Economic Updates: Retail Sales, Housing Starts, Jobless Claims

Analysis of the economic data released during the past week, and how current economic conditions are affecting the real estate market.

• The producer price index (PPI), a measure of the prices received by producers of goods, increased in November for all finished goods and for core goods, finished goods excluding food and energy.  The PPI is very volatile from month to month so annual growth figures can be more meaningful.  Prices of core finished goods have increased at an annual pace between 0.5 and 2 percent for the past 13 months, well below the 3.6 percent 10 year average, but strong growth in prices of intermediate and crude goods suggest that inflation is more likely than deflation in the year ahead.  Already mortgage rates have begun to rise due to rising treasury rates.  Today’s inflation data suggest that continued upward pressure on rates is ahead. 
•  The annual increase in prices of core finished goods was 1.2 percent compared with 4.7 percent for intermediate goods and 30.2 percent for crude goods (all excluding food and energy).  A similar pattern is seen when looking at the indexes that include food and energy prices.  The price index for all finished goods rose 3.5 percent in the year ending November 2010, while prices of intermediate goods increased 6.3 percent and prices of crude goods rose 12.8 percent.  All three indexes have averaged between 3 and 4 percent over the past 10 years, but the average obscures large swings in price growth, especially among intermediate and crude goods.
• Retail Sales were strong in November and were revised higher for October.  General merchandise, sporting goods, hobby, book & music stores, and clothing stores saw strong growth as holiday shopping was underway.  Sales increased at gasoline stations as the price of gas rose.
• At today’s Federal Open Market Committee (FOMC) meeting, the FOMC held the Federal Funds rate at its near zero range.  Despite upward pressure on Treasury rates, the Committee held to its previous commitment to purchase $600 billion in Treasury securities by the end of June 2011, generally judging that low inflation is a greater risk to price stability than high inflation in the period ahead.  The Committee pledged to continue to monitor and adjust its actions to manage inflationary and deflationary risks.  Dr. Hoenig again dissented from this FOMC decision because he believes that the current policy stance is too accommodative and could lead to higher inflation in the future.

• Mortgage purchase applications were down 5.0 percent for the week ending December 10^th. Applications are up 22% since the July 9^th lows. Purchase applications do not always translate into loan acceptances and transactions. Also, purchase applications do not take into consideration cash buyers who according to the September REALTORS® Confidence Index make up as much as 29 percent of transactions.
• Mortgage purchase applications were down 17.0 percent from the same week a year ago.
• Refinances, which made up 76.7 percent of mortgage activity, fell 0.7 percent as mortgage rates climbed to 4.84 percent on a 30-year fixed mortgage.
• Inflation was tame, with the consumer price index moving up 0.1 percent in December. Core inflation (less food and energy) was also up 0.1 percent.
• Prices were up 1.1 percent from the previous year. The core index was up 0.7 percent from the previous year.
• The housing component of the CPI was unchanged.
• The National Association of Home Builders’ Housing Market Index was unchanged at 16 for December. This is a very low number and usually tracks closely to the official housing starts numbers which will be out tomorrow.

• Initial jobless claims continued to improve last week with claims falling 3,000 to 420,000. For continued claims, the four-week average is at 4.186 million and makes the sixth week of a fallen four-week average. This suggests that continued claims have been falling at 150,000 – 200,000 claims per month and indicates improvement in the employment sector. New York state had the largest jump in claims, 16,863 new claims, due to layoffs in the construction, service and transportation sectors. Iowa had the largest decrease in claims, 2,146 drop, due to fewer layoffs in the construction and manufacturing industries.
• Another positive piece of news came from housing starts, which posted a 3.9 percent increase in November. This is after a significant drop of 11.1 percent the month before. Taken on an annual basis, this suggests 0.555 million units built over the past year, which is down 5.8 percent from a year ago. The increase in November starts was led by single-family starts, while multifamily starts were down.
• The largest increase in housing starts was in the Midwest which posted a 15.8 percent increase from the month before. Following were the South and West regions, up 2.3 percent and 2.1 percent, respectively. The Northeast fell 2.5 percent. Housing permits were down in November, 4.0 percent, which was largely due to drop in multifamily component, 23.0 decline. Single-family permits were up 3.0 percent.

• The Conference Board’s index of leading indicators increased by 1.1% in November to 112.4, following approximate 0.5% gains in September and October.
• The increase in the index is primarily attributable to an increase in the spread between long term and short term treasuries and a decline in average weekly jobless claims.
• Overall, the increase in the leading indicator index suggests stronger growth prospects for the economy going forward.

©Copyright National Association of Realtors – reprinted with permission.