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Great Article on the Economy!

Recession eased in second quarter, data show
GDP dips at better-than-expected 1 percent pace, but revisions are deep
The Associated Press
updated 8:07 a.m. PT, Fri., July 31, 2009

WASHINGTON - The U.S. economy sank at a pace of just 1 percent in the second quarter of the year, a new government report shows. It was a better-than-expected showing that provided the strongest signal yet that the longest recession since World War II is finally winding down.

The dip in gross domestic product for the April-to-June period, reported by the Commerce Department on Friday, comes after the economy was in a free fall, tumbling at an annual rate of 6.4 percent in the first three months of this year. That was the sharpest downhill slide in nearly three decades.

The economy has now contracted for a record four straight quarters for the first time on records dating to 1947. That underscores the grim toll of the recession on consumers and companies.

Many economists were predicting a slightly bigger 1.5 percent annualized contraction in second-quarter GDP. It's the total value of all goods and services — such as cars and clothes and makeup and machinery — produced within the United States and is the best barometer of the country's economic health.

"The recession looks to have largely bottomed in the spring," said Joel Naroff, president of Naroff Economic Advisors. "Businesses have made most of the adjustments they needed to make, and that will set up the economy to resume growing in the summer," he predicted.

Less drastic spending cuts by businesses, a resumption of spending by federal and local governments and an improved trade picture were key forces behind the better performance. Consumers, though, pulled back. Rising unemployment, shrunken nest eggs and lower home values have weighed down their spending.

A key area where businesses ended up cutting more deeply in the spring was inventories. They slashed spending at a record pace of $141.1 billion. There was a silver lining to that, though: With inventories at rock-bottom, businesses may need to ramp up production to satisfy customer demand. That would give a boost to the economy in the current quarter.

The Commerce Department also reported Friday that the recession inflicted even more damage on the economy last year than the government had previously thought. In revisions that date back to the Great Depression, it now estimates that the U.S. economy grew just 0.4 percent in 2008. That's much weaker than the 1.1 percent growth the government had earlier calculated.

Also Friday, the government reported that employment compensation for U.S. workers has grown over the past 12 months by the lowest amount on record, reflecting the severe recession that has gripped the country.

Federal Reserve Chairman Ben Bernanke has said he thinks the recession will end later this year. And many analysts think the economy will start to grow again — perhaps at around a 1.5 percent pace — in the July-to-September quarter. That would be anemic growth by historical measures, but it would signal that the downturn has ended.

Naroff said he now thinks growth in the third quarter could turn out to be much stronger because companies will need to replenish bare-bone stockpiles of goods.

"You could get a huge swing in inventories that could create a much bigger growth rate than anybody expects," he said.

If that were to happen, it's possible the economy's growth could clock in around 4 percent in the current quarter, he said.

Obama's stimulus package of tax cuts and increased government spending provided some support to second-quarter economic activity. But it will have more impact through the second half of this year and will carry a bigger punch in 2010, economists said.

"Our first mission in coming to office was to rescue the economy, to stop the slippage, to prevent it from going over the edge," White House press secretary Robert Gibbs said of the new GDP figures.

Even if the recession ends later this year, the job market will remain weak. Companies are expected to keep cutting payroll through the rest of this year, but analysts say monthly job losses likely will continue to narrow.

Still, unemployment — now at a 26-year high of 9.5 percent — will keep rising. The Fed says it will top 10 percent at the end of this year. Businesses will be unlikely to boost hiring until they're certain the recovery has staying power.

In the second quarter, businesses continued to cut all kinds of spending, but not nearly as much as they had been, one of the reasons the economy didn't contract as much.

For instance, they trimmed spending on equipment and software at a 9 percent pace in the second quarter, compared with an annualized drop of 36.4 percent in the first quarter. Similarly, they cut spending on plants, office buildings and other commercial construction at a rate of 8.9 percent, an improvement from the annualized drop of 43.6 percent in the first quarter.

Housing — which led the country into recession — continued to be a drag on the economy. Builders cut spending at a rate of 29.3 percent, also an improvement from the 38.2 percent annualized drop reported in the first quarter.

Consumers, meanwhile, did a slight retreat in the spring.

They sliced spending at a rate of 1.2 percent in the second quarter, after nudging up purchases at a 0.6 percent pace in the first quarter. It turns out consumers didn't have nearly the appetite to spend in the first quarter as the government previously thought, according to the revisions released Friday.

In large part, that's because wages and salaries were revised much lower in the first quarter. They totaled $6.339 trillion annualized, down from the old estimate of $6.495 trillion — a huge drop of $156 billion.

With consumers spending less on everything from cars to clothes, Americans' savings rate rose sharply — to 5.2 percent in the second quarter, the highest since 1998.

One of the wild cards in the shape of the recovery will be how consumers behave in the months ahead. Their spending accounts for the single-largest chunk of economic activity.

A return to spending by governments helped economic activity in the spring. The federal government boosted spending at pace of 10.9 percent, the most since the third quarter of 2008. And state and local governments increased spending at a pace of 2.4 percent, the most since the second quarter of 2007.

An improved trade picture also added to economic activity in the spring. Although exports fell, imports fell more, narrowing the trade gap. That added 1.38 percentage points to second-quarter GDP.

The convergence of a collapse in the housing market, a near shutdown of credit and a financial crisis created what Bernanke and others have called a perfect storm for the economy. Those negative forces — the scale of which hasn't been seen since the 1930s — plunged the U.S. into a recession in December 2007. It is the longest since World War II.

Southern California home prices rise slightly in May

The median price was $249,000, which is up less than 1% from $247,000 in April. It was the first month-to-month gain since July 2007.
By Peter Y. Hong

June 18, 2009

Southern California's median home price rose slightly in May for the first time in nearly two years. But the increase was more reflective of a change in the types of homes sold than an end to falling values, a real estate research firm reported Wednesday.

The $249,000 median price in May was up less than 1% from April's $247,000 figure, and marked the fifth-straight month the median has held at roughly $250,000, according to San Diego-based MDA DataQuick.

The modest rise reflects increasing purchases at the high end of the housing market, where sales have been virtually frozen. For much of the last year, most home sales have occurred in the low end of the housing market, with banks unloading foreclosed properties at deep discounts, dragging the median price down.

Now, more expensive properties are selling, which raises the median, through a market paradox: many of those homes sold after owners cut prices to lure buyers. Still, stirring sales activity at the high end is a sign that the market is crawling toward equilibrium.

"As more sellers get realistic, more buyers get off the fence and more lenders offer reasonable terms for high-end purchase financing, we'll see a more normal share of sales in the more established, higher-cost areas that have been nearly comatose," said John Walsh, president of San Diego-based MDA DataQuick.

A slowly growing number of buyers like Geoff Graham, 40, is changing the mix of homes sold. Graham and his husband, James Tee, 35, bought a new three-bedroom row house in San Diego's Hillcrest neighborhood last month for $750,000.

The couple had admired the place a year ago but couldn't believe the seller wanted $995,000. "I thought, 'What a cool place, but who in the world would ever pay so much money for it ?' " Graham said.

The answer was no one.

In January, Graham and Tee saw that another row house in the development had sold for $760,000 and decided that price was within their comfort zone. The $10,000 state tax credit for new-home purchases also "made us feel a little more comfortable paying that price," Graham said.

Homes priced at $500,000 and above accounted for 17% of Southland home sales in May, up from 15% in April, DataQuick reported.

The median price is the level at which half of the homes are sold at higher prices and half at lower prices. As higher-priced homes have trickled into the sales mix, foreclosures are less dominant. In May, foreclosed homes accounted for 50% of sales, down from 54% in April and a peak of 57% in February.

The April-to-May Southern California median price increase was the first month-to-month gain since July 2007, when it moved from $502,000 to $505,000, which was the market's peak.

May's price was a 51% drop from that peak, and it was down 33% from the May 2008 median price of $370,000.

Lower prices continued to drive purchases: the 20,775 Southern California homes sold in May was up 1% from April and 23% above the May 2008 sales total.

The housing market "is starting to reach the bottom; prices have reached levels where they make sense again," said Christopher Thornberg, a Los Angeles economist who was an early forecaster of the housing bubble.

"But hitting the bottom is different from coming off the bottom," he said, noting that prices will probably remain low as long as "we still have a massive wave of foreclosures to deal with."

About 150,000 homes in California were in some stage of foreclosure in May, according to ForeclosureRadar, an online seller of default data.

The median price climbed most in the region's more affluent counties. Orange County posted the largest monthly median price increase among the Southern California counties. Its $410,000 median price was up 8% over its April median of $380,000. Ventura County's median was up 4% in May, to $355,000 from $340,000 in April. San Diego also saw a modest 2% price increase in May, to $295,000 from $290,000 in April.

Those counties rank first, second and third, respectively, in household income among the six counties, according to the U.S. Census Bureau.

The median home price in May essentially matched April's figure in Los Angeles ($300,000), Riverside ($180,000) and San Bernardino ($137,000) counties.

San Diego County may be a bit ahead of the local housing market curve: Its median sale price peaked at $517,500 in November 2005. That peak occurred 1 1/2 years before Los Angeles County hit its high median price in May 2007, at $550,000, according to DataQuick.

Those 18 additional months of price declines may have worn down the resistance of some San Diego sellers who until recently had expected to sell properties for near-peak prices. Kris Berg, a San Diego broker who works in the Scripps Ranch community, said homes in her area listed for around $700,000 are now selling quickly.

Those same homes might have sold for more than $900,000 at the height of the market, and until recently sellers continued to demand such prices, with few if any takers.

"A year ago, two years ago, so many sellers were still insisting their house was special. Now, the ones who want to sell are getting it; they're pricing their homes more appropriately," Berg said.

Spending, Home Sales Probably Increased: U.S. Economy Preview

By Shobhana Chandra

June 21 (Bloomberg) -- Consumer spending in the U.S. probably rose in May for the first time in three months and home sales increased as Americans became more confident the recession will end this year, economists said before reports this week.

Purchases advanced 0.3 percent, according to the median of 58 estimates in a Bloomberg News survey ahead of Commerce Department figures due June 26. Combined sales of new and existing homes likely improved to 5.18 million, capping the first back-to-back increase since 2006, the survey showed.

“There’s more optimism as we get further away from last year’s financial-market chaos,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Spending on the part of consumers seems to be picking up after a soft patch. It looks like housing has bottomed.”

Government efforts to restore the flow of credit and prop up incomes are allowing households to take advantage of retailer discounts even as unemployment soars. Federal Reserve policy makers, meeting this week, may try to reassure investors that interest rates will stay low for the foreseeable future and acknowledge the economy has improved since their last gathering.

The Commerce Department’s spending report may also show incomes increased 0.3 percent in May after gaining 0.5 percent the prior month, mainly reflecting the tax cuts and transfers linked to the administration’s stimulus plan, economists said.

Home Sales

Sales of existing homes climbed 3 percent to an annual pace of 4.82 million, the highest level since October, when the economy was in the throes of the financial crisis, according to the survey median. Foreclosure-driven declines in property values are helping to reduce the glut of unsold houses. The National Association of Realtors’ report is due June 23.

The next day, Commerce data may show purchases of new homes rose 2.3 percent in May to an annual pace of 360,000.

In another sign of the improving economic outlook, the Reuters/University of Michigan final index of consumer sentiment probably rose to 69 in June, the highest level in nine months, from 68.7 in May, economists’ forecasts show. The figures are due on June 26.

Business in Las Vegas has “clearly bottomed out,” said Jim Murren, chief executive officer of casino company MGM Mirage. “It’s just a matter of how long we’re going to be on the bottom, and that is what we’re debating internally,” Murren said in a telephone interview last week. “The business trends are no longer deteriorating.”

More Upbeat

Fed officials on June 24, at the conclusion of their two- day meeting, may say the U.S. is showing signs of emerging from the worst recession in a half century. Following their last meeting in April, policy makers said the economy will “remain weak for a time.” The central bankers will also keep the benchmark interest rate in the range of zero to 0.25 percent, economists said.

“The Fed is likely to sound more upbeat on growth prospects,” Dean Maki, chief U.S. economist at Barclays Capital in New York, said in a note to clients. At the same time, the central bank may “aim to convince investors that tightening is not imminent,” he said.

Such an announcement may be an attempt by policy makers to prevent borrowing costs from climbing even more, undermining tentative signs of recovery. The yield on the benchmark 10-year note reached as high as 3.95 percent at the close on June 10, after being as low as 2.54 percent on March 18, the day the Fed announced it would buy Treasury securities in a bid to push borrowing costs down.

Some parts of the economy are lagging. A Commerce report due June 24 may show bookings for goods meant to last several years slid 0.8 percent in May, the survey showed. Durable-goods orders excluding transportation equipment may have also fallen.

Gross domestic product shrank at a 5.7 percent pace in the first quarter, the same as estimated in May, revised figures from Commerce may show. Following a 6.3 percent pace of contraction in the last three months of 2008, the drop capped the worst six-month performance in five decades. The figures are due on June 25.


Bloomberg Survey

================================================================
Release Period Prior Median
Indicator Date Value Forecast
================================================================
Exist Homes Mlns 6/23 May 4.68 4.82
Exist Homes MOM% 6/23 May 2.9% 3.0%
Durables Orders MOM% 6/24 May 1.7% -0.8%
Durables Ex-Trans MOM% 6/24 May 0.4% -0.4%
New Home Sales ,000’s 6/24 May 352 360
New Home Sales MOM% 6/24 May 0.3% 2.3%
GDP Annual QOQ% 6/25 1Q F -5.7% -5.7%
Personal Consump. QOQ% 6/25 1Q F 1.5% 1.5%
GDP Prices QOQ% 6/25 1Q F 2.8% 2.8%
Core PCE Prices QOQ% 6/25 1Q F 1.5% 1.5%
Initial Claims ,000’s 6/25 13-Jun 608 600
Cont. Claims ,000’s 6/25 6-Jun 6687 6707
Pers Inc MOM% 6/26 May 0.5% 0.3%
Pers Spend MOM% 6/26 May -0.1% 0.3%
PCE Deflator YOY% 6/26 May 0.4% 0.1%
Core PCE Prices MOM% 6/26 May 0.3% 0.1%
Core PCE Prices YOY% 6/26 May 1.9% 1.8%
U of Mich Conf. Index 6/26 June F 69.0 69.0
================================================================

Inflation worries, mortgage rates ease

BY INMAN NEWS, THURSDAY,
JUNE 18, 2009.
Inman News


Yearly drop in consumer prices biggest since 1950


Mortgage rates fell this week after price reports suggested inflation remains at bay, Freddie Mac said in releasing results of its Primary Mortgage Market Survey.

The 30-year fixed-rate mortgage (FRM) averaged 5.38 percent with an average 0.7 point for the week ending June 18, down from 5.59 percent last week and 6.42 percent a year ago.

The 15-year FRM averaged 4.89 percent with an average 0.7 point, down from 5.06 percent last week and 6.02 percent a year ago.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 4.97 percent with an average 0.6 point, down from 5.17 percent last week and 5.89 percent a year ago.

One-year Treasury-indexed ARMs averaged 4.95 percent with an average 0.6 point, down from 5.04 percent last week and 5.19 percent a year ago.

Reports of benign inflation figures reversed the upward trend seen in mortgage rates in recent weeks, Freddie Mac Chief Economist Frank Nothaft said in a statement.

The producer price index rose only 0.2 percent in May, a third less than forecast, and the consumer price index increased by just 0.1 percent.

A 5 percent drop in producer prices from a year ago was the largest since 1949, and a 1.3 percent yearly decrease in consumer prices was the biggest since 1950.

Tips for Selling Your Home to a First-Time Buyer

1. Maintain and stage.
A home that has been taken care of throughout the years will offer a stark contrast to a vacant, empty foreclosure.

As with any home, a fresh coat of paint, decluttering and the removal of unpleasant odors can go a long way to making a good first impression. But be careful not to over-improve the home, because the investment might not be worth the cost.

2. Mention that you'll help pay closing costs.
Whether it's in the marketing material or in the listing, this could be an extra motivator to reel in a buyer.

If rising mortgage rates have your buyer spooked, consider paying mortgage points to bring the rate down.

3. Offer a home warranty.
First-time buyers are often coming from a rental, and they are used to calling a landlord when there's a problem. To help them more easily transition into homeownership, provide them a warranty that covers major systems when problems arise.

4. Offer a buyer mortgage protection.
In some cases, it might make sense to address buyers' fears by purchasing insurance so they can keep up with their mortgage even if after losing a job. Coldwell Banker has such a program through its parent company, Realogy.

Basically, the plan will make several months of mortgage payments in the event that the buyer becomes unemployed. "There are people with secure jobs who are still nervous. This can give them just a little more comfort," Ms. MacKenzie said.

5. Don't snub low offers
Buyers know prices have fallen, so they're being aggressive in their offers -- sometimes extremely aggressive. But even if they come in with a shocking lowball offer, don't scoff at it. Simply counter.

Mortgage-Bond Yields Fall for Fifth Day, Signaling Lower Rates

By Jody Shenn

June 17 (Bloomberg) -- Yields on Fannie Mae and Freddie Mac mortgage securities declined for a fifth day, tracking a drop in rates on benchmark U.S. Treasuries and suggesting further declines in borrowing costs for new home loans.

Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds fell 0.06 percentage point to 4.52 percent as of 10:55 a.m. in New York, the lowest since May 29, according to data compiled by Bloomberg.

Treasuries and so-called agency mortgage bonds rallied after a government report showed the cost of living rose less than forecast in May. The mortgage-bond yields are down from 5.07 percent on June 10, the highest level since the Federal Reserve announced plans to buy home-loan bonds in November.

“There is a large feeling that we hit the highs in yield last week because of supply,” said Adam Brown, a managing director and Treasury trader at primary dealer Barclays Capital Inc. in New York, referring to government notes. “The absence of supply has allowed the market to rally back to what people think are fair levels.”

The difference between yields on the Fannie Mae bonds and 10-year Treasuries fell 0.02 percentage point today to 0.9 percentage point, Bloomberg data show. The gap, which grew to as much as 2.38 percentage points last year, contracted to 0.7 percentage point on May 22, the lowest since 1992.

The mortgage securities had soared from 3.94 percent on May 20, helping drive the average rate on a typical 30-year loan to 5.59 percent in the week ended June 11, up from 4.82 percent for the week ended May 21 and a record low of 4.78 percent April 30, according to McLean, Virginia-based Freddie Mac.

‘Tail of the Dog’

The rate fell to 5.53 percent as of early yesterday, from a six-month high of 5.74 percent on June 10, according to Bankrate.com. Yield spreads over 10-year government notes on the mortgage bonds have narrowed from a two-month wide of 1.14 percentage point on June 8.

Hedging by mortgage-bond holders and servicers had driven some of the recent increase in Treasury yields and spreads on home-loan bonds, a dynamic that is now being reversed.

“A lot of the movements in Treasuries have come because of supply and demand from other markets, namely mortgages and swaps,” Brown said. “The Treasury market has been the tail of the dog and not the dog itself.”

As rates increase, the expected average lives of mortgage bonds and loan-servicing contracts extend as potential refinancing drops, leaving holders with portfolios of longer- than-anticipated durations. Investors then may seek to pare durations by selling longer-dated Treasury securities, mortgage bonds and interest-rate swaps, sending yields even higher. The opposite happens when rates decline.

Bond Duration

The duration of the agency mortgage-bond market extended to the equivalent of about $1.9 trillion of 10-year U.S. Treasuries as of yesterday, almost double the year-end level of about $1 trillion, Chris Ahrens, Jeana Curro and Eric Liverance, UBS AG strategists in New York, wrote in report today.

Duration is an estimate of how much the price of a bond will change when interest rates rise or fall. The duration of fixed-rate agency-mortgage bonds fell to 3.18 years as of yesterday, down from a seven-month high of 3.85 years on June 10, according to Barclays Capital index data.

“For those who believe rates will go down, hedge ratios will certainly shrink which will result in an immediate contraction as borrowers refinance,” the UBS analysts wrote. “We do not expect to see 4.875 percent mortgage rates anytime soon and consequently anticipate the market will stay extended for some time.”

Consumer Prices

Yields on agency mortgage bonds are guiding rates on almost all new U.S. home lending following the collapse of the non- agency market in 2007 and a retreat by banks. The almost $5 trillion market includes securities guaranteed by government- controlled Fannie Mae and Freddie Mac and bonds of U.S.-insured, low-down-payment loans backed by federal agency Ginnie Mae.

The consumer price index increased 0.1 percent in May after no change a month earlier, capping the biggest 12-month decline since 1950, the Labor Department said today in Washington. Economists forecast consumer prices rose 0.3 percent, according to the median of 75 projections in a Bloomberg News survey.