Weekly Forecast Update: Monthly Personal Income, Inflation Rate, ISM Manufacturing Index , and More

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

• Monthly personal income, unadjusted for inflation, increased by 3.8 percent in December from December 2009. Consumer spending, also unadjusted for inflation, increased by 4.1 percent over the same time frame.
• The headline inflation rate, based on the personal consumption expenditure data, increased by 3.8 percent from November on an annualized basis. The core inflation rate, which excludes volatile food and energy prices, increased by 0.4 percent.
• The annual increase in personal income is the highest since late 2008 and suggests that consumers will have more discretionary income to spend which will further buttress consumer spending. Although core inflation is less than 1 percent in December, headline inflation is increasing based on higher energy and food prices. If inflation seeps into the broader economy, long term interest rates will increase to offset such an increase. As of its “December 2010 outlook”, NAR is forecasting that the interest rate on the 30-year fixed rate mortgage will increase to 5.3 percent by the fourth quarter of this year.

• The ISM Manufacturing Index continued to gain in January registering 60.8 up from 58.5 in December. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. The PMI has been above 50 for a year and a half.
• Sub-indexes from the ISM show that employment in manufacturing continues to grow. BLS data out Friday could further confirm this trend. One potential area of concern is manufacturing prices which are rising. ISM indicates that this trend which has been seen for the past 19 months has coincided with expanding production in manufacturing seen for the last 18 months. Stay on top of other price changes by checking out NAR’s Inflation Watch.
• Construction spending declined slightly in December to a rate of $787.9 billion. An annual total of $814.2 billion was spent on construction in 2010. Total construction spending is currently similar to what was spent in 1999 -2000 (not accounting for price level changes). Spending was down for the month and the year on residential and most types of non-residential construction, but spending on infrastructure such as transportation, power and communication showed some growth.
• The outlook for economic growth improves, while mortgage rates will be pressured to rise a bit.

• Mortgage purchase applications rose 9.5 percent for the week ending January 28th. Purchase applications were stronger compared with the previous holiday shortened weekend.
• 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 November REALTORS® Confidence Index make up as much as 31 percent of transactions. In Las Vegas and Miami, the cash purchases have said to approach 50 percent.
• Mortgage purchase applications were down 21.4 percent from the same week a year ago.
• Refinances, which made up 69.3 percent of mortgage activity, rose 11.7 percent as mortgage rates were up slightly to 4.81 percent on a 30-year fixed mortgage.
• The ADP employment report showed job gains of 187,000 for January. A more detailed picture will be available when the government releases its report on Friday.

• Initial jobless claims dropped last week by 42,000 to 415,000. The drop is more than economists predicted.
• While initial claims declined, the four-week moving average rose slightly to 430,500.
• Jobless claims under 400,000 would suggest improving job market. One year ago initial jobless claims were 490,000.
• Oil prices have risen dramatically to a 28-month high today as the crisis in Egypt continues. Oil prices are now above $103 per barrel. The rise in oil prices will squeeze household budgets for gas, heating, and food.
• Oil prices have risen to a 28-month high today as the crisis in Egypt continues. Oil prices are now above $103 per barrel. For each $10 rise in oil price, American consumers and companies will have to fork over an additional $220 million each day for oil consumption, and unfortunately to mostly foreign oil producing countries. The rise in oil prices could also put upward pressure on mortgage rates if broader inflation expectations also rise.

• 36,000 payroll jobs were created in January according to the Bureau of Labor Statistics. The figures for December and November were revised upward by 18,000 and 22,000, respectively. The wholesale and retail sectors along with the durable manufacturing sector experienced the strongest gains, while government hiring contracted along with construction jobs. Unusually poor weather was blamed for the decline in construction employment.
• The unemployment rate slipped from 9.4 percent to 9.0 percent over this same period. This figure is derived from a different survey which queries households about their employment position. Consequently, non-payroll jobs are counted. According to the household survey, the number of unemployed fell by 600,000, which helped to pull down the unemployment rate. However, the number of respondents who wanted work, but had not searched for a job in 4 weeks (the rule used to count them as unemployed) rose by 300,000. Despite this disconnect, the figures suggest that non-payroll job creation is up.
• This month’s reading of the labor market was a mixed bag. The decline in the unemployment rate points to improvement and will help consumer confidence, but job creation on the payroll side remains anemic at best. Better weather in February will help construction employment to bounce back, but far more job creation is necessary to drive the economic expansion.