May 2010 International Trade: World Trade Volumes and Prices Trending Higher

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis (known by its Dutch acronym CPB) world trade volume increased by 1.8 percent in May from the previous month, following an upwardly revised decrease of 1.1 percent in April. The rebound in trade volume enabled prices to jump nearly 3.5 percent in May. Although the volume of trade has nearly returned to its April 2008 peak, prices are lagging.

Import volumes went up in the advanced economies as well as emerging Asia and emerging Europe, whereas Latin America, Africa and the Middle East posted sizable declines. Import growth was extraordinarily high in Japan. Export volume increased in all major regions with the exception of emerging Europe. In May, world trade was 3 percent below the peak level reached in April 2008 and 23 percent above the trough reached in May 2009.

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Turning to the United States, the U.S. trade deficit unexpectedly widened by 4.8 percent in May to $42.3 billion. Imports of goods and services ($194.5 billion, up $5.5 billion) rose faster than exports ($152.3 billion, up $3.5 billion) in May. The deficit for the year now totals $197.8 billion, up from $143.8 billion in the same period last year.

The April-to-May increase in exports of goods reflected increases in capital goods; industrial supplies and materials; consumer goods; and automotive vehicles, parts, and engines. A decrease occurred in other goods. Foods, feeds, and beverages were virtually unchanged.

The April-to-May increase in imports of goods reflected increases in consumer goods; automotive vehicles, parts, and engines; capital goods; and foods, feeds, and beverages. A decrease occurred in industrial supplies and materials. Other goods were virtually unchanged.

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U.S. trade in wood pulp, paper and paperboard contributed to the widening trade gap; exports fell by 161,000 metric tons (5.5 percent) while imports rose a marginal eight metric tons (2.1 percent). Both imports and exports were essentially at their year-earlier levels in May; on a year-to-date basis, however, exports are nearly 1.3 million tons “ahead” of the same period in 2009, while imports are virtually unchanged.

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Trade in softwood lumber did not share in the overall increase in imports and exports; both metrics declined in May relative to April. Because the absolute decrease in exports was smaller than that of imports, net exports were less negative in May than in April. Lumber exports were 51 percent higher in May 2010 than a year earlier, while imports are 9 percent higher.

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One of the reasons the jump in the trade deficit was unexpected is because of the dollar’s appreciation between April and May. A weaker dollar makes U.S.-made products relatively more attractive in both the domestic and export markets, but it often worsens the trade deficit because more dollars are required to buy the equivalent volume of imports. Conversely, a stronger dollar stunts demand for domestic products, but can improve the overall trade deficit.
In light of additional dollar appreciation in June, we would not be surprised to see the deficit dip somewhat in the next month or two.

During his State of the Union address, President Obama set a goal of doubling exports in five years; on 7 July, the president said the economy is on track to meet that goal. “Export growth leads to job growth and economic growth,” Pres. Obama said. “At a time when jobs are in short supply, building exports is an imperative.” But the president’s goal of doubling exports by 2015 “is challenging. It’s going to require a very broad set of initiatives,” said Pat Mears, director of international commercial affairs at the National Association of Manufacturers.

So, is the goal realistic? According to international trade statistics from the Census Bureau, U.S. exports of goods and services doubled on a nominal value basis between May 2003 and July 2008; so, there is some precedent for such an achievement. To do so, however, the pace of growth will need to pick up relative to the first four months of this year. A doubling of exports from January 2010 at the average absolute growth rate seen between January and April ($1.46 billion per month) would take until April 2018. Accomplishing the goal would require exports to rise by $2.46 billion every month until January 2015 – a feat that has never been achieved. The fastest average monthly rate of growth over a five-year period was $1.3 billion per month, set between mid-2003 and mid-2008.

The International Monetary Fund recently raised its forecast of global growth for 2010 but downside risks outweigh upside opportunity; also, it is unclear if the level of global growth forecast will be sufficient to fuel the level of U.S. exports necessary to meet the Administration’s goal. Our conclusion, then, is that the goal is possible but not likely, particularly if global growth stagnates and/or the dollar remains as strong as it presently is.

June 2010 Consumer and Producer Price Indices: More Gradual Erosion

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in June, the third consecutive monthly drop. The index has increased 1.1 percent over the last 12 months. As was the case in April and May, a decline in the energy index caused the seasonally adjusted all-items decrease in June. The index for energy decreased 2.9 percent in June, the same decline as in May, with a decline in the gasoline index accounting for most of the decrease. This more than offset an increase in the index for all items less food and energy, while the food index was unchanged for the second month in a row. The index for all items less food and energy (a.k.a., the “core” index) rose 0.2 percent in June after increasing 0.1 percent in May. Increases among a variety of items -- including shelter, apparel, used cars, medical care, tobacco, and recreation -- more than offset declines in the indexes for household furnishings and operations and for airline fares. The 12-month change in the core index remained at 0.9 percent for the third month in a row.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) also moved down in June (by 0.5 percent). This decrease followed declines of 0.3 percent in May and 0.1 percent in April. On an unadjusted basis, prices for finished goods rose 2.8 percent for the 12 months ended June 2010, their third straight month of slowing year-over-year advances.

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At the earlier stages of processing, prices received by producers of intermediate goods moved down 0.9 percent in June (its first decline since July 2009) and the crude goods index dropped 2.4 percent.

Finished goods: In June, over eighty percent of the 0.5 percent decrease in the finished goods index could be traced to prices for consumer foods, which fell 2.2 percent. Also contributing to lower finished goods prices, the index for finished energy goods declined 0.5 percent. By contrast, prices for finished goods other than foods and energy inched up 0.1 percent in June.

Intermediate goods: About two-thirds of the June decrease can be attributed to lower prices for intermediate energy goods, which fell 2.6 percent. The index for intermediate materials less foods and energy also contributed to the overall decline, moving down 0.4 percent. By contrast, prices for intermediate foods and feeds inched up 0.1 percent. On a 12-month basis, prices for intermediate goods climbed 6.4 percent, their seventh consecutive month of year-over-year advances.

Crude goods: For the three months ending in June, crude material prices fell 6.2 percent after moving up 8.2 percent from December to March. In June, about eighty percent of the monthly decrease was due to the index for crude foodstuffs and feedstuffs, which dropped 5.3 percent. Lower prices for crude nonfood materials less energy also contributed to the overall decline, falling 4.8 percent. By contrast, the index for crude energy materials rose 1.7 percent in June.

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With the exception of Pulp, Paper and Allied Products, the forest products-related PPIs we track retreated in June. Other than pulpwood, all of the PPIs are higher than they were a year earlier. Given the recent declines in both Lumber and Wood Products, and Softwood Lumber, we expect the index for Softwood Logs, Bolts and Timber to retreat more quickly during the next several months.

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The figure immediately above and table below provide a better perspective of the relative magnitudes of the indexes and their respective percentage changes.

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June 2010 Industrial Production, Capacity Utilization and Capacity: Data Revisions Muddy the Water a Little

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Industrial production edged up 0.1 percent in June after having risen 1.3 percent in May. For the second quarter as a whole, total industrial production increased at an annual rate of 6.6 percent. Manufacturing output moved down 0.4 percent in June after three months of gains at or near 1 percent. At 92.5 percent of its 2007 average, total industrial production in June was 8.2 percent above its year-earlier level.

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Industrial production of forest products manufacturers dropped off in June – by 2.9 percent for Wood Products and 0.8 percent for Paper.

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The capacity utilization rate at the all-industry remained unchanged in June at 74.1 percent, a rate 5.9 percentage points above the rate from a year earlier but 6.5 percentage points below its average from 1972 to 2009. Not surprisingly, capacity utilization among forest products manufacturers fell in June. In the case of Wood Products, the 2.3 percent retreat broke a three-month streak of increases; Paper, by contrast, has been flip-flopping from month to month, and decreased 0.6 percent in June.

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The Fed’s annual revisions (including changing the base from 2002 to 2007) are perhaps most evident in the capacity numbers – although the overall story is essentially unchanged. The upward trends in industrial production and capacity utilization have not been sufficient to prevent excess capacity from “falling out,” although – at least in the case of all industries – the pace of curtailments appears to be flattening.

As explained in our essay Smokey Bear Economy, rising capacity utilization will slow and ultimately reverse the capacity drawdown. For now, the amount of existing overcapacity helps to keep prices relatively stable at the consumer level because manufacturers can ramp up output with comparatively little difficulty. It will be a different story, though, if and/or when new capacity must be built to meet demand.

Of course, it is nearly impossible to predict with any degree of accuracy when that reversal might occur. In light of our expectation for another recessionary relapse during 2011, our best guess is 2012 at the earliest.

June 2010 U.S. Treasury Statement and May TIC Flows: Foreign Investors Still Sending Cash

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Federal outlays of $319.5 billion and receipts of $251.0 billion added another $68.4 billion to the federal budget deficit in June…

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…bumping the cumulative deficit to just over $1 trillion during the first nine months of the fiscal year. At the current rate, the deficit will total $1.3 trillion by September 30 (the end of the fiscal year), although the Obama administration predicts a shortfall closer to $1.6 trillion. Interestingly, the Treasury’s June deficit figures do not include $142.5 billion in “excess” borrowing (i.e., above that needed to close the outlay-receipt gap). Fiscal year-to-date, the U.S. government has borrowed $290 billion more than needed to close the gap; and $1.5 trillion since FY2007.

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The deficit is having predictable impacts on the total federal government debt held by the public. The debt totaled $12.8 trillion at the end of 1Q2010, or nearly 88 percent of gross domestic product.

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As mentioned above, the shortfall between receipts and outlays has to be made up from somewhere, and borrowing from overseas is a common occurrence. So, how are we doing on that score? According to the Treasury International Capital (TIC) accounting system, foreign inflows have been averaging around $19 billion per month over the three months through May -- well off the $70 billion per month that was common between January 2002 and August 2007 (the date of the first financial scare).

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The three-month average of foreign inflows into short-term securities appear ready to turn positive for the first time since May 2009, despite near-zero yields…

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…while it remains to be seen whether the recent dip in long-term public debt instruments represents a tipping point or just a breather that will subsequently push higher.

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Although net TIC inflows were nearly flat in May, several countries adjusted their Treasury security holdings. China, Japan, OPEC countries and Brazil all trimmed their holdings, while the United Kingdom, the Caribbean banks and the rest of the world added to theirs.

For now, at least, it appears there is sufficient foreign demand for U.S. paper that public and private borrowing costs will remain fairly tame. That could change unexpectedly, however, particularly if other countries follow China’s lead and also downgrade the U.S.’s creditworthiness.

July 2010 Macro Pulse -- More Economic “Stall” Warnings

Executive Summary

The second downward revision of 1Q2010’s change in gross domestic product (GDP) to 2.7 percent is one warning indicator that the U.S. economy may be in the process of stalling. Moreover, it is becoming increasingly evident that a significant share of consumer spending since late 2008 resulted from government transfer payments and tax breaks. But even that government-induced growth was not sufficient to materially lower the jobless rate. Manufacturing appears to be providing some lift for now, as industrial production and capacity utilization both rose in May. However, two other indicators are possibly sending warning signals: New factory orders declined in May and growth in the Institute for Supply Management’s purchasing managers’ index slowed during June

More time will be required to determine whether the downturn in world trade during April was just a false alarm or something about which to be genuinely concerned. Exchange rates could frustrate U.S. exporters’ attempts to expand market share, as the dollar strengthened against the euro in June. The monthly average price of West Texas Intermediate crude oil ticked higher in June despite a stronger dollar, the lagged impacts of a slight setback in consumption in April, and crude stocks that are well above the average five-year range.

Construction in the United States, including the housing market, is sounding the loudest warning. The value of construction put in place declined across nearly all categories during May – public works projects excepted. Hence, the contribution to GDP of private residential fixed investment is at its lowest level since the 1940s.

Click here to read the entire July 2010 Macro Pulse.


Macro Pulse is a compilation of economic developments over the past month that provide context for our complete, 24-month forecast, which is contained in the Economic Outlook newsletter available through Forest2Market. While we note developments on the Macro Pulse blog as they occur, the monthly Macro Pulse newsletter provides a summary and point-of-access to economic conditions over the past 30 days affecting the forest products industry.

June 2010 ISM Reports: Manufacturing and Service Sector Growth Slows

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The Institute for Supply Management’s (ISM) reports on the manufacturing and service sectors provide a more up-to-date view of conditions than either the Federal Reserve Board’s report on industrial production and capacity utilization or the U.S. Census Bureau’s report on manufacturers’ shipments, inventories and orders.

Although economic activity in the manufacturing sector expanded in June for an eleventh consecutive month, ISM’s report on manufacturing hints at an impending slowdown. "The manufacturing sector continued to grow during June,” said Norbert Ore, chair of the ISM Manufacturing Business Survey Committee. “However, the rate of growth as indicated by the Purchasing Managers Index (PMI) slowed when compared to May. The lower reading for the PMI came from a slowing in the New Orders and Production Indexes. We are now 11 months into the manufacturing recovery, and given the robust nature of recent growth, it is not surprising that we would see a slower rate of growth at this time. The sector appears to be solidly entrenched in the recovery. Comments from the respondents remain generally positive, but expectations have been that the second half of the year will not be as strong in terms of the rate of growth, and June appears to validate that forecast."

Forest products manufacturers put in a mixed performance in June. Changes in Wood Products were almost universally negative, a situation confirmed by one respondent who observed that the "market had begun to change [for the better], but it is now declining again." Metrics for Paper Products, on the other hand, were largely positive.

Behavior of the service sector paralleled that of manufacturing; i.e., it grew at a slower pace in June than May. However, overall service employment shrank in June. Real Estate, Rental & Leasing; Agriculture, Forestry, Fishing & Hunting; and Construction were all among the industries reporting growth.

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One of the most remarkable aspects of the manufacturing report was that the input price index fell to 57 percent, 20.5 percentage points (or 26.5 percent) lower than the 77.5 percent reported in May. I.e., prices rose overall in June, but the rate of change slowed dramatically when compared to the prior month (50 percent is the breakpoint between rising and falling prices). Copier paper, corrugated containers and products, and paper products were among the wood-derived products up in price. Diesel and gasoline were down in price.

June 2010 Monthly Average Crude Oil Price: Higher Despite Current Fundamentals

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The monthly average price of West Texas Intermediate crude oil ticked higher in June, to $75.35 per barrel – an increase of $1.51 (2.0 percent). That price increase occurred despite a stronger dollar, the lagged impacts of a slight setback in consumption of roughly 0.2 million barrels per day (BPD) in April, and crude stocks that are well above the average five-year range.

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The Deepwater Horizon oil leak dominated energy-related news during the past month. The extent and impacts of the leak have been difficult to quantify, but reports from the research vessel Thomas Jefferson estimated the amount of oil leaking into the Gulf of Mexico at 120,000 BPD; also, the oil “lake” underneath the surface of the water could be covering up to 40 percent of the entire Gulf. The National Oceanographic and Atmospheric Administration predicts that tar balls will likely reach the Florida Keys and Miami in the months ahead.

A legal tug-of-war erupted after 27 May, when the Obama administration imposed a six-month moratorium on offshore drilling in water deeper than 500 feet. The administration claimed to have based its moratorium on the recommendations of seven experts, but had to backtrack when the panel members wrote a letter criticizing the moratorium and revealing that the version of the Interior Department report they were asked to review had not mentioned a drilling ban. A federal judge in Louisiana issued a preliminary restraining order against the ban, but the White House kept the moratorium in place by immediately appealing the judge’s ruling.

The Interior Department has said shallow-water drilling is unaffected by the ban, but area operators counter that the Department has imposed a “stealth” moratorium on virtually all operations by holding up permits. The Bureau of Ocean Energy Management, Regulation and Enforcement (formerly known as the Minerals Management Service), issued 11 permits for rigs in waters less than 500 feet from June 8 through June 30, when the first of two new safety rules was released. The government normally issues about 10 to 15 permits a week, said Randall Stilley, chief executive officer for Seahawk Drilling Inc. "We've got a long way to go before we get back to that level," said Stilley, whose Houston-based company provides so- called jack-up rigs supported by legs that extend to the seafloor. "It is so slow. We're having to shut down rigs, and that's a bad situation for everybody."

Although the BP oil spill and moratorium may wreak lasting havoc on local communities, the United States’ energy budget and GDP are likely to suffer only a mild impact. Wells Fargo economist Mark Vitner expects up to 250,000 Gulf jobs in fishing, tourism and energy will be lost in 2H2010. However, Vitner estimates those job losses will lower 3Q2010 GDP growth by only 0.2 percentage point; he envisions little or no effect on growth in 4Q2010, assuming the leak is plugged by then.

June 2010 Currency Exchange Rates: Two Steps Back and Two Forward

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The U.S. dollar depreciated in June against two of the three currencies we track: by 0.3 percent against Canada’s “loonie” and 1.3 percent against the yen; but the greenback appreciated by 2.8 percent against the euro. On a trade-weighted index basis, the dollar gained 0.6 percent against a basket of 26 currencies.

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Canada: The loonie’s gain against the U.S. dollar occurred despite a stall in economic growth. Real gross domestic product was unchanged in April after seven consecutive monthly increases. A large decline in retail trade and smaller declines in manufacturing and utilities were offset by increases in mining, wholesale trade and, to a lesser extent, the public sector and construction.

Part of the loonie’s support derived from Russia’s addition of the currency to its foreign reserves. Russia's push to diversify reserves "is more a result of their desire to do something in response to the extreme volatility of the dollar and the euro," said Elena Matrosova, a Moscow-based economist at BDO International.

Europe: The euro’s depreciation against the greenback coincided with more bad news for the region – including a downgrade of Greece’s government bond rating to junk status. Concerns over the economic health of the so-called peripheral European nations caused bond yields – particularly those of Greece and Spain – to continue rising.

Not all of the news coming out of the 16-nation euro area is bad, however; a number of statistics are fairly positive. For example, GDP expanded in 1Q2010, and the external trade surplus jumped six-fold in April. The unemployment rate appears to have stabilized (although at an admittedly high 10 percent). Industrial new orders rose for a third consecutive month in April and represented the steepest annual percentage increase since May 2000.

Japan: The yen appears to have benefited from investors running from the euro. Whether that move will ultimately prove to be a wise one remains to be seen. Although the Bank of Japan stated the economy in that country "shows further signs of a moderate recovery, induced by improvement in overseas economic conditions," that recovery apparently still needs another $32.8 billion in new lending. Falling consumer prices, slower-than-expected increases in exports, and a surprising spike in the unemployment rate seem to have spooked the Bank.

China: Because China’s currency does not trade freely against the U.S. dollar, our interest in that country primarily centers around whether it will continue buying U.S. debt. A year after criticizing U.S. fiscal policy as "irresponsible," the answer to that question appears to be “yes” – at least for the time being. China boosted holdings of Treasury notes and bonds by 2.6 percent to $900.2 billion in March and April, after reducing its stake by 6.5 percent from November through February, the longest consecutive monthly declines in a decade.

May 2010 Manufacturers’ Shipments, Inventories and New Orders: Broad-based Decline

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Shipments, inventories and new orders all experienced setbacks at the total manufacturing level in May, but most performance metrics of the solid wood and paper manufacturers improved.

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The value of shipments, down following two consecutive monthly increases, decreased $5.3 billion (1.3 percent) to $416.8 billion. The decline in shipments of durable goods was led by the ever-volatile transportation equipment, which retreated by 2.8 percent. Shipments of nondurable goods also declined, led by petroleum and coal products. Petroleum and coal products were down 8.0 percent, the largest decrease since December 2008.

Forest products manufacturers put in a mixed performance in May. Solid wood shipments declined 0.9 percent (to $7.2 billion) while paper shipments rose 0.7 percent (to $14.2 billion).

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Although the value of paper shipments may have increased, data from the Association of American Railroads show that the volume of material shipped by rail declined in May. Nonetheless, rail traffic remained well ahead of year-earlier volumes.

The Ceridian-UCLA Pulse of Commerce Index (PCI), which is based on real-time diesel fuel consumption data from over-the-road trucking, provides a “contrary” piece of evidence. The PCI climbed 3.1 percent in May, the first increase this year. “Absent good news from the usual recovery indicators – i.e., consumer optimism expressed by buying homes and cars, and business optimism expressed by hiring – the spike in the PCI is indeed very welcome news for the economy,” said Ed Leamer, the PCI’s chief economist. “One month does not make a trend, but at least we are back in a recovery groove.” According Ceridian, the May results “suggest the recovery is on pace for GDP growth in the healthy range of 3 to 5 percent for the second quarter of 2010, moving closer to the 5 to 6 percent increase necessary to drive down the unemployment rate.”

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Inventories, down following four consecutive monthly increases, decreased $2.0 billion (0.4 percent) to $520.4 billion in May. Inventories of durable goods increased 0.9 percent (to $304.7 billion), led by primary metals. Inventories of manufactured nondurable goods decreased 2.1 percent (to $215.7 billion), driven lower by petroleum and coal products.

Solid wood and paper inventories “bucked” the wider trend in May: Wood inventories rose by a substantial 9 percent (likely in response to a concurrent jump in lumber futures prices); the rise in paper inventories was a more modest 0.5 percent.

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New factory orders may be providing a sign that manufacturing (and perhaps the broader economy) could be starting to cool. New orders for manufactured goods in May, down following eight consecutive monthly increases, decreased $5.8 billion (1.4 percent) to $413.2 billion. Excluding transportation, new orders decreased 0.6 percent.

New orders for durable goods decreased 0.6 percent (to $192.9 billion), led by transportation equipment. Orders for nondurable goods fell 2.1 percent, to $220.4 billion.

"Manufacturing has been the star of the economy this year so any signs that conditions are turning would cause some concern," said Joel Naroff, president of Naroff Economic Advisors. "The demand for products is slowing."

June 2010 Employment Report: Rising and/or Falling?

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U.S. employment fell for the first this year in June as thousands of temporary census jobs ended and private hiring grew less than expected. Total nonfarm payroll declined by 125,000, reflecting a decrease (-225,000) in the number of temporary employees working on Census 2010. Private-sector payroll employment edged up by 83,000.

One might be tempted to take encouragement from the news that the number of unemployed persons, at 14.6 million, and the unemployment rate, at 9.5 percent, edged down in June; unfortunately, the underlying cause for those declines is that more people stopped looking for work, and thus were not counted as unemployed – not because of a sudden burst in hiring.

Also, average hourly earnings declined by $0.02 (to $22.53), and the average workweek for all private nonfarm payrolls decreased by 0.1 hour (to 34.1 hours).

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"Overall, [the employment report is] weak with very little breadth in new hiring," said John Herrmann, a senior fixed-income strategist at State Street Global Markets. "This will lead to second-half consumption growth well below the first half."

With unemployment stubbornly high, recent sluggish household spending is threatening to tip the economy back into recession. Moreover, federal decision makers are about out of ammunition in terms of what else they might try. "We are in a difficult situation. I don't think there is political will to have another stimulus program and even if we did I am not sure people feel it would be that effective," said Stephen Bronars, a senior economist at Welch Consulting.

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It is noteworthy that 147,000 of the 863,000 (nearly one in five) not-seasonally adjusted private sector jobs came from the Current Employment Statistics (CES) models. The Bureau of Labor Statistics uses the CES models to account for business closings and openings that occurred recently enough that they were not captured in the employment survey. Because these numbers are statistically derived, many analysts refer to them as “ghost” jobs. Those models do no always perform well, so their results should be taken with a grain of salt.

Also noteworthy is the observation that, although 225,000 Census 2010 workers were “sent packing,” federal government employment fell by only 173,000. That means 52,000 other – most of them presumably full-time – employees were added to the federal payroll. Hiring among state and local governments appears to be in full-scale retreat, however.

May 2010 U.S. Construction: Serious Setbacks in Residential Starts and New-home Sales

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Following two months of gains, construction spending dipped in May as residential building slowed -- concurrent with the demise of the federal homebuyers' tax credit. The 0.4 percent rise in public construction spending (mainly highways and other infrastructure projects) was insufficient to offset the 0.5 percent drop in private spending, resulting in a 0.2 percent overall decline.

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The drop in private residential construction was concentrated in the single-family section (-17.2 percent, the largest monthly retreat since January 1991). Total starts are up 24.3 percent from their trough in April 2009, but still off by 73.9 percent relative to the peak of January 2006.

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The impact of the tax credit’s expiration was most evident in new home sales, which “cratered” by nearly one-third in May – falling to a new record-low level of only 300,000 units (seasonally adjusted and annualized rate, or SAAR).

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Despite a modest decrease in the absolute number of unsold homes, the fall-off in sales caused the months of inventory to bolt upward from 5.8 months in April to 8.5 months in May. Resales of homes, townhouses, condominiums and co-ops also retreated in May, but nowhere near as dramatically (-2.2 percent) as new homes.

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New home prices “fell off a cliff” after March (the median price dropped by $22,500 between March and April), and now stand 9.6 percent below year-earlier levels. The median price of existing homes, by contrast, has been rising since February. Much of that rise is attributable to seasonality – prices typically rise during the middle of the year, but even the S&P/Case-Shiller home price index showed a modest increase.

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Miami and New York were the only markets in which home prices fell between March and April (the latest data available). Prices in more than half the markets were higher than during April 2009; also, year-over-year increases were typically larger on a percentage basis than the decreases in declining markets.

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The slight uptick in composite prices may be only temporary. “Home price levels remain close to the April 2009 lows set by the S&P/Case Shiller 10- and 20-City Composite series,” said David Blitzer, chair of the Index Committee at Standard & Poor’s. “The April 2010 data for all 20 metropolitan statistical areas (MSA) and the two Composites do show some improvement with higher annual increases than in March’s report. However, many of the gains are modest and somewhat concentrated in California. Moreover, nine of the 20 cities reached new lows at some time since the beginning of this year. The month-over-month figures were driven by the end of the Federal first-time home buyer tax credit program on April 30th. Eighteen cities saw month-to-month gains in April compared to six in the previous month. Miami and New York were the two that fared the worst in April compared to March. New York is the only MSA to have posted a new relative index low with April’s report.”

“Other housing data confirm the large impact, and likely near-future pullback, of the federal program,” Blitzer continued. “Recently released data for May 2010 show sharp declines in existing and new home sales and housing starts. Inventory data and foreclosure activity have not shown any signs of improvement. Consistent and sustained boosts to economic growth from housing may have to wait to next year.”

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If recent history is any indication, private residential fixed investment is unlikely to contribute significantly to GDP in the near futures. Part of the reason for this turn of events, according to Moneynews.com, is that developers are trying to sell a glut of homes built during the boom years. And they must compete against foreclosed homes selling at deep discounts. As a result, new home sales made up about 7 percent of the housing market last year (5 percent in May), down from about 15 percent before the bust.

Each new home built creates the equivalent of three jobs for a year and generates about $90,000 in taxes paid to local and federal authorities, according to the National Association of Home Builders. The impact is felt across multiple industries, from makers of faucets and dishwashers to lumber yards, but it has weakened in recent years. Spending on residential construction and remodeling made up only about 2.4 percent of GDP in 1Q2010, down from a peak of more than 6 percent during the housing market's boom years.

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