Friday, 28 September 2007

US labour market says no recession, housing market says maybe

Yesterday's economic reports show that the labour market in the United States remains relatively healthy. On the other hand, they also show that the housing market is in worse shape than many earlier thought.

The Commerce Department yesterday updated the second quarter report on US gross domestic report and showed that the economy grew 3.8 percent in the quarter, slightly down from the 4 percent previously reported.

With the turmoil in credit markets in August, though, the GDP report has limited relevance for estimating growth in the current and, especially, future quarters. However, August data do have greater significance.

Early this month, the Labor Department had reported that US non-farm payroll employment fell by 4,000 in August. I had written then though that despite the apparently deteriorating employment situation, it was probably too early to say that the US economy was headed for a recession.

As it turned out, another Labor Department report yesterday showed that the US labour market may not be as weak as it had looked earlier this month. Initial claims for unemployment insurance fell last week to a four-month low of 298,000. This pulled the four-week average down to 311,500, which is close to its lowest levels in the current expansion.

If the employment data do not suggest a recession, other data have been somewhat more ominous.

Following the weak existing home sales for August reported earlier this week, the Commerce Department reported yesterday that sales of new single-family homes fell 8.3 percent in August to a 795,000 annual sales pace, its slowest rate in over seven years. As a result, the inventory of unsold homes at the end of August rose to 8.2 months of sales at the current sales rate. The median sales price in August was 7.5 percent lower than a year ago.

Indeed, on a year-on-year basis, new home sales have been down over 20 percent for much of the period since the middle of 2006. The accompanying chart shows that in the past, such prolonged weakness in new home sales has usually been followed by a recession.

And if the housing data so far look bad, it could get worse. The recent turmoil in financial markets is likely to exacerbate the housing weakness by tightening credit conditions in the housing market further. The industry itself for one apparently thinks the situation is unlikely to improve soon.

KB Home, one of the biggest home builders in the US, reported a wider-than-expected loss for the third quarter yesterday and its Chief Executive Officer Jeffrey Mezger said in a statement that housing industry conditions are expected "to continue to worsen through the end of the year and into 2008".

Similarly, Fannie Mae Chief Executive Officer Daniel Mudd said in an interview yesterday that the industry will not hit bottom until the end of next year.

Freddie Mac Chief Executive Officer Richard Syron said yesterday that the US economy faces a 40 to 45 per cent risk of recession because of the housing market downturn.

Amid the housing gloom, though, it is useful to remember that at least the data on unemployment claims in September so far indicate that the US economy as a whole is probably not in recession yet.

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