BondSquawk

By Rom Badilla, CFA – Bondsquawk.com

September 2, 2010

The National Association of Realtors reported that more people signed contracts to purchase a home than the previous month.  Pending Home Sales, which is a leading indicator of home activity and provides insight on economic growth, increased by 5.2 percent in July on a monthly basis. Economists were expecting sales to decline by 1.0 percent following a revised prior period drop of 2.8 percent.  While the gain is encouraging, keep in mind that the sales level is improving off a low base and is far and away from offsetting the massive drop of 29.9 percent experienced in May.  On a year over year basis, Pending Home Sales is down 20.1 percent.

Pending Home Sales - Year Over Year Basis

Factory Orders, which provides insight on new orders on both durable and non-durable goods, increased just 0.1 percent in July versus surveys of 0.2 percent.  The anemic increase follows the June reading which was revised upward from -1.2 percent to -0.6 percent.

Jan Hatzius and the U.S. economics team from Goldman Sachs added the following on today’s report from the U.S. Department of Commerce:

The factory orders report rarely brings much new news of import to the table, and this one was no exception. Overall orders edged up, as widely expected, and data for durable goods were revised slightly higher (to +0.4% from +0.3%). The revision to capital goods orders was larger, but the pattern is still one of a substantial setback in July (-7.2% instead of -8.0%) following gains in May and June. Inventories rose 1.0%, the largest increase since February.

The U.S. Department of Labor reported that Non-Farm Productivity in the second quarter was drastically lower than initial reports.  Non-Farm Productivity, which allows for higher wages and faster economic growth, fell by 1.8 percent from an initial estimate of a decline of 0.9 percent.  The drop was mostly in-line with estimates as economists expected productivity to show a decline of 1.9 percent. Unit Labor Costs, which reflect the labor costs of producing each unit of output, increased by 1.1 percent in the second quarter from an initial estimate of a gain of 0.2 percent.  Economists were in the ballpark as consensus surveys were at 1.2 percent according to Bloomberg.  Despite the increase, unit labor costs remain low, as costs have fallen in four out of the previous five quarters.  With this amount of wood to chop, in order to have growth in labor costs over a longer period, inflation pressures should remain low for quite some time.

Unit Labor Costs - Year Over Year Basis

Figures of people filing for unemployment benefits for the first time were in-line with expectations as Initial Jobless Clams for the week ending August 28 inched down to 472k from a revised prior period of 478k.  The decline, which was slightly below surveys of 475k, results in the four-week moving average ticking down to 485,500 people.  Despite the move downward, the four week moving average has been hovering between 450k and 500k since last November, which is more in-line with further job losses.  A moving average of below 400k is more in line with a recovery.

Continuing Claims for the week ending August 21 decreased to 4456k versus surveys of 4450k and a revised prior period number of 4479k.  Despite the decline, which can be attributed to the exhaustion of benefits, Continuing Claims remains relatively high which signals weak labor market conditions.