Housing & manufacturing data

You may have noticed lately that ze blog has been fairly dull for awhile. This has nothing to do with my celebration of the Holidays and more to do with the dearth of economic movement and lack of newsworthy information. Which brings me to today’s post which is evidence of an economy with accelerating upward movement. Also, today I introduce a new tool for readers the “importance grade.” My goal for this grade is to give you not just a qualitative reading on the news flow, but also a quantitative read, too.

Housing data:

The National Association of Realtors reported that its index of pending sales of previously owned homes was down 16.0% to 96.0 from October’s reading of 114.3.

Analysis: While this sounds like a bad figure, it is not. In fact, I intentionally described the information in this way to highlight the need for discernment when evaluating data. The decline of 16.0% in pending real estate sales needs a proper context. The context that sheds light on the data is that in November the Federal Government’s first time home buyer tax credit expired. This led to an obviously big decline in the sale of previously owned homes. Subsequently the Feds have re-instituted the tax credit. So, in other words, this data is noted, but ignored. More importantly for our purposes is what November’s pending real estate transactions look like relative to the year prior’s figures. Recall that in November 2008 the U.S. economy was in free-fall.

Housing data, revisited:
The National Association of Realtors reported that its November index of pending sales of previously owned homes was up 15.5% to 96.0 from 2008’s November figure of 83.1.

Analysis: This is clearly a strong reading and is an important indicator of several things.

First, money is moving more freely in the economy. Most people do not pay cash for homes and instead borrow money to buy them. Because we know that much of the recent real estate surges are due to “first time home buyer tax credits” we can assess that banks are finally lending money. This is because folks who are just now getting around to buying their first house are generally poorer credit risks than others. This is because they are typically younger and less experienced with mortgage debt. Also, if they are older, but have not purchased a house, it is likely that they have poorer credit than others. So, in summary, banks must have more confidence in the direction of the economy and in their own mortgage balance sheets to be lending so much money.

Second, the confidence of consumers has to be improving. We can infer this because folks buying houses are in a much different economic position than those who rent. To be willing to take on a definite and sizable monthly payment in the form of a mortgage indicates that these many home buyers have confidence in their continued ability to reliably pay the bank. This will also likely translate into a greater willingness to spend, in general.

Third, it will be very important to see the trajectory of the data going forward. When the “first time home buyer” tax credit expired the sale of existing homes plunged. This is an indication of a somewhat frail economy. I would anticipate that going forward these data will be reported with an approximation of the effect of the tax credit.

Importance grade: I give these data a 5 out of 10 in terms of importance. While it is important to see an improvement in banks’ willingness to lend, and growing consumer confidence, these data do not alter perceptions already in place. Additionally, there is a strong possibility of this data turning south again after the removal of the large Federal first time home buyers tax credit.
 
Manufacturing data:

On Monday the Institute for Supply Management reported that the purchasing managers index rose 55.9 last month. A number greater than 50 represents expansion in U.S. manufacturing. This level is the highest since April of 2006. An additional report indicated that manufacturers’ new orders was at its highest level in 5 years. And a manufacturers’ employment figure showed that these businesses are hiring workers at a brisk pace.

Analysis: All of this is good news for the economy. Economic growth that is based on physical goods is an indication of economic health. In other words, this kind of growth is not based on easy money driving a high demand in mortgages that in turn propels a high demand for real estate. Manufactured goods are also not purchased on speculation, they are purchased with a purpose in mind and that purpose is usually economic. Most importantly, demand is high enough that manufacturers are hiring employees to meet the demand.

Importance grade: I give this data an 8 out of 10 in terms of importance. More data like this and we can be assured that the economy is in robust expansion.

*****

Be very, very well!

Jason