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Analysis/Comment Last Updated: May 19, 2011 - 8:03 AM


Dr. Peter Morici: US home sales, gas prices and stocks
By Professor Peter Morici
May 19, 2011 - 5:11 AM

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President Barack Obama works as his motorcade arrives at Bradley International Airport in Windsor Locks, Connecticut, May 18, 2011.

Dr. Peter Morici: US home sales, gas prices and stocks; Thursday, economists expect the National Association of Realtors to report existing home sales were 5.2m in April, up modestly from 5.1m in March but down significantly from 5.8m last April.

If April sales come in lower than economists expect, stock and bond investors will interpret this as bad news. Along with declining housing starts, slow traffic at new home showrooms and flat industrial production data for April, disappointing existing home sales would be interpreted by investors that the already weak economic recovery is losing steam.

My view is that both equity and bond traders are misreading housing and industrial production data.

The US housing market was already holding back the recovery—nothing new in these data indicates a much larger drag for the second quarter. The economy need not be led out of recession by new home construction, and for seven quarters, the economy has expanded without a housing construction recovery.

Simply, during the boom of the last decade,ms too many houses were built—many were sold to buyers who could not afford them and others as second homes. In the wake of the financial collapse, Millions of homes are moving through bankruptcy sales—albeit at a slower pace in recent months owing to the Robo Scandal. Still this overhang will keep new home construction subdued and kill the modest recovery in prices that began and then faltered last spring.

Prices are likely to firm this spring and summer. Already prices have firmed in places like Washington, Manhattan and Dallas, thanks to strong employment and payroll growth in the federal government, finance and energy but overall, buyers are more confident that a bottom has been reached. Don’t expect rising prices to much add to consumer wealth and spending, but we are nearing the end of the subtraction. Incidentally, you won’t see this soon in the much watched Case-Shiller, S&P indexes of home prices, because those data lag several months—March data will only be released on May 31.

Economic growth was a tepid 1.8% the first quarter—demand was weighed down by the continuing slip in housing prices, higher gas prices, a drop in defense spending, and bad weather slowing non-residential construction.

The April data we are now seeing for industrial production reflects higher gas prices and the supply chain effects of the disaster in Japan. The nadir in defense spending and construction are reversing and manufacturers are finding ways to accommodate shortages from Japan. Moreover, oil prices have pulled back and gas prices are starting to level off and fall a bit. Economists are expecting second quarter growth better than 3%—my forecast is 3.1%.

In the second half, growth will slow but stay above 2.5% and the recent dip in corporate earnings and expectations will prove temporary.

The key thing is that the data the stock market is panicking now about reflects a passed reality—rising gas prices and falling home prices and construction and defense spending from the first several months of this year. By all reports those factors have either abated or reversed, and for now, the recovery—though not a champ-- is stabilizing.

Investors should continue to look for value—they will be feeling much better about equities soon. After the usual spring lethargy passes, the summer rally will redeem the optimists.

Chairman of Economic Advisers Goolsbee Talks Job Growth:

Peter Morici,

Professor, Robert H. Smith School of Business, University of Maryland,

College Park, MD 20742-1815,

703 549 4338 Phone

703 618 4338 Cell Phone

pmorici@rhsmith.umd.edu

http://www.smith.umd.edu/lbpp/faculty/morici.html

http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm

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