HOUSING
Engine of recovery
As the economy continues to shuffle toward recovery, struggling sectors continue to ride on the shoulders of housing construction.
While putting millions of Americans to work wielding hammers and trowels, the building industry’s boom also has drawn in an enormous share of the output from the nation’s factories.
At retailers, shoppers seeking appliances and refurbishments keep cash registers humming. And for now, there is no end in sight, although a few Cassandras offer warnings that housing is being stoked toward a price bubble.
That brings us to Tuesday’s report on May housing starts. Economist Sung Won Sohn is looking for a modest increase, to 1.60 million units annually from 1.55 million in April.
“Housing continues to be a stabilizer for the economy and it will remain healthy for the rest of this year,” said Sohn, of Wells Fargo & Co. in Minneapolis.
The bulk of new building is taking place in the market for affordable homes, he said, while there is a bit less emphasis on luxury construction. That means the number of housing units created has risen faster than dollars being spent.
“Housing is being helped by mortgage rates that are at a near-record low,” Sohn said. “And despite the recession, in many areas of the country, notably San Francisco, sellers still are seeing multiple bids and offers.”
About the only thing holding it back for now, he said, is a lack of land on which to build, which is shifting buyers toward townhouses and condominiums.
TRADE
A widening chasm
The world economy continues to build momentum from a slowdown that began two years ago, prompting some investors to begin scanning the globe for investment opportunities, in the process dumping the dollar.
After seven years atop the currency heap, the greenback is struggling.
Firing up concerns about the currency is an intractable trade deficit, which annually creates a need for upwards of $400 billion to be brought in from overseas. A fresh look at the shortfall occurs Thursday.
Chicago economist Brian Wesbury is looking for the trade gap for April to widen to $32 billion from $31.6 billion a month earlier.
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“Historically, when the economy strengthens, the trade deficit tends to grow a bit,” said Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm.
However, he sees little chance that the weakening of the dollar will lead to a crisis.
“The dollar remains very strong, having declined about 8 percent in recent months,” he said. “Part of the problem is that overseas investors are wondering about Enronitis and the problems of American corporate accounting.”
A greater factor, Wesbury said, is foreign concern about U.S. protectionism, especially this country’s moves to slap tariffs on overseas steel.
PRICES, PROSPECTS
Small gains
Those who anticipate a return of inflation keep putting off the date when it will make its unwelcome presence known. First it was late spring, now it’s late summer, fall, or even next year.
Watch for Tuesday’s report on the inflation-sensitive May consumer price index to show a tiny gain, on the order of 0.2 percent.
On Thursday, watch for May leading economic indicators from the Conference Board to move ahead 0.2 percent, following a drop of 0.4 percent a month earlier.
EQUITIES
Reality disconnect
The stock market is mired in a disconnect from the economic recovery.
The latest worry: a possibility that consumers are reaching their spending limit.
For a variety of reasons, major stock indexes have dropped nearly 10 percent in the last four weeks.
Chicago investment manager Marshall Front says it will take a while to rebuild investor confidence, but good news looms on the horizon.
“We are currently in the midst of earnings preannouncements, and that often brings negative shocks,” said Front, of Front Barnett Associates.
“But by next month, when actual profit reports roll out, there should be some upside surprises,” he added.
Offsetting investors’ losses in stocks, he said, are big gains in the value of their homes and their ability to refinance mortgages, freeing up wealth and reducing monthly payments.
Wall Street should get a much-needed boost later this year, Front said, “because the economy still is recovering and profits are improving.
“By the fourth quarter, year-over-year earnings comparisons will be much easier.”