Builders’ Confidence at Record Low; Retail Prices Surge

MBA (7/17/2008 ) Velz, Orawin
Home builders continued to be more pessimistic in July. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index declined to 16 from 18 in June, a record low that matched the level in December 2007. This marked the third consecutive decline in the index. (Readings below 50 indicates that more respondents view conditions as poor.)

The survey asks builders for their sentiments on current sales, traffic of potential buyers and projected sales over the next six months. All three components fell to record lows in July. The index gauging current sales conditions fell to 16 from 17 in June, while the index gauging traffic of prospective buyers fell four points to 12. The index gauging sales expectations for the next six months dropped to 23 from 27 in the prior month. Regionally, the Northeast posted an increase from its record low in June while the rest of the regions saw declines.

Deteriorating job markets, rising energy costs and declining home prices aggravated by the rising foreclosures have caused many prospective buyers to remain on the sidelines, according the NAHB, which is calling for urgent actions from Congress to address “the worsening housing slump and the near-meltdown in financial markets last week.”
The Housing Market Index is considered one of the leading indicators of future home sales because it also captures sales expectations over the next six months. Given continued eroding confidence, new home sales will likely trend down through the rest of the year. In its July mortgage finance forecast released on July 10, the Mortgage Bankers Association projected that home sales will continue to decline modestly and will hit bottom in the fourth quarter at 475,000 units (seasonally adjusted annualized rate)—the slowest quarterly pace since the first quarter of 1991.

Another report showed a worrisome inflation picture. The Consumer Price Index (CPI) rose 1.1 percent in June after a 0.7 percent gain in May. This was the biggest increase since September 2005 at the aftermath of Hurricane Katrina and the second biggest gain since June 1982. A 6.6 percent jump in energy prices led the increase in the headline CPI. Food prices increased 0.8 percent over the month. Over the past year, the CPI increased 4.9 percent.

Excluding the volatile food and energy items, the core CPI rose a strong 0.3 percent. Rents, which accounted for almost 40 percent of the core CPI, rose 0.3 percent after a 0.1 percent gain in May. Over the past year, the core CPI was up 2.4 percent, accelerating from 2.3 percent in May.

A separate report showed that incomes are not keeping up with prices. Inflation-adjusted weekly earnings fell 0.9 percent in June from May and were down 2.4 percent from last June.

In his semiannual Monetary Policy report to Congress this week, Fed Chairman Ben Bernanke noted that upside inflation risks have “intensified,” given elevated energy and commodity prices and the declining dollar. Bernanke was especially concerned that potential increased in inflation expectations may lead to wage increases during the “wage- and price-setting process.”

Another report showed that the nation’s output from factories, mines and utilities increased strongly. Industrial production was up 0.5 percent in June, following a 0.2 percent drop in May.

Unseasonably hot weather likely drove utilities, which rose 1.1 percent. Mining output also increased strongly by 2.1 percent. Manufacturing output, which accounts for about four-fifths of industrial production, gained 0.2 percent, thanks to increased auto production as the protracted strike at American Axle was resolved in late May. Manufacturing production outside of motor vehicles fell 0.1 percent.

The industrial production report showed that capacity utilization, which measures a portion of plants in use and a gauge for inflationary pressures, rose to 79.9 percent from 79.6 percent in May, the first increase since March. Industrial production is one of the five monthly indicators (including monthly gross domestic product) that the National Bureau of Economic Research tracks to date recessions and expansions. Because of its large increase in June, industrial production has dropped only 0.3 percent since peaking in December 2007.

Finally, the Federal Reserve released the minutes from the Federal Open Market Committee (FOMC) meeting on June 24-25, which showed a divided camp of FOMC members. Some members believed that downside risks to growth had diminished while the upside risks to inflation had increased and thus a rate hike "would be appropriate very soon." Other members said financial conditions remained under a great deal of stress and risk spread remained elevated by historical standards. As a result, credit availability remained restrictive and further deterioration in financial market developments could threaten economic activity. Overall, most members felt that both growth and inflation outlook was uncertain and thus “the timing and magnitude of future policy actions was quite unclear."

Bernanke’s testimony this week did not reiterate the FOMC’s view that downside risks to growth have diminished. Instead, he argued that there are “significant” downside risks to growth outlook, due to the possibility of higher energy prices, tighter credit market and a deeper housing decline.

Stock markets rallied after profit at Wells Fargo & Co. topped analysts' estimates and oil dropped for a second day. Treasury yields rose as funds moved to the equity markets from the Treasury market. Short-term Treasuries extended their losses after the release of the minutes of FOMC meeting showing that some members wanted a rate hike very soon. The yield on the 10-year Treasury note stayed around 3.90 percent by mid-Wednesday afternoon, 10 basis points higher than the rate on Tuesday.