What I Saw Last Week

Inflation, as measured by the Consumer Price Index rose 0.3% in June, down from a 0.4% increase in May – I had expected an increase of 0.4%. Excluding food and energy, core CPI increased 0.1% in June after increasing 0.3% in May.

As expected from the June PPI report, a strong increase in energy prices – up by 1.6% in June – was the main catalyst for the overall increase in consumer prices. June’s figure was the largest increase in monthly energy costs since December 2013.

There were no outliers in the core data, and the slowdown in price growth can be chalked up to normal volatility. The larger-than-normal increase in May was simply offset by slower-than-normal growth in June.

Year-over-year, core CPI increased 1.9%. That was down from a 2.0% y/y increase in May, but slightly higher than the 1.7% yearly increase that the index has averaged over the last five years. Even with the slight uptick in core pricing trends, price growth remains below the FOMC’s implied target rate.

Existing Home Sales increased to 5.04M (SAAR) in June from an upwardly revised 4.91M in May. I had expected an increase to 5M (SAAR).

Pleasingly, this was the first time sales exceeded 5M since October 2013 but, that said, sales are still down 2.3% year-over-year.

Distressed sales accounted for 11% of total June sales, down from 15% a year ago. Investor sales, however, have not gone away. Sales to all-cash buyers accounted for 32% of existing home sales in June, up from 31% in June 2013.

First-time home buyers accounted for 28% of all sales, which was the same rate as June 2013. Without an acceleration in first-time buyers, existing home sales growth will likely remain tepid.

The median sales price increased 4.3% y/y to $223,300 from $214,000.

Washington State Employment data for the individual counties in our state was released last week that showed King County adding 50,300 jobs over the past year and 16,200 jobs in June. The unemployment in the County remained at 4.7%.

Interestingly, King, Pierce, Snohomish and Kittitas counties have now recovered all of the jobs that were lost during the recession.

Initial Unemployment Claims dropped to 284,000 even as I looked for a rise to 305,000.

Last week’s drop in claims brought the overall level to its lowest point since February of 2006 and the four-week moving average is down to its lowest level since May of 2006.

The DOL stated that there were no special factors that caused the initial claims level to suddenly drop over the past couple weeks. Timing wise, though, the move did coincide with the auto manufacturers’ normal retooling period. 

It is possible that the fall in claims is simply a seasonal effect. A surge in motor vehicle demand over the past few months may have incentivized manufacturers to keep their plants open during historical shutdown periods in an effort to increase production and satiate demand.

As it stands, the current trend in the initial claims level would suggest a gain of over 300,000 jobs in the July payroll report. If, as I suspect, the job gains come in significantly below that figure, it would suggest that the recent drop in claims has likely been a result of seasonal problems.

As I had expected, New Home Sales in June dropped dramatically from a downwardly revised 442.000 to 406,000 (-8.1%). I called for a drop to 475,000 (SAAR).

The drop in demand was not totally unexpected. Price gains in the new home sector have vastly outpaced price increases for existing homes. That has led to an upward move in the new home price premium and lower affordability conditions.

Inventory levels increased 3.1% in June to 197,000, which represented 5.8 months of supply. A majority of the increase in inventory levels was the result of builders listing homes that were not yet started. Thus, higher inventories won’t put added pressure on builders to lower prices or to liquidate holdings.

Median new home prices increased 5.3% y/y in June to $273,500.


What to Watch for This Week

We have a pretty busy week for economic data with several important releases.

Pending Home Sales in May rose by 6.1% but are not likely to see this trend continue. I expect to see a contraction of 1%.

Case Shiller Index data for May is released on Tuesday and the 20-City composite should rise by 10% y/y – down from the 10.8% annual rate reported for April. Seattle will fare better and rise by 11% y/y.

All eyes will be on the initial GDP figure for the second quarter and the number will be a good one. Look for a 3.3% growth rate. (Considerably better than the 2.9% contraction seen in Q1!)

Initial Unemployment Claims are likely to rise back above 300,000. Look for 310,000.

Non-Farm Payrolls in July should show the country having added 240,000 jobs in the month.

Even with this number, the Unemployment Rate will remain at 6.1%.

Income & Spending in June will show both rising by 0.4%.

The final Consumer Sentiment number for July will show slight improvement from the 81.3 figure given earlier in the month. Look for 82.0.

Construction Spending rose by 0.1% in May and I think that we will see a better number for June. Look for a 0.3% increase.