mark. I suspect that the vast majority of people who are in that category assumed that they would have found a new job by now when they first got laid off, and thus did not cut back their spending as fast as, in retrospect, they should have when they first got their pink 
slip.



It is long term unemployment that is the hallmark of a recession. The graph below shows the number of unemployed (in thousands) in each duration group back to 1960. This is not adjusted for the rather substantial increase in the total population over that period, so some upward trend to the numbers would be normal. Notice how stable the pink short term unemployment line is. There are always people getting laid off, and people getting hired. In good times, the number of people becoming unemployed does not really fall that much, it is just that they don't stay unemployed for all that long. They are either able to find a new job quickly, or in the case of many manufacturing jobs, get called back to work by their previous employer.

The light blue line of moderate length unemployment (5 to 14 weeks) shows a little bit more cyclical behavior, but nothing like the two longer term measures, the yellow 15 to 26 week group and the dark blue over 26 week long term group. What is striking about this recession is just how high that long term dark blue line has soared. While these graphs do not have the recession bars in, I would note that the level of long term unemployment usually continues to rise for many months after a recession ends. The shorter term groups tend to turn down well before the long term group does. This means that the situation is likely to continue to get worse before it gets better.



When these people do return to work, it is highly unlikely that they will be earning anything close to what they were earning before they got laid off. Many will be homeless, without any savings and in pretty desperate shape. We have already seen a steep rise in the poverty rate, which rose to 13.2% in 2008 from 12.5% in 2007 (see Census Bureau: Poverty Rising and Income, Poverty & Health Insurance).

Among children, the poverty rate rose to 19.0% in 2008 from 18.0% in 2007. I would be shocked if it does not exceed the one in five level when the statistics come out next summer for 2009. Since health care coverage is largely tied to employment in this country, the rising number of unemployed means that the number of people without health insurance, already at 46.3 million in 2008, is likely to jump further. While it is true that the stimulus package did subsidize COBRA insurance by as much as 65%, by the time people are unemployed for more than six months, it is very difficult for most of them to be able to afford even those subsidized premiums. When those people get sick, their only option is to go to the hospital emergency room, which is a very expensive and inefficient way of being treated. It is not free either, the hospital will try to bill them for the services, and even send debt collectors on them, although in most of these cases they will be trying to get blood from a stone.

For many, it simply means that they go without treatment, other than over-the-counter medicines they buy at Walgreen's (WAG). If it turns out to be something more serious, it very often results in death. A Harvard study recently estimated that 46,000 Americans die prematurely each year because of a lack of health care coverage. That is a national disgrace.

While unemployment is a lagging indicator of the economy, it does play a role in the economy going forward. It will be very hard to sustain the surprisingly strong growth we have seen in recent months if we don’t start to see some improvement in the employment picture. Yes, huge improvements in productivity are good, but people on the ground need jobs.

Source: FRED

On Tuesday the Census Bureau announced that U.S. retail and food services sales in August were 2.7% higher than in July on a seasonally adjusted basis. True, 2/3 of the additional $9 billion in spending was attributed to motor vehicles and parts, and September car sales could be much worse than August. Another 1/6 of the new spending came from gasoline stations, and the higher average gasoline prices in August are hardly cause for celebration. But even excluding autos and gasoline, core retail sales were up 0.6% in August. Here's the summary from Stephen Stanley of RBS:

after a string of contractions, these data suggest that consumer demand is, at a minimum, stabilizing. Core retail sales may even be starting to firm slightly (up in 2 of the past 3 months), but we will need to see another month or two of positive data to have confidence in that view.

Source: FRED

On Wednesday the Federal Reserve reported that its index of U.S. industrial production grew by 0.8% in August, adding to the 1% gain seen in July, and breaking the steady drop this indicator had been exhibiting since January 2008. Spencer of Angry Bear notes that the increase in industrial production over the last two months is typical for previous economic recoveries. If this does prove to be a typical recovery, given the sharpness of the downturn we would expect to see sharp growth from here.

Source: Angry Bear

These new readings for sales and production were enough to push the Aruoba-Diebold-Scotti Business Conditions Index back into positive territory for the first time since the recession began.

Aruoba-Diebold-Scotti Business Conditions Index.

What's not to like? My key worry about the U.S. economy remains the employment picture. The Conference Board includes initial claims for unemployment insurance and average weekly manufacturing hours in its index of leading economic indicators, the number of workers employed on nonfarm payrolls in its index of coincident economic indicators, and average duration of unemployment in its index of lagging economic indicators. Manufacturing hours have indeed rebounded off their lows.

Source: FRED

But for total private industry jobs, we've been stuck at 33.1 hours/week since March, unless you want to claim victory on the basis of the brief nadir of 33.0 hours/week touched in June.

Source: FRED

New claims for unemployment insurance did fall this spring. But the 4-week average reported Thursday is actually worse than the numbers we were seeing at the end of July.

Seasonally adjusted weekly new claims for unemployment insurance (black line) and 4-week average (blue line) so far this year.

Bill McBride believes that as long as the number of new claims remains above 400,000 per week, the total number of Americans working is going to continue to fall. With the latest 4-week average for new claims at 563,000, we've got a long way to go before the employment situation is actually improving.

Source: FRED

And even once the number of Americans working starts to grow, unless it grows faster than the number looking for work as a consequence of population growth, the unemployment rate will continue to climb.

Source: FRED

I see this as more than the conventional hand-wringing about a "jobless recovery." That phrase might suggest that we're just talking about a replay of the anemic recovery that followed the 2001 recession. In the first 6 months of 2002, nonfarm payrolls fell by 350,000, or 58,000 per month. In July and August of 2009, payrolls fell by 492,000. If the recession really ended in June, as some claim, this is a much more serious problem than we saw in 2002-2003.

And it is a more serious problem not just because of the ongoing human cost. It also undermines the prospects for continued improvement in the other indicators. As long as large numbers of people are still losing their jobs, that can set in motion a number of undesirable feedbacks such as increasing loan delinquencies that could bring about a replay of some of the concerns many of us had hoped were behind us. Federal Reserve Bank of San Francisco President Janet Yellen was right on target:

The financial system has improved but is not yet back to normal. It still holds hazards that could derail a fragile recovery....

And the likelihood of continuing losses by financial institutions will add new fuel to the credit crunch. In particular, small and medium-size banks could experience damaging losses on commercial real estate loans. Thus far, the largest losses have been on loans for construction and land development. Going forward, however, rising loan losses on other commercial real estate lending is likely because property values are falling, office vacancy rates are rising, and credit remains tight or nonexistent for those many property owners that will need to refinance mortgages over the next few years. Financial contagion from this sector is one of the most important threats to recovery.

So yes, it was a good week for some key economic indicators. But serious concerns remain.

Aug 30, 2009

If you've only been following Econbrowser since 2008, you may have thought that the crabby countenance in the upper-right corner of our main page was a permanent fixture, conveying our general grumpiness about the state of the economy or perhaps life in general. Despite having been stuck in the pessimistic mode for quite some time now, the emoticon was in fact always intended to be a dynamic feature, adjusted from time to time to provide readers with our overall impression of incoming data. The table on the left provides links to each occasion that our Little Econ Watcher's countenance has changed in the past.

Last week's data persuaded me to move the Econbrowser Emoticon back into neutral, signifying that I now judge overall output to be growing slowly rather than declining. Here are details on the evidence that prompted this change in assessment, and what it signifies.

What's changed? For starters, we saw a surge in automobile sales and production in July, and preliminary indications are that August will be even stronger. Granted, there are real concerns that this was a temporary kick from the cash for clunkers program, meaning that September sales could fall sharply. But remember that the revised data reported by BEA on Thursday showed U.S. real GDP growth of -1.0% at an annual rate for the second quarter, to which motor vehicles and parts contributed -0.13%. Even if auto sales in Q3 were at the same low level they had been in Q2, a 0% rather than -0.13% contribution would mean a higher GDP growth rate for Q3 than Q2, other things equal. And even with a very bad September, Q3 auto sales should handily exceed Q2.

An even stronger case holds for housing, which contributed -0.66% to that -1.0% 2009:Q2 GDP growth. The Census Bureau reported on Wednesday that seasonally adjusted new home sales in July were 9.6% higher than in June. Granted, they remain at historically very low levels. But again, even if these are only modest improvements over the dismal Q2 numbers, that -0.66% becomes a positive number for Q3. And although there's lots of potential measurement error in the new home sales data, a 9.6% gain within a month isn't a modest number.

Many analysts were troubled by the BEA report on Friday that personal income was flat in July, and I agree that this is not what you'd expect in a surging economy. But it's worth noting that real personal consumption expenditures were up 0.2% in July, consistent with the conclusion that we're unlikely to see a further decline in overall GDP this quarter.

Source: Calculated Risk

There are other indicators that encourage me as well. The Census Bureau released on Wednesday a very favorable report on new orders for durable and capital goods. Semiconductor chip maker Intel (INTC) announced Friday that it expects much higher revenue for the third quarter than it saw in the first half, suggesting sales of computers and a variety of electronic products are picking up. The Aruoba-Diebold-Scotti Business Conditions Index, although still negative, has climbed back up considerably from its earlier lows. All of this leads me to form the opinion that U.S. real GDP has stopped falling and is starting to grow again.

Aruoba-Diebold-Scotti Business Conditions Index as reported on Aug 28, 2009, with NBER-dated recessions as shaded regions. Data source: FRB Philadelphia.

Let me now clarify what this change in our little friend's countenance does not signify. First, it is not an Econbrowser Declaration that the recession is over-- that will have to wait until our GDP-based recession indicator index falls below 33%.

Nor is this a less formal "all-clear" signal. Far from it. I still don't see the evidence that employment has started to pick back up, and as long as the number of people with jobs is falling, there is plenty of potential for destabilizing feedback. Lower employment can aggravate mortgage defaults and put further stress on key financial institutions. As long as employment continues to fall, things could rapidly deteriorate.

But the situation definitely looks better than it did.

Chicago, IL – July 27, 2009 – Zacks Equity Research highlights Onyx (ONXX) as the Bull of the Day and Starwood Hotels and Resorts Worldwide (HOT) the Bear of the Day. In addition, Zacks Equity Research provides analysis on D.R. Horton (DHI), Lennar (LEN) and Beazer (BZH).

Full analysis of all these stocks is available at http://at.zacks.com/?id=2676

Here is a synopsis of all five stocks:

Bull of the Day:

We maintain our Buy rating on Onyx (ONXX) shares with price target of $45.

Onyx delivered strong financial performance in 1Q09 and we expect the company will continue to deliver very good financials for 2009. Nexavar sales continued to grow in 1Q08, which was mainly attributed to the market penetration in liver cancer while market share has stabilized in kidney cancer market in spite of heavy competition. Total Nexavar sales came in at $178.1 million, up 17% year over year. This increase was mainly driven by international sales which reached $130 million, up 29% year over year.

Bear of the Day:

We maintain our Sell rating on shares of Starwood Hotels and Resorts Worldwide (HOT). The shares have climbed significantly since bottoming out in early March.

Industry fundamentals have continued to deteriorate, with year-to-date weekly revenue per available room, or RevPAR, down nearly 20% versus the year-ago period.

Latest Posts on the Zacks Analyst Blog:

Homeowner Vacancies Fall

The Census Bureau provided another sliver of good news on the housing front today. It reported that the homeownership rate in the second quarter actually rose slightly to 67.4% from 67.3% in the first quarter. Not a huge improvement, but it reverses a steep slide that the rate has been on.

The slight uptick in the ownership rate, combined with the slowdown in the pace of new homebuilding, has had another very beneficial effect. It has lowered the vacancy rate of houses, as is shown in the second graph.

At 2.5%, it is still far above the historical norm of about 1.7%, but it is a very sharp improvement from the 2.9% rate last winter. This data is in line with the drop in existing home sales inventory we saw yesterday, and the lower trend of absolute new home inventory we have seen in recent months (new home sales data is due out on Monday).

The gap between the current rate and "normal" still represents a huge overhang of housing supply on the market. There are a total of about 75 million owner occupied homes in the U.S (69% of which have mortgages, the rest owned free and clear). Thus, the 0.8% above the normal vacancy rate represents an overhang of about 600,000 excess houses. That is the glass half empty part.

The half full part is that we have absorbed about 300,000 excess houses so far this year. The situation is still bad, but we are making significant progress. If you are a particularly adventuresome sort, you might actually think of putting some of the homebuilders in your portfolio. However I would stick to the financially stronger players like D.R. Horton (DHI) and Lennar (LEN) and still avoid the more speculative weaker players (and I would still consider strong players to be speculative) like Beazer (BZH).

Get the full analysis of all these stocks by going to http://at.zacks.com/?id=5507.

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We cannot blame the Obama administration for failing to predict June's 9.5 percent unemployment rate. That result just shows the size of the shocks hitting the economy: Even the best forecasters can miss the unemployment rate by almost two percentage points, even when forecasting fewer than six months ahead.

That makes sense, and is in line with my previous post. But he then argues that since we’ve seen little stimulus effect so far, we should cancel the stimulus, since it'd be costly on a per-job basis (and in any case, he believes the effect on GDP to be small [1]). These are interesting assertions meriting further analysis.

Stock-Flow Mismatch

We're all free to use whatever multipliers we want (although I like to look at ranges, in order to safeguard against prejudices) in making our arguments. But one thing we shouldn't do is confuse stocks and flows. Professor Mulligan writes:

"The Obama administration had said that the stimulus bill would "save or create" 3.5 million jobs while adding $787 billion to the federal budget. Admittedly, some of this money went to taxpayers and to some worthwhile public works, but it also created additional economic burdens in the process of collecting the taxes and issuing the debt to pay for it. To an order of magnitude, the promise of those 3.5 million jobs cost a quarter of a million dollars per job promised."

Note that $787 is spent over several years (a flow). 3.5 million jobs is a stock. But wouldn't we want to incorporate how long those jobs would be around? That suggests we should use job-years instead of jobs, to make the numerator and denominator comparable. The Administration estimated the number at 6.8 million [2]. That works out to a cost per job-year of $116 thousand.

From my perspective, I view the appeal to the number of jobs created and saved alone as an inadequate approach. Rather, I think the concept of focusing on output makes more sense, as it incorporates indirectly how much income goes along with that employment. And GDP incorporates the returns to land and capital, as well. Furthermore, to the extent that economic activity is above what would obtain without the stimulus, then asset prices (think houses, plant and equipment, etc.) are above what they otherwise would be. Focusing on jobs, even job-years, or even output, omits these factors. On the other side, of course, one accumulates debt, and in the absence of slack, induces crowding out. Those potential effects should also be acknowledged (and are incorporated in the simulations conducted by CBO, IMF, etc.)

Sectoral Stimulus Mismatch

I do wonder about Professor Mulligan's assertions that the effect of stimulus spending will be limited due to absence of slack resources in targeted sectors. In particular, he has argued that stimulus spending directed to health care will have little multiplier impact since unemployment in that sector is low. However, the most recent Employment Situation reveals for June 2009, unemployment in health services was 5.2 percent, compared to 3.1 percent in June 2008. As an aside, while Professor Mulligan didn't mention education services, I'll observe that a lot of spending in the stimulus bill went either directly or indirectly (via transfers to the states) in support of education. Unemployment rates in June 2009 were 9.8 percent, compared to 4.8 in June 2008...I think some slack exists even in these sectors doing relatively well.

Construction Crowding Out

By the way, Professor Mulligan argues that the presence of offsetting cycles in residential and nonresidential construction suggests that the spending now occurring in nonresidential construction will result in crowding out of residential spending. This is a quite interesting approach to the question of crowding out, although not, in my opinion, the natural way. It seems to me one would want to examine the cross correlation of private and public construction. It turns out that the Census Bureau reports these numbers here. The resulting graph is below:

A Granger causality test on first difference of each series (2 lags) fails to reject the null hypothesis that public construction does not cause private construction, at the 5% msl. On the other hand, the test rejects the null that private construction does not cause public construction at the nearly 1% msl. This is hardly a formal test, and I suspect that this conclusion could be overturned by different specifications. However, the main point is the evidence for crowding out is hardly overwhelming.

Output Multipliers

So, in my opinion, let's return to output multipliers in our discusion of fiscal policy efficacy (timing has been dealt elsewhere [2] [3], [4]). Professor Mulligan is free to use whatever multipliers he believes in. I'll rely upon a range, and here's the range the CBO uses.

Source: FRED.

One bit of good news this week was the Census Bureau report that nominal seasonally adjusted U.S. retail and food services sales rose 0.5% in May. But of the $1.57 billion increase in total spending, almost $1 billion of it came from extra spending at gasoline stations. An optimist might read that as an indication that consumers are now prepared to spend more, and just happened to devote most of that extra spending to gas. A pessimist might worry that it portends further cuts in spending on other items ahead. But then, pessimists always find something to worry about, don't they?

National average U.S. gasoline retail price. Source: NewJerseyGasPrices.com.

Or perhaps we can take some cheer from the Labor Department report that new claims for unemployment insurance fell again this week. In principle that could be quite a promising signal. But this week's number puts the 4-week moving average barely below the value we saw May 7.

Seasonally adjusted weekly new claims for unemployment insurance (black line) and 4-week average (blue line) so far this year.

Count Jeff Frankel among the skeptics who see no hint of recovery in total hours worked.

Seasonally adjusted index of aggregate weekly hours (CES0500000034), from BLS.

So maybe all the optimism is inspired by favorable developments elsewhere on this globe. Some point to a resumption of strong economic growth from China. But Edward Hugh (via Brad DeLong) notes that any growth in China is not coming from their ability to sell more products to the rest of us.

Source: Edward Hugh.

Is China's domestic expansion so strong that it can carry this all by itself? Hugh steers us to Macro Man, who thinks that a big part of what's happening is the Chinese are simply buying raw commodities to stockpile. Their copper imports, for example, far exceed what could plausibly be attributed to increased domestic production.

Source: Macro Man.

The above graph, by the way, appears to just go through April, and China's copper imports were up another 6% from those sky-high April values in May. Macro Man has similar graphs for China's imports of coal and iron, and a slightly less dramatic picture for oil. All of which may have something to do with the fact that, despite what looks to me to still be a very weak world economy, the average commodity price in the graph below has increased by over 25% in the last three months.

Prices of assorted commodities normalized at March 17, 2009 = 100. Data source: WSJ commodity cash prices, via Webstract.

Technorati Tags: macroeconomics, China, commodities, economics, recession

Financials were the leading gainers yesterday, with a 3.6% advance, ahead of today's release of methodologies employed in the stress tests given to 19 US banks, intended to indicate the banks' abilities to survive more adverse economic conditions. The consensus belief is that most banks will fare relatively well, passing the tests, but the nervousness is intact until the results are declared on May 4. Credit card firms saw a jump in their stocks yesterday after President Obama's meeting with senior executives of Bank of America (NYSE:BAC), JP Morgan Chase (NYSE:JPM), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), US Bancorp (NYSE:USB), Visa (NYSE:V), MasterCard (NYSE:MA), Capital One Financial (NYSE:COF), American Express (NYSE:AXP), Discover Financial Services (NYSE:DFS) and several other firms. Obama's conciliatory tone soothed nerves, sending shares of Wells Fargo (NYSE:WFC) up 10.5%, Capital One (NYSE:COF) up 17.7%, and American Express (NYSE:AXP) up 7.9%. Today's docket will witness applicants for five positions as managers for raising funds in the governments' program to create a market for banks' illiquid, mortgage-backed assets clogging balance sheets. Candidates include Blackrock (NYSE:BLK), Pimco, and Bank of New York Mellon (NYSE:BK).

Economic posts yesterday failed to give any indication of a budding recovery, as US labor and housing posts continued to disappoint. Initial jobless claims rose 27,000 to 640,000, inline with analyst expectations. Continuing claims advanced to a record 6.137 million. On the housing front, existing home sales revealed a surprisingly large 3% drop in March to an annual rate of 4.57 million.

Today's key items of interest include March durable goods orders, expected to reverse February's 5.1% rise with a decline of 1.5%. Excluding autos, orders are expected to have dropped 1.3%, reversing the prior month's 3.9% jump. New home sales for March are expected to hold steady at 337,000. Disappointment outweighs chances of a pleasant surprise, following last week's Census Bureau report that new-home construction fell 9% in March from the prior month's pace. Also meeting are leaders of G7, with Treasury Secretary Geithner slated to speak after the meeting at 4:30 PM ET.

On the corporate front, Microsoft's (NASDAQ:MSFT) headline results indicated a 30% decline, on "a broad-based slowdown across virtually all product lines and geographies" according to the firm's CFO, who also expects the recovery to be slow and gradual. However, Microsoft shares rose in after-market trading as results ex-items matched estimates and release of its Windows 7 operating system appears on track.  Bellwether UPS (NYSE:UPS) warned of a challenging second quarter, although hopeful the economy would bottom later this year. Steelmaker Nucor (NYSE:NUE) rued a virtually nonexistent demand for steel.

Note: graph does not include today's new home sales data. Source: Calculated Risk.

The new home sales figure is particularly relevant. Calculated Risk has been emphasizing the discrepancy between the possible turnaround in sales of existing homes and what had up until today been an ongoing slide in new home sales. Much of the strength in existing home sales has come from foreclosure resales. Large numbers of foreclosures coupled with falling sales of new homes do not paint a picture of a healthy housing market. Although the February bump in seasonally adjusted new home sales is encouraging, on a seasonally unadjusted basis, we'd usually expect February sales to be 25% above the seasonal low in December. But the seasonally unadjusted February 2009 number was about the same as was reported for a very weak December and 44% below February 2008.

Seasonally unadjusted new home sales. Source: Calculated Risk.

Despite the increase in sales of existing homes, the inventory of unsold existing homes unfortunately also increased in February. But the good news is that this inventory remains below the levels seen for most of 2008.

Source: Calculated Risk.

Here is Calculated Risk's take on the earlier existing home sales report:

Inventory levels increased sharply in 2006 and 2007, but have been below the year ago level for the last seven months. This might indicate that inventory levels are close to the peak for this cycle. Note: there is probably a substantial shadow inventory-- homeowners wanting to sell, but waiting for a better market-- so existing home inventory levels will probably stay elevated for some time. There is also the possibility of some REOs [real estate owned] being held off the market.

It is important to watch inventory levels very carefully. If you look at the 2005 inventory data, instead of staying flat for most of the year (like the previous bubble years), inventory continued to increase all year. That was one of the key signs that led me to call the top in the housing market!

If the trend of declining year-over-year inventory levels continues in 2009 that will be a positive for the housing market. Prices will probably continue to fall until the months of supply reaches more normal levels (in the 6 to 8 month range), and that might take some time.

As long as house prices continue to fall, concerns about the true value of mortgage-backed securities and financial instruments constructed from them will still be with us. But a lower bound on how much farther house prices will fall would help significantly to resolve the status of trillions of dollars in these "troubled assets".

On Monday CR wrote:

I think the keys to watch for the housing market are declining inventory levels, a bottom in new home sales, and the gap between new and existing home sales closing.

CR was right on target about the housing peak, so I trust his judgment in calling the bottom. But I take some encouragement in the news of the last two weeks.

Technorati Tags: macroeconomics, economics, housing, recession

Retail Sales increased unexpectedly by 1% to $344.6 billion in January, ahead of the 0.6% drop grew anticipated , following a decline of 3% in December (originally reported 2.7%), breaking the 6 month streak of declining retail sales which are down 9.7% from January 2008 levels.  Sales at Building Material & Garden Equipment & Supplies Dealers was the kind of business with the largest reduction in retail sales, by 3.2% as a result of exceedingly harsh winter conditions.  Nonstore retailers increased the most, by 2.7%, while sales at Gasoline Stations increased 2.6% over the month although 35.5% below sales volume 12 months ago.  Retail sales excluding autos, which tends to be a more volatile component of spending, increased by 0.9%, also a positive surprise as this figure was also expected to decline, by 0.5%, following a 3.2% drop in December (originally reported as a 3.1% drop) and declined 6.0% over the past year.  Sales in motor vehicle parts and dealers are up 1.6% over the month and are down 22.2% over the year.

Initial Claims for the week ending Feb. 7th fell by 8,000 to 623,000, the second highest level since October of 1982, from 631,000 last week (revised upwards by 5,000), which was the 26 year high.  This report was in line with analysts' consensus estimate of 620,000, a 0.48% surprise.  The 4-week moving average was 607,500, an increase of 24,000 from the previous week's revised average.  California made a 20k impact in last week's dismal initial claims figure from layoffs cited in construction and service industries.  North Carolina also made a heavy impact with an increase of 8,663 filings from layoffs in textile, transportation equipment, industrial machinery, construction, and services industries.  The report shows those continuing to receive unemployment benefits rose by 11,000 to 4,810,000 last week, again the highest continuing number ever, and was only 2,695,000 in the prior year, when the U.S was only in the second month of the current recession. 

Today at 10:00 AM EST, Business Inventories for December 2008 will be released by the Census Bureau, expected to shrink by 1.1% following a 0.7% decline in November.

Upcoming Releases
Net Foreign Purchases (02/17 at 9:00 AM EST)
Housing Starts (02/18 at 8:30 AM EST)
Building Permits (02/18 at 8:30 AM EST)
Industrial Production (02/18 at 9:15 AM EST)
Capacity Utilization (02/18 at 9:15 AM EST)
Producer Price Index (02/19 at 8:30 AM EST)
Leading Indicators (02/19 at 10:00 AM EST)

This morning, the Census bureau confirmed that it was an absolutely dismal holiday retail sales season. On a seasonally adjusted basis, total retail sales dropped 2.7% from November, and were down 9.8% from a year ago. On top of that, the drop in retail sales in November was revised down to a decline of 2.1% from October rather than the -1.8% originally reported.

If you strip out auto sales (as dismal as the auto sales numbers were), on a month-to-month basis things were even worse, down 3.1% from November, although somewhat better on a year-over-year basis, down 6.7%.

Keep in mind that these are nominal figures, not adjusted for inflation. In real terms, the year-over-year figures are much worse; however they might not be quite as bad on a month-to-month basis because it is possible we are now deflating on the consumer level.

The declines came despite retailers being extremely promotional throughout the holiday season. This indicates that gross margins probably suffered as well as sales -- not a pretty combination. I seriously doubt that gift-card sales will save the retailers in January, so look for some very ugly earnings reports.

If you did get gift cards over the holidays, by all means use them as soon as possible. If a retailer goes belly-up, gift-card holders are unsecured creditors and are likely to get nothing. So use 'em or lose 'em. 

I would expect a rash of store closures and bankruptcies in the retail sector, both "mom & pops" and big chains. Firms in the middle to high-end of the retailing scene seem particularly vulnerable, and even if they avoid going bankrupt do not look like good places to invest. Avoid firms like JC Penney (JCP), Nordstrom (JWN) and Sears (SHLD). In addition, this will cause serious pain to the owners of malls like General Growth Properties (GGP). 

Read the full analyst report on JCP.

Read the full analyst report on JWN.

Read the full analyst report on GGP.

Upcoming Releases
 Treasury Budget (today at 2:00 PM EST)
 Initial Claims (12/11 at 8:30 AM EST)
 Retail Sales (12/12 at 8:30 AM EST)
 Producer Price Index (12/12 at 8:30 AM EST)