Welcome to the ‘happy holidays’ edition of the RCM blog.
I thought we should begin with a little year end wisdom:
“Life isn’t about waiting for the storms to pass. It’s about learning to dance in the rain.” – Vivian Green
Managing capital during the last two years required the ownership of solid wading boots and a strong hurricane slicker. For those of you still standing I commend you. In fact, feel free to join us while we dance a jig.
In a nod to the time of year and the tendency for factual stories to be laced with pure fiction, I offer you the following two economic anecdotes.
To begin, let’s review the housing fable released today. Market participants responded to the details with a cheer, an equity market rally and a strong US$ bid. However, as with most fables, one must read between the lines to grasp the true meaning. In the case below, I have boldfaced the important detail and the moral of the story becomes clear. The “good” news about November was in fact fabricated at the expense of future months…
ECONX Existing Home Sales Rise Again
The Existing Home Sales report for November brought good news on a number of fronts. Specifically, sales increased 7.4% from October to a seasonally adjusted annual rate of 6.54 million units (consensus 6.25 mln); median prices rose slightly to $172,600 from $172,200 in October.
Based on the November sales pace, the supply of unsold homes dipped to 6.5 months from 7.0 months. The surge in home sales was driven by a rush of purchasers aiming to capture the benefit of the first-time homebuyer tax credit that they feared might expire at the end of November.
That benefit was ultimately extended, however, so the National Association of Realtors thinks it is quite possible there will be a “measurable decline” in home sales the next few months before another surge starting in spring…
Low financing rates and relatively low prices, though, continue to provide strong support to the housing recovery. If there is a point of consternation for the stock market, it is the idea that uplifting data like this could force the Fed to raise rates sooner than previously expected. That would be tolerable if there was a concomitant pickup in hiring activity, but absent that, higher rates would be a retardant on the housing recovery since it would reduce affordability…
Separately, there is a residual concern that the encouraging signs in the housing market will ultimately unleash a load of shadow inventory being held by banks and current homeowners, who have been waiting for improved conditions to list the homes for sale. The added supply could keep pressure on prices…
…Below, we have the next chapter in the ongoing saga of economic recovery. Rumplestiltskin, a.k.a. the US government, would like to tell the story of economic recovery. Upon the original unrevised GDP release, the US$ rallied due to the “better” than expected number. Today, during a quiet holiday week, the real GPD number reveals a “surprisingly” lower growth rate…
ECONX Q3 GDP- Final +2.2% vs +2.8% consensus, prelim +2.8%
ECONX Q3 Personal Consumption- Final +2.8% vs +2.9% consensus, prelim +2.9%
ECONX A Surprise Revision to Q3 GDP
In surprising fashion, the revision to Q3 GDP was fairly substantial. According to the third estimate from the Bureau of Economic Analysis, GDP grew at a 2.2% annual rate in the third quarter versus 2.8% in the second estimate. A slight downward revision to personal consumption expenditures, which were said to be up 2.8% (versus prior 2.9%) from the preceding period played a part in the downgrade, as PCE contributed just 1.96 percentage points to the change in real GDP versus 2.07 percentage points for the second estimate…
Other gauges that were adjusted to show a lower contribution to the change in real GDP included gross private domestic investment (from 0.91 to 0.54), the change in private inventories (from 0.87 to 0.69), imports (from -2.53 to -2.59), and government spending (from 0.63 to 0.55). Separately, the GDP price index was revised down as well from 0.5% to 0.4%. Core PCE was reported to be up 1.2% quarter-over-quarter versus 1.3% for the second estimate. This inflation gauge won’t alter the Fed’s assured view on near-term inflation pressures.
…So, will the 2010 economic fable resemble a Grimm fairy tale or an uplifting Christmas story? Only time will tell. I will be traveling over the next two weeks, but if duty calls I will post. Until then, enjoy the rest of 2009 and have a happy and healthy.
