Housing Market Remains Weak

Apr 30, 2008

May 13, 2008—The housing market remains weak and despite many good deals, pending home sales data indicate that existing home sales will not recover in the next few months. The ISM nonmanufacturing index increased, indicating that the service sector is growing, while productivity growth continued in the 1st quarter.

Pending Home Sales
The index for pending home sales declined 1.0% in March to 83.0 after falling 2.8% in February. The index is 20.1% lower from its March 2007 level of 103.9. The data suggest that existing home sales should continue to be flat or in outright decline for the next few months.

ISM Index
The Institute for Supply Management's nonmanufacturing index (NMI) increased in April to 52.0 from 49.6 in March. The index had been below 50 the previous three months. A number above 50 indicates that the service sector is expanding. Among the specific components, the business activity index declined by 1.3 percentage points to 50.9 and the index for new orders decreased by 0.1 points to 50.1. Prices continued to trend upwards, increasing this month at a faster rate to 72.1 from 70.8. On the upside, the employment index increased by 3.9 points to 50.8, the first reading above 50 since December.

Productivity and Costs
Nonfarm business productivity increased 2.2% (SAAR) in the 1st quarter, following a modest increase of 1.8% in the 4th quarter of 2007. On a year-ago basis, productivity increased 3.2%, the strongest year-over-year gain since 2004. Nonfarm output only increased 0.4%, barely up from 0.2% in the 4th quarter. Thus, the strong productivity growth was driven by a decline of 1.8% in total hours worked, the 4th decline in the last 5 months. Hourly compensation increased at a healthy 4.4%, but was down slightly from 4.6% in the 4th quarter. Unit labor costs rose 2.2%, but over the year have only increased 0.2%, suggesting there is little upward pressure on prices from labor costs.

International Trade
The trade deficit narrowed in March to $58.2 billion, well below consensus expectations. In February the monthly trade deficit was $61.7 billion. With rising prices, petroleum imports decreased 5.9% over the month and all imports declined by 2.9% due to continued weakness in the dollar and the broader economy. Exports of goods and services declined 1.7% in March, but are still up over 15% on a year over year basis. While it is a healthy development to see the trade balance narrow, the weak export data is worrisome because they have played a significant role in offsetting the losses in the housing market and have so far kept the economy out of a formal recession.

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