Thursday, August 25, 2011


Condition of the US Economy Report

It is a mistake to attempt to match daily or weekly changes in the stock market with underlying economic conditions.  This is popular among individuals on Wall Street and in the media, but the two do not necessarily track one another in the short term, especially in today’s environment.  In the long run, improvements in productivity lead to improvements in profits.  This, of course, directly impacts the stock market.  In the short run, however, other issues are at play.  Businesses and consumers continue to be impacted by negative psychological influences.  Now, the Federal government has introduced politics combined with heightened uncertainty into the mix.  This also happened at a time when the stock market was overvalued a bit anyway.  We all know what happens when all of these things come together.

The good news is that the broad-based psychological impacts will diminish over time as economic conditions improve (especially related to more positive employment data being released).  The semi-good news is that the Federal government can reduce the additional uncertainty and risk it recently introduced by actually fixing the imbalance between revenues and expenditures.  The term “semi-good news” is used since the practice of competency does not always occur in Washington D.C.  Get it done Mr. President and members of Congress.

So what are the economic conditions that would lead an economist to believe that all is not as dire as the stock market suggests?  First, this past month’s employment data is much improved over the previous two months. Creating 117,000 new jobs nationally in July is not all that impressive, but it compares to 46,000 new jobs in June and 53,000 new jobs in May.  Bottom line: employment is still growing, albeit very slowly.

As for this past week’s data, it does not appear that all is lost.  Housing starts in July were below June levels as was much noted this past week.  However, these starts were 9.8% above July of 2010.  Industrial production was up 0.9% in July compared to June.  Furthermore, stronger manufacturing output resulted in upward revisions in both the May and June data.  Manufacturing output rose 0.6% in July over the previous month while motor vehicles and parts production increased by 5.2%.  The capacity utilization rate improved to 77.5%, very near the point where companies feel pressure to expand.  If “analysts” across the country can get back on their anti-psychotic pills, maybe we will see some increase in confidence and additional business investment by this winter.

Jobless claims were basically flat given the degree to which the data is regularly revised.  Finally, the Leading Indicators Index rose for yet another month, to a level of 115.8.  However, keep in mind that stock prices are part of this index.  The subtle growth in the other categories in August will very likely be offset by the trauma in the stock market that we are experiencing.  This will give the appearance of major trouble in the index this next month.  But, as has been noted several times now, stock prices (especially today) are not based on quantitative evaluation.

In addition, while consumer sentiment is down in the most recent survey, retail sales are up 8.9% from a year before and have been trending around 8% since last September.  There is a difference between what a person “thinks” about the economy after watching the news and if they actually spent some money that day.  Those that do not have a job right now probably won’t have one for a while.  But, those that are indeed employed are becoming more confident in their situation.  Furthermore, Real GDP growth isn’t impressive but is growing, as are incomes.  In fact, nearly all of the key economic indicators are still growing.  The underlying economic data from this past month really isn’t all that different from the spring.  All signs point to continued economic expansion, but at a slow pace.

There is one qualifier though.  A weak economy can be significantly impacted by economic shocks.  A shock can be a spike in oil prices, turmoil in the Middle East and now Europe , as well as a large government forgetting how to balance its checkbook.  As of today these shocks have not derailed our weak economic recovery.  But, the risk exists, even if small.  Keep in mind that the economy is large and conditions do not change all that rapidly, at least not as rapidly as opinion on Wall Street.


Phoenix Real Estate Market Report Summary

This data includes single family detached homes, patio homes, condos, and townhomes provided by the Arizona Multiple Listing Service. The monthly charts above are based on trailing twelve monthly averages from August 2010 to July 2011 which shows the total activity in the Phoenix Metropolitan real estate market over a twelve month period. The yearly charts above are based on a yearly average for 2005 to 2010 but a trailing twelve month average from August 2010 to July 2011 for the year 2011. Without the trailing twelve month average for the year 2011, the charts would be substantially skewed and would not portray an accurate view of the market on an annual basis.

As you can see from the first chart above, Cromford Market Index, the first time home buyer tax credit created a great deal of demand in the market similar to the real estate boom from 2004 to 2006. When the government withdrew the first time home buyer tax credit on April 30, 2010, the average sold price and number of transactions decreased and the average days on market increased. Currently the residential real estate market is experiences another buying frenzy that is caused without government intervention or relaxed mortgage underwriting standards. Consumers are jumping into the real estate market because market statistics are indicating the market has hit the bottom and investors can purchase homes at rock bottom prices where they can rent the homes out to receive a 10% to 15% or more return on investment. Due to the current oversupply of homes on the market, real estate prices have not increased significantly but once the supply of homes are purchased real estate prices will start to increase at a faster pace (Chart #2 shows supply). Since January 2011, the average sold price has decreased approximately -2.3% (down from last month), the average days on market have decreased approximately -13.5% (down from last month) and the number of transaction has increased approximately +30.7% (up from last month). It should be noted that the month of June experienced 12,190 transaction of which 5,728 transaction were bank owed (up 85.4% since January) and 3,028 transactions were short sales (up 120.2% since January.    
The number of Notice of Trustee Sales is currently experiencing a decline due to the declining number of adjustable rate mortgages coming due and from more lending institutions working harder on helping people stay in their homes. The number of foreclosures “notices” entering the market is expected to continue its decline in late 2011 and early 2012 due to the exhaustion of adjustable rate mortgages created between 2003 to 2007. The percentage of third party purchases (other than banks taking back as REO) has increased substantially since the beginning of this year where we are currently at 40% of all purchases are from third parties. The percentage might appear to be a low number but the last time we experience this volume of purchase was back in August 2006. The real estate market has reached a level of equilibrium where demand is equal to supply and all buyers are rushing into the market to take advantage of low prices. Once the supply of residential homes are exhausted and demand continues to rise, real estate prices will begin to rise (depends on the sustained level of demand). Time to buy is NOW!!