Vital Signs: Housing and Spending Still Look Weak

On deck: new and existing home sales, home prices, consumer confidence, a GDP revision, personal income and spending, and durable goods orders

By James Cooper

Economic reports this week will shed light on three crucial areas that will determine just how far down the U.S. is sinking in to recession this quarter: housing, consumer spending, and business outlays for equipment.

Right now, economists generally expect the 0.3% decline in third-quarter real gross domestic product to be revised down slightly, and they look for fourth-quarter real gross domestic product to contract in the neighborhood of 3% to 4%. That expectation includes another sizable subtraction to growth from home construction, along with another drop in consumer spending similar to the 3.1% decline in the third quarter, and an acceleration in the falloff in capital spending by businesses on equipment and construction. Data this week will offer some clues on how much of a drag these sectors will be.

October housing starts and the homebuilders survey for early November made it clear that housing is no where near a recovery. New construction on single-family homes fell 3.3% from September, and permits to begin breaking ground plunged 14.5%, the largest decline in 24 years. The November reading on the homebuilders’ index, based on assessments of market conditions, fell to just 9 -- a record low. In November, 2007, the index was 19, the year before it was 33, and the year before that it was 61. The index attempts to measures the percentage of builders who see improving market conditions.

October sales of existing homes on Monday and new homes on Wednesday are unlikely offer any optimism. Housing starts have been falling much faster than sales this year, allowing a sharp drop in the inventory of unsold new homes, but falling sales are keeping the months supply of homes at a high level. At first blush, sales of existing homes appear to have bottomed out, but the overall numbers are bouyed by the surge in distressed sales of foreclosed properties. Sales in California are up 58% from a year ago, with Arizona rising 49% and Nevada jumping 76%. Those are states where sales had boomed, and areas that now have the highest rates of foreclosures. The September price indexes from the Federal Housing Finance Agency (formerly OFHEO) and the Standard & Poor’s Case Shiller index, both reported on Tuesday, will most likely show continued declines.

The news from consumers on Wednesday will not be good, either. The broad measure of real consumer spending, which includes both goods and services and enters directly into the calculation of GDP, is expected to decline for the fourth month in the past five. October spending will begin the fourth quarter far below the third quarter average, setting up another big quarterly drop that could, by itself, subtract 2-3 percentage points from the quarter’s real GDP growth.

Finally, the key information from the October report on durable goods orders on Wednesday will be the readings on orders and shipments of capital goods outside of defense and commercial aircraft. The accelerating declines in payrolls in recent months suggest businesses are starting to slam on the brakes in all areas. Real outlays for business equipment fell 5.5% in the third quarter, the third quarterly decline in a row, and each drop has been larger than the previous one. Fourth-quarter capital spending is expected to fall sharply.

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