Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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Have you seen the silly commercial, where the guy crawls through a swamp and emerges to announce that he has “found the Internet?” Well, we’ve crawled through a statistical swamp and found good news to report – quite a lot of it, actually. And, note the calendar – this is not an April fool’s joke.

That was last week. An increasing number of positive reports suggest to some analysts that the end of the steepest economic contraction since the Depression may be in sight. Or not. There is still plenty of bad news floating around. But, channeling Pollyanna rather than Cassandra, we’re going to skip the latest jump in unemployment claims, the fourth quarter GDP report (the worst in 26 years), and other downers, and go straight to the housing market. Yes, the U.S. housing market, which is finally producing something other than a steady outpouring of dismal data.

Existing home sales increased by more than 5 percent in February to an annual rate of 4.72 million units. That’s still 4.6 percent below the year-ago level, but it represents the largest sales increase in nearly six years. Declining prices (15.5 percent lower than in February, 2008, according to the National Association of Realtors) had much to do with the increase, as did mortgage interest rates, at record low (below 5 percent) levels and the large proportion of “distressed” sales, representing between 40 percent and 45 percent of total sales, according to the NAR. Still, the gain was welcome and unanticipated; analysts had expected another 4 percent or 5 percent decline.

Even better, NAR’s pending sales index, reflecting future home buying activity, increased by 2.1 percent in February, although the association’s chief economist, Lawrence Yun, suggested that the increase should be interpreted cautiously. “Pending home sales have a way to go for there to be a meaningful [gain],” he said, “but recent increases in shopping activity are hopeful indicators that we’ll see additional sales gains. More buyers are getting into the market to take advantage of stimulus incentives and much improved housing affordability conditions,” he added, “but it will take a few months before we could see this turn up in measurable sales contract activity.”

New home sales, which have kept builders depressed for months, also turned positive in February, rising 4.7 percent to a seasonally adjusted annual rate of 337,000 units. Adding another snippet of good news, the sales figures for the three previous months were all revised upward. “This is an encouraging sign that the market may finally be reaching a bottom,” Joe Robson, chairman of the National Association of Home Builders, said in a press statement.

The same wave (or ripple) boosted new home starts by 22.2 percent – the first increase in eight months. Most of the gain was in the volatile multi-family sector; single-family home starts are still down more than 40 percent from last year. But a gain is a gain and we’re not going to dash any more cold water in the face of this one. A reality check is probably in order, however. The recent report “is generally a good sign, but it’s definitely not enough to say that the housing market is starting to recover,” Andreas Carbcho-Burgos, an economist at Moody’s, told Bloomberg News. “This is only a single month’s worth of data,” he added. “You need at least three months of increases before you can say the market is recovering.”

Even with that ‘back-to-earth’ caution, there’s still more good news for housing. Inventory levels for both new and existing homes were essentially unchanged in February compared with the prior month, which doesn’t sound much like cause for celebration, but it’s an improvement over the monthly increases we have been reporting for most of the past year.

Applications for home loans are increasing, propelled by low interest rates (thanks to the Fed’s active purchase of mortgage-backed securities), leading the Mortgage bankers Association to predict that originations could exceed 2.7 billion this year – much of that total (nearly 2 billion loans) attributable to refinancing.

The foreclosure picture turned uglier in February – up 30 percent year-over-year — as lenders repossessed another 74,000 homes. Analysts had been expecting better numbers, reflecting all the loan modification initiatives under way. But Faith Schwartz, director of HOPE Now – the lender coalition promoting voluntary modifications — was able to find a measure of good news here. With the economy still shedding 650,000 jobs a week, she told CNN/Money, the report could have been a lot worse. Lenders are demonstrating “more flexibility,” she said. “They’re offering more forbearance in response to job losses.”

Housing isn’t the only source of relatively good news. Other positive reports included:

  • The Standard & Poor’s 500 gained 8.5 percent in March – by far its best performance in recent memory, leading more than one analyst to discern ‘a light at the end of the tunnel.’ “Our bet is that the global economy is poised for significant improvement,” David Hensley, director of global economic coordination at JP Morgan Chase & Co., told Bloomberg News.
  • Construction spending and manufacturing activity both declined less than anticipated. Spending on public construction actually eked out a tiny (0.8 percent) gain, while the Institute for Supply Management’s factory index rose to 36.3 in March — improving over the prior month, although still nowhere near the 50 level indicating expansion. A stronger signal came from the new orders index, which rose to 41.2 from 33.1 in February, as order backlogs increased from 31 to 35.5.
  • Factory inventory levels also declined by nearly 1 percent in February following a 1.1 percent dip in January — the largest two-month dip since 2003, according to the Commerce Department, triggering the first decline in the ratio of inventories to sales in seven months. “There is hope,” Stephen Stanley, chief economist at RBS Greenwich Capital, proclaimed in a recent note to clients. “This is exactly the progression that needs to happen, so today’s data represents an important step on the road to recovery.”
  • The employment picture remains icky, but we found something good to say about this area, too. Challenger, Gray & Christmas, the outplacement firm, reports that the number of job layoffs announced by major corporations declined in March for the second consecutive month. That’s not much consolation to the 150,411 people who lost their jobs, but it is an improvement over the 186,350 layoffs announced in February, and the lowest layoff number reported since last October.
  • Consumer confidence levels remain at subterranean levels, but the percentage of people saying they think the economy is improving has been increasing steadily – at 29 percent in the most recent Gallup Poll posing that question, the highest level since July 2007.
  • Consumers may be gloomy, but they are beginning to shop again. Retail sales (excluding cars and trucks) increased by 0.79 percent in February, delivering another surprise to analysts, who were predicting a continued decline.
  • It isn’t hard to find gloomy reports as a counterweight to all this upbeat data, and there is still more than enough statistical gloom to support analysts who think the light at the end of the tunnel is that proverbial oncoming train. But we’ll give the last word this month to one of the optimists, Jonathan Basili, an economist at Credit Suisse Holdings USA, who, noting the accumulation of encouraging reports, told Bloomberg News, “The more we get economic data points like these, the more there’s an indication that stabilization in the economy is starting to unfold.”