Vital Signs: Spending and Housing Show Recovery

On deck: retail sales, producer and consumer price indexes, business inventories, industrial production, Beige Book, homebuilders' survey, and housing starts

By James Cooper

Some of the most hopeful signs that the economy is beginning to stabilize come from two key areas: consumer spending and housing. This week's economic reports will provide updates on both that will help to determine if recent signs of bottoming out are for real or just a head fake.

Consumers were far less tight-fisted in January and February than they were at the end of 2008. Retail sales excluding autos rose strongly in both months, after declining for five months in a row. And in March, car sales rose to a 9.8 million annual rate, from 9.1 million in February, while weekly store receipts continued to hint at fading weakness. The government's data on March retail sales, due on Tuesday, will be an important signpost. Overall spending data through February suggest real consumer spending could make a small positive contribution to first-quarter gross domestic product, after large declines in both the third and fourth quarters of last year.

Even amid steep job losses, it would not be unusual to see consumer spending stabilize before the job markets do. Wage income is the most important driver of outlays, but it isn't the only one. Residual effects from the drop in gasoline prices have boosted buying power, along with January's 5.8% cost-of-living adjustment in Social Security benefits. The recession has also triggered big increases in various income support programs, including unemployment insurance.

More such support is on the way from the $787 billion stimulus package. A per-worker tax credit to be paid out via lower withholding beginning Apr. 1 will provide an ongoing rise in pay for many households. A one-time payment of $250 to Social Security recipients in May will also boost incomes, in addition to an expansion of unemployment benefits, food stamps and other income security programs. Plus, the housing program is lowering mortgage rates and boosting refinancing activity that will lower mortgage payments and add to purchasing power.

The week's news on housing will also be important for any continuation in the recent nascent signs of stabilization. Housing starts jumped 22% in February, the first increase in ten months and the largest in almost 20 years. Analysts were leery of that spurt because it was concentrated in multifamily construction, which can be very volatile from month to month, but permits to begin work on single-family homes rose 16%. Housing starts for March, due on Thursday, after the April homebuilders' survey on Wednesday, will show how much stock to put in the February data.

The key to a housing recovery in both construction and prices is reducing inventory. For new homes, housing starts have already fallen far below the level of sales, and inventories have dropped sharply. The problem is that sales continue to fall about as fast, leaving the months' supply at a high level. As for existing homes, sales data continue to be skewed by distressed sales of properties in foreclosure. Still, those sales are cutting inventory, and the drop in mortgage rates to below 5% should support home demand in coming months. Whether all this adds up to a stabilization in the economy, however, remains an open question, although recent signs have been mildly encouraging.

Here's the weekly economic calendar, from Action Economics: