Digging for the Goods

Digging for the Goods

This week brought us a few key indicators: consumer spending, durable goods orders and home sales (both new and existing). Although the personal consumption report showed income growth accelerating at the same time inflation was easing, consumers apparently remained a cautious lot since real spending edged up a paltry 0.1 percent. With consumer confidence plunging to its lowest point in 15 years (excluding March 2003), slower spending growth is not at all surprising. This article (subscription required) shines a light on a particularly nervous group of people that are keeping a watchful eye on shaky labor and equity markets.

The two separate home sales reports provided what some viewed on the surface as conflicting evidence. National Association of Realtors (NAR) reported existing home sales increased nearly 3 percent and the Census Bureau showed new home sales falling almost 2 percent. Though the uptick in mortgage purchase applications, as reported by the Mortgage Bankers' Association, does offer some evidence that buyers are entering the fray due to falling home prices, a sizable proportion of existing home sales are coming from foreclosure sales and auctions. Numerous more foreclosures are a possibility in 2008, leaving foreclosure sales a significant share of any rebound in this metric. Still, some sellers have avoided foreclosure and a few have managed to sell their homes with fairly auspicious outcomes, such as the $81.5 million home sale (subscription required) by apparel mogul/movie director Sidney Kimmel.

Data on durable goods were not particularly reassuring about the economy's near-term prospects. Orders and shipments of nondefense capital goods excluding aircraft dropped for the second consecutive month, and thus point to an outright decline in capital spending that occurred during the first quarter and could remain weak going into the second quarter. Machinery shipments rebounded and appear to be running at a surplus versus the fourth quarter of 2007, but new orders plummeted and could signal trouble for producers in the months ahead.

Also, inventories are on the rise and touched a 5-year high relative to sales. At a time of slackening demand, this situation could spell even more problems for manufacturers as it would indicate production cuts would be needed to prevent unwanted stockpiling; however, conditions aren't as bad as first glance since much of the increase in inventories has come from incomplete aircraft orders. Although news from the marketplace hasn't been particularly encouraging, domestic businesses can rest a bit easier knowing they are saving a lot of money, so long as they're not located in New York City or the Bay Area of California.

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