Economic Indicators: Weekly Update for March 18

Every week the Research staff analyzes key data releases and explain what they mean for you and your business. In this update, we give the highlights of the most important data releases for the week of March 14-March 18, 2011 along with graphs that show the latest movement and overall trends.

Highlights for Monday, March 14, 2011:

• It is worth examining what could happen economically in the days to come in Japan. There will be a massive rebuilding effort. That will lift Japan’s GDP over time.
• However, in the short-term, there will be factory shutdowns. There could add to a shortage of some critical parts, particularly related to electronic products, and thereby lift inflationary pressure for these goods worldwide. Less nuclear energy usage will mean more oil consumption, which could also add to inflationary pressure on energy products.
• The money for rebuilding will be from government borrowing. Japan already has one of the highest government debts in relation to the economy, measurably higher than the national debt in the U.S.

Highlights for Tuesday, March 15, 2011:

• Home builders’ confidence rose 1 point in March as measured by the latest Housing Market Index from the National Association of Home Builders/Wells Fargo. This was the first increase after four consecutive flat months. Despite the modest increase, the index remains weak and well below the critical 50 level above which more builders view the market as “good” rather than “poor”.
• Import prices were 6.9% higher in February of 2011 than the same month in 2010. The bulk of the growth came from fuel prices, which are up 18.6% over this period, but non-fuel import prices are also up 3.6%.
• Construction growth is likely to follow sluggish builder confidence in the near term, but this should improve as sales eat away at the reserve of foreclosures and the economy slowly improves.
• Rising fuel prices are weighing on both consumers and REALTORS® who drive frequently for their work.

Highlights for Wednesday, March 16, 2011:

• Mortgage purchase applications fell 4.0 percent for the week ending March 11th. Purchase applications are a leading indicator of home sales.Mortgage purchase applications were down 15.8 percent from the same week a year ago.
• Consumers took advantage of low mortgage rates, which fell to 4.79 percent on a 30-year fixed mortgage. Refinances, which accounted for 66.4 percent of mortgage activity, rose 0.9 percent.Housing starts were weak in February declining from an annualized pace of 479,000 compared to a rate of 560,000 units the month before.

Highlights for Thursday, March 17, 2011:

• Jobless claims continued their improving trend and reversed from last week’s rise with a 16,000 decrease in new claims.  Assuming that jobless claims continue to trend down, NAR expects about 1.5 to 2 million net new jobs in the next 12 months.
• The Consumer Price Index (CPI) shows price pressures primarily coming from food and energy, with the headline index jumping 0.5 percent in February. A smaller increase in core CPI was driven by new vehicles, medical care, and airline fares. Cost of housing increased only marginally.
• Over the past year, overall CPI inflation increased to 2.2, while the index excluding food and energy rose to 1.1 percent. Today’s CPI report illuminates underlying inflation pressures which normally means that interest rates would be rising soon.

Friday, March 18, 2011:

• After the Fed’s meeting on Tuesday, the FOMC statement declared, “Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.”  Inflation data was released earlier this week.  Today we’ll take a closer look at some of the consumer price data.
• The Consumer Price Index is weighted by expenditures on various items so that it reflects the price change experienced by a “typical” consumer.  Because about two-thirds of homes are owner-occupied, the most heavily weighted expenditure component of the CPI is Owner’s Equivalent Rent of Primary Residence (OERP)—an estimate of the rent that would be paid for a home that is currently owner occupied (23.3).  Rent of Primary Residence (Rent)—rent paid by renters—is given about the same weight as food away from home (5.9).  Fuels and utilities for housing are given about the same weight as motor fuel (5.1).  Transportation (17.3) is slightly more important than food (14.8) and Medical Care (6.6) is weighted slightly more than Education and Communication (6.4) which includes technology.  These weights tell you how much price changes in the weighted components affect the overall index; the more heavily weighted the expenditure, the more influence its price change has on the overall index.
• The two rent series, Rent and OERP, generally follow a similar pattern, but in the last 4 years, Rent has grown faster than OERP on a year over year basis in every month except 1.  Growing at 1.1% this year, the increase in Rent outpaced the 0.6% increase in OERP.
• In the transportation category, only the price of new vehicles is not growing at a rate of at least 2 percent per year.  The entire category increased 5.4 percent on a year over year basis in January and 7.1 percent in February, largely driven by motor fuels.
• Food prices were weak or falling in the second half of 2009 and 2010, but have begun rising faster, with food at home rising more than 2 percent on a year over year basis this year.
• One category where prices are decreasing is Communication.  For example, personal computers and peripheral equipment prices declined nearly 7 percent year over year in January and February.  You’ve probably observed some of this price decline.  You may not have observed the entire 7 percent.  That’s because the BLS adjusts for quality differences in products. Using a “quality adjustment” the BLS determines how much more valuable a newer laptop with more computing power is relative to an older laptop that was priced in a previous period.  Thus, while the price of a “laptop” may remain constant at $1,000 or so, if it is more powerful, the BLS will factor in a small price decline to account for this improvement.
• These adjustments do not always cause prices to move down.  Adjustments for quality in clothing more often lead to an upward adjustment in the measured price change because quality adjustments are not always improvements.
• You have probably noticed that mortgage rates have come down significantly in the wake of uncertainty over the crisis in Japan.  The long-term effect will depend on a currently unknown outcome, but as the market adjusts, these rates are likely to be only temporary lows.  Buyers able to lock-in rates now may get a very good deal.