The U.S. economy appears disjointed. Consumers are showing remarkable strength, buying houses, cars and iPhones. However, manufacturing and a broad swath of the service sector is stalled as global risk factors seem to increase daily and we march steadily toward the Fiscal Cliff. The European Union remains unsettled as Finland vetoed two leverage schemes for the European Stability Mechanism and Spain tries to negotiate a bailout to ease borrowing costs. U.S. job growth is tepid and wage gains are not keeping up with inflation, so real wage and salary income is not driving household spending. Increasing credit availability and low interest rates in the presence of pent-up demand is the combination that is fueling the household sector. The Federal Reserve has launched QE3, in part to sustain household spending by trying to keep mortgage rates low and juice up the stock market. However, real income growth remains threatened by weak job growth, flat salaries and the large tax increases of the upcoming Fiscal Cliff. Unless Congress acts to eliminate or significantly reduce or delay the impact of the Fiscal Cliff it will overwhelm the stimulatory effects of QE3 early next year. The Conference Board’s Leading Economic Index for August declined by 0.1 percent as manufacturing indicators cooled. The Leading Index has now declined in three out of the last five months. Initial claims for unemployment insurance declined by 3,000 for the week ending September 15, reversing only some of the upwardly revised 18,000 claim increase from the week before. Hurricane Isaac is at least partially responsible for the large increase in claims in early September. The New York Fed’s Empire State Manufacturing Survey showed worsening manufacturing conditions there in September. The Philadelphia Fed Business Outlook Survey was slightly negative for September after a sharp decline in August. Housing starts for August increased by 2.3 percent to hit a 750,000 unit rate. This was below market expectations, possibly held back by Hurricane Isaac. Permits for new construction remained firm in August settling slightly to an 803,000 unit rate after a surge in July. Existing home sales in August were not dampened by Isaac; they gained a strong 7.8 percent to hit a 4.82 million unit annual rate. One month does not make a trend, but the August data point is a clear break out from what has been a visible stall in existing home sales through most of this year. The median sales price of existing homes continues to improve, up 9.5 percent in August from a year ago. Inventories of existing homes for sale continue to tighten, now down to 6.1 months’ worth, which is in the range of a “normal” housing market. The Mortgage Bankers Association’s composite application index ticked down by 0.2 percent for the week ending September 14, after increasing strongly the week before. It looks like September will be another good month for U.S. housing markets.
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