Thursday, 25 August 2005

Weaknesses appearing in US economic data

Yesterday's data on durable goods orders and new homes sales reveal that cracks are clearly beginning to show in the US economy. Reuters reports:

Two government reports painted a mixed U.S. economic picture on Wednesday, as new orders for durable goods fell more than expected in July but sales of new homes unexpectedly rose to another record...

New single-family home sales rose 6.5 percent to a seasonally adjusted annual rate of 1.41 million units. The July sales pace was 27.7 percent higher than a year earlier. Economists had expected new home sales at a 1.333 million unit pace.

A separate report showed new orders for U.S. durable goods tumbled by a larger-than-expected 4.9 percent in July, the biggest drop in more than a year-and-a-half, as demand for most manufactured items fell. Orders excluding volatile transportation equipment also slipped much more than expected, declining 3.2 percent. Economists polled by Reuters were expecting a 1.2 percent drop in durable goods orders and a 0.6 slide in durables excluding transportation...

The housing report showed that while sales climbed, so did supply. The inventory of homes available for sale at the end of July stood at a record 460,000, up 1.8 percent from June and 15 percent higher than a year ago, the report showed. At the current sales pace, the supply of homes represented 4 months' worth in July.

The median price of a new home dropped for the third consecutive month, down 7.2 percent to $203,800 from $219,500 in June and off 4 percent from the price a year ago, the report said. The July sales price was the lowest since December 2003, when it hit $196,000...

In a separate report, the Mortgage Bankers Association said applications for U.S. home mortgages decreased last week, with purchasing activity falling for the first time in a month despite slightly lower interest rates.

Tim Duy, "unsettled" by these pieces of news as well as global capital flows into the US housing market, looked at some of the factors in the housing market and concluded that although there was a strong correlation between the lagged spread between mortgage rates and the fed funds rate and housing starts during the 1970s and early 80's, that relationship broke down in the late 1980's.

Well, as I look at his chart, it looks to me more that the relationship broke down in the mid-1990s, around the time the stock market acquired "irrational exuberance".

Surely not a mere coincidence.

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