Last week's reports on home sales and durable goods orders added further confirmation that the recession is nearing an end. Strong late 2008 declines in home sales, factory orders and personal spending appear to have bottomed out. The watch now is for the speed of the initial upward trend, expectations are modest despite the massive stimulus.
I touched on the home sales early signs of stability in an April 24 post. While signs from existing home sales have to be questioned given the inclusion of resold foreclosures, the flat-lining in new home sales suggests that the trough hit early in the year when the level was -76% below the peak in mid 2005. A revival in housing starts will wait for inventories to be further pared down as demand strengthens.
Durable goods orders (see Apr 24 post) have also flattened out in 2009 after a dramatic drop over the second half of 2008. The back to back gains in April and May leave market expectations for a rise in factory orders Thursday. More importantly, factory orders are a leading read on industrial production (see May 15 post) which have been in a severe nosedive leaving capacity utilization at just 65% for the key manufacturing sector. The strengthening stability in manufacturing is key for the economy and seen in the ISM manufacturing index as well.
The effects of the fiscal stimulus are evident in consumer spending (see May 27 post) as tax cuts and refunds have provided the recent stability after the plunge in late 2008. The forces fighting for continued weakness are the lower employment and income growth which limit the ability to spend as well as the return of stronger savings given the massive decline in household wealth (see June 16 post).
Real personal spending, in the chart below, adds service spending to the goods spending of retail sales. The inflation adjustment in real spending has been significant as well. The 0.1% rise in the personal consumption expenditures (PCE) price index from a year ago contrasts with a 4.5% annual rate in July 2008. With a large 70% weight of GDP, consumer spending is the key to positive economic growth.
My current expectations are that more troughing indicators will leave a slight rise in the current Q3 GDP and stronger late 2009 growth as the recession marks the longest since the 1930's depression.
I want to bring out the secrets of nature and apply them for the happiness of man . I don't know of any better service to offer for the short time we are in the world .(Thomas Edison , American inventor)
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