June's Economic Pulse

By Arthur Pinkasovitch | July 01, 2010 AAA
June's Economic Pulse

"Industry Speeds Recovery, And Housing Slows It Down," "Weak Economic Indicators Bolster Precious Metals" and "Consumer Confidence Tumbles In June" are just some of the many headlines emerging in the latter part of the month that help reflect the current economic situation.

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The past few months have seen strong improvements in housing, outlook and retail sales indicators, while employment figures remained at recession lows. Such a pattern of "economic progress" during a period of massive unemployment is simply unsustainable and unrealistic. Either the unemployment rate would have to improve or the growth in the aforementioned indicators would have to slow down to achieve a level of balance. Unfortunately, as observed in the last two weeks, the latter situation prevailed.

Index This Month Last Month Last Year Monthly Change Annual Change
Housing Starts * 593 659 550 -10.02% 7.82%
Existing Housing Sales * 5660 5790 4750 -2.25% 19.16%
Housing Prices * 179.6 172.3 174.8 4.24% 2.75%
Unemployment Rate 9.70% 9.90% 9.40% -2.02% 3.19%
Half Year Unemployment * 6763 6716 4030 0.70% 67.82%
Initial Jobless Claims * 476 460 613 3.48% -24.96%
Business Outlook *** 8 21.4 -5 -16.24% 23.97%
Consumer Confidence 52.9 63.6 49.3 -16.82% 7.30%
Retail Sales ** 362.5 366.9 339.1 -1.20% 6.90%
Car Sales ** 55.5 56.4 49.3 -1.60% 12.58%
S&P 500 Index 1041 1089 919.32 -4.41% 13.24%
*Thousand **Billion ***Adjusted for mean and standard deviation

Stifled growth forecasts for China, in addition to the numerous negative economic indicators, caused the market to recede as a wave of panic spread through Wall Street and Main Street. The S&P 500 drew back by 4.42% through June. The European budget concerns and the BP oil spill continue to remain great sources of future uncertainty, and more internal problems have emerged.

Housing

Not surprisingly, after termination of the federal government home buyer tax incentives, the housing market tumbled due to a rapid decrease in demand. Housing starts decreased by 10% on a month-over-month basis, still showing improvement over last year's data. Likewise, existing housing sales declined from 5.79 million to 5.66 million, and new building permits faced a near 6% drop-off.

Throughout 2010, the government made a solid effort to artificially improve the housing industry. Home builders were given preferential tax treatment, incentives were provided to home buyers and attempts were made to reduce foreclosures. Although the intentions were noble, the market could not be inflated indefinitely, and eventually it began its reversion to required levels.

Employment

While all indicators of interest showed negative movement, employment was actually mixed - the unemployment rate decreased from 9.9% to 9.7%. Even before accounting for statistical error in the Bureau of Labor Statistics Employee Situation Report, the suggested improvement is marginal at best. Practically one in 10 Americans are still out of work. (From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone in our Macroeconomic Analysis.)

Furthermore, this statistic can be somewhat misleading because unemployment is typically calculated by the number of job seekers who are unable to find work. Those who are frustrated with not having a job for an excessive time period may simply remove themselves from the labor force; the number of individuals who have been unemployed for over half a year increased by 0.7%.

Business

The diffusion index, a leading indicator that measures expected industry growth, decreased from 21.4 to 8, the lowest level in eight months. Since the index remains above zero, the manufacturing sector is still expected to expand, but at a much slower pace than in previous periods. Out of the companies questioned for the Business Outlook Survey, the Federal Reserve Bank of Philadelphia notes that 18% of firms decreased their number of employees while 17% had employment increases.

The Consumer Confidence Index shrank by 16.82% and now hovers around the same area where it stood at this time last year. Consumer confidence is a major market driver; when the decrease was released, it helped push the stock market 3% into the red.

Outlook

Poor month-over-month economic performance should not come as a complete surprise, given that the unemployment rate remains at nearly 10% and government incentive programs were terminated. Full and sustainable recovery requires that consumers have the necessary funds to fuel economic expansion; government funding cannot achieve this task independently. In addition to decreased housing activity, retail and car sales retracted by 1.2% and 1.6%, respectively. Unemployed people simply cannot buy houses and cars.

Since employment figures are not expected to make a complete turnaround within the next month, the economy can experience a further pullback in the upcoming summer months. Although June's Existing Home Sales report noted a 4% increase in May housing prices, this trend is unlikely to continue.

Catch up on the latest financial news; read Water Cooler Finance: Shocking Court Rulings, Sinking Markets.

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