2Q2010 GDP: Growth Rate Revised Down by One-Third

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The Bureau of Economic Analysis reduced the 2Q2010 growth rate in real gross domestic product (GDP) by one-third (from 2.4 to 1.6 percent), reflecting a smaller rise in inventories and a wider trade gap than initially estimated.

"The economy has slowed a bit and will probably continue to slow through the second half," said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. "We're skating on thin ice, and we don't have a lot of margin for error."

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Other noteworthy details from the latest GDP report:

• The trade gap in 2Q widened to $445 billion, compared with an initial estimate of $425.9 billion, subtracting 3.37 percentage points from growth, the biggest reduction since record-keeping began in 1947. Imports grew at a 32.4 percent pace, the most since 1984, while exports increased by only 9.1 percent.
  
  
• Analyst Vincent Fernando pointed out that government spending comprised over half (0.86 percentage point) of the 1.6 percent GDP growth value -- one of the highest quarterly government contribution to GDP since at least 2007. The only quarters to beat it since the beginning of 2007 were 3Q2008 and 2Q2009 (+1.04 and +1.24 percentage points, respectively).
  
  
• Although overall private domestic investment remained smaller relative to 1Q2010, contributions to growth from both residential and nonresidential fixed investment increased in 2Q.

If there are any silver linings in what could be construed as discouraging data, these might be worthy of mention:

• Whatever the reason for the outsized drag from net exports, Federal Reserve Chair Bernanke does not expect it to be repeated: "Like others, we were surprised by the sharp deterioration in the U.S. trade balance in the second quarter. However, that deterioration seems to have reflected a number of temporary and special factors. Generally, the arithmetic contribution of net exports to growth in the gross domestic product tends to be much closer to zero, and that is likely to be the case in coming quarters."

• Another mildly encouraging detail, brought to our attention by James Hamilton, involves the first estimate of 2Q gross domestic income (GDI). According to economic theory, GDI should be exactly the same number as GDP. In practice, however, GDI and GDP often return slightly different results since they are constructed in part from different sources. Federal Reserve economist Jeremy Nalewaik has argued that GDI is sometimes a better measure than GDP for tracking the business cycle. The rate of growth of GDI has been coming in a little better than GDP lately. GDI showed a 2.3 percent annual growth rate for 2Q, about the same rate as the BEA’s initial estimate of GDP.
  

June 2010 International Trade: Higher Global Volumes Translate Into Wider U.S. Trade Gap

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume increased by 0.7 percent in June from the previous month, following an upwardly revised increase of 2.3 percent in May. Trade growth during 2Q2010 accelerated in advanced economies, but fell back considerably in most emerging regions. As a result 2Q2010 world trade growth slowed to 3.6 percent (compared to 5.7 percent in 1Q and 6.1 percent in 4Q2009).

Although the volume of trade has increased since year-end 2009, price changes have not followed suit; in fact, prices have been trending lower since early 2010, and in June were 4.3 percent below their November-to-January plateau.

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Turning to the United States, the U.S. trade deficit widened sharply in June to the highest level in 20 months on rising imports from China, and waning exports. The trade gap grew at its fastest monthly pace on record (18.8 percent), reaching $49.9 billion and threatening to erode already slow economic growth. Imports increased 3.0 percent to $200.3 billion while exports declined 1.3 percent to $150.5 billion.

The trade gap is "bad news for real GDP growth in the United States, which will be further reduced by the effects of rising imports," said Moody's Economy.com's economist Christopher Cornell. Nigel Gault, an economist at IHS Global Insight, said the June deficit figure means that the government will trim its estimate of overall economic growth from an already sub-par 2.4 percent to 1.2 percent when it releases a revised estimate on August 27.

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U.S. trade in wood pulp, paper and paperboard was essentially flat in June (relative to May), with imports outpacing exports by about 6,000 metric tons. Exports were off year-earlier levels by 2.9 percent while imports were 18.2 percent higher.

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Trade in softwood lumber was one of the factors contributing to the widening trade gap. Exports fell back by two million board feet (MMBF), or 1.8 percent, between May and June while imports jumped by 135 MMBF (16.4 percent). Exports are 30 MMBF (37.5 percent) ahead of year-earlier levels, but imports have risen by 176 MMBF (22.5 percent).

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With the U.S. dollar weakening in July against a basket of other currencies, we would not be surprised to see the July trade gap widen even more. 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 improves the overall trade deficit.

July 2010 Consumer and Producer Price Indices: Where’s the Deflation?

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in July; before seasonal adjustment, the all items index was unchanged for the month. Over the last 12 months, the index increased 1.2 percent before seasonal adjustment.

The energy index posted its first increase since January and accounted for over two thirds of the seasonally adjusted all-items increase. Both the gasoline and household energy indexes turned up in July after a series of declines. By contrast, the food index declined in July, largely due to the fourth consecutive decline in the fruits and vegetables index.

The index for all items less food and energy rose 0.1 percent in July after increasing 0.2 percent in June. The 12-month change in the index for all items less food and energy remained at 0.9 percent for the fourth month in a row.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) rose 0.2 percent in July. This advance followed a 0.5-percent decline in June and a 0.3-percent decrease in May.

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At the earlier stages of processing, prices received by manufacturers of intermediate goods moved down 0.4 percent in July and the crude goods index rose 2.7 percent. On an unadjusted basis, prices for finished goods advanced 4.2 percent for the 12 months ended July 2010, their ninth consecutive 12-month increase.

Finished goods: The increase in the index for finished goods can be traced to higher prices for finished goods other than foods and energy, which rose 0.3 percent. Also contributing to the advance in finished goods prices, the index for consumer foods moved up 0.7 percent. By contrast, the finished energy goods index fell 0.9 percent in July. Prices for finished goods have risen 4.2 percent during the past 12 months.

Intermediate goods: The index for Intermediate Materials, Supplies, and Components moved down 0.4 percent in July, its second straight decrease. Prices for both intermediate materials other than foods and energy and for intermediate foods and feeds fell 0.4 percent in July. The index for intermediate energy goods decreased 0.7 percent. On a 12-month basis, prices for intermediate goods climbed 6.4 percent for the second consecutive month.

Crude goods: The index for Crude Materials for Further Processing moved up 2.7 percent; almost two-thirds of the monthly increase came from crude energy materials, which moved up 4.5 percent. Also contributing to the July increase, prices for crude foodstuffs and feedstuffs rose 3.3 percent. By contrast, the index for crude nonfood materials less energy moved down 1.4 percent in July.

Our reaction to the CPI and PPI data is consistent with that of Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, who opined that "we're going to avoid an outright bout of deflation."

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The price index for pulpwood jumped a rather substantial 5.7 percent in July, which in turn helped push the change in the Pulp, Paper & Allied Products index into mildly positive territory (0.2 percent). The other forest products-related price indices declined between June and July.

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All of the indices are higher than a year earlier, but -- except for Pulp, Paper & Allied Products -- the rates of increase have slower than their previous peaks.

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July 2010 Industrial Production, Capacity Utilization and Capacity: Overall Capacity Losses at a Virtual Standstill

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According to the Federal Reserve's G.17 report, industrial production edged up by 1.0 percent in July (the fifth monthly increase this year), reversing June’s 0.1 percent decline. Much of the jump in manufacturing output was attributed to an increase of nearly 10 percent in the production of motor vehicles and parts; even so, manufacturing production excluding motor vehicles and parts advanced 0.6 percent. The output of mines rose 0.9 percent; and utilities, +0.1 percent. At 93.4 percent of its 2007 average, total industrial production in July was 7.7 percent above its year-earlier level.

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Industrial production among forest products manufacturers split, with Paper gaining 0.5 percent (returning to a level last seen in 4Q2008) and Wood Products dropping by 1.2 percent (on par with January 2009).

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That pattern of monthly changes was repeated in capacity utilization. Capacity utilization among all industries rose 1.0 percent in July; Paper gained 0.7 percent while Wood Products lost 0.7 percent.

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Although additional forest products manufacturing capacity was shuttered in July, perhaps the most noteworthy aspect of the report was that the fall-off at the all-industries level slowed to a virtual standstill. It remains to be seen whether that outcome signals an impending turnaround or is just a pause in the downward trend. Our guess would favor the latter option given all of the other headwinds challenging the U.S. economy at the moment; but, as we have previously indicated, rising capacity utilization will slow and ultimately reverse the capacity drawdown. For now, the amount of existing excess capacity helps to keep prices relatively stable at the consumer level because manufacturers can ramp up output with existing production infrastructure. It will be a different story, though, if and/or when new capacity must be built to meet demand.

July 2010 U.S. Treasury Statement and June TIC Flows: Status Quo -- For Now

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Federal outlays of $320.6 billion and receipts of $155.5 billion added another $165.0 billion to the U.S. federal budget deficit in July…

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…bumping the cumulative deficit to just under $1.2 trillion during the first ten months of this fiscal year (which ends on September 30). If the revenue shortfall during the final two months is equivalent to last year, the deficit will total $1.32 trillion -- $280 billion better than the $1.6 trillion assumed in the White House budget.

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The shortfall between receipts and outlays has to be made up from somewhere, and borrowing from overseas is one of the main ways of accomplishing that. According to the Treasury International Capital (TIC) accounting system, foreign inflows went negative in June (i.e., more money flowed out of the United States than in), which helped pull the most recent three-month average rate down to $19.5 billion per month. That is far below the $70 billion per month typical of the period between January 2002 and August 2007 (the date of the first financial scare).

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Flows into short-term securities (e.g., Treasury bills) expanded and contracted during the past three months as the markets alternated between desires for safe-haven and riskier investments; on average, monthly flows were negative.

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Despite rumblings of impending U.S. debt problems, net inflows into long-term public debt (e.g., Treasury bonds) were still safely in positive territory ($51.5 billion) in June -- although well below the $130.8 billion peak of March. Flows into private equities, on the other hand, have been negative during two of the past three months (the first back-to-back outflows since February 2009), causing the three-month average to “head south” in June. One question that occurs to us: Is this a case of public sector debt “crowding out” the private sector?

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The amount of U.S. public debt held by foreigners broke the $4 trillion dollar mark for the first time in June. China is still the single largest holder, but its net sales of $24 billion (China's largest sale ever) in June put Japan within striking distance of retaking the top spot. China has instead been “loading up” on Japanese government and European bonds. "Diversification should be a basic principle," said Yu Yongding, former adviser to the People's Bank of China, who added that a "top-level Chinese central banker" told him to convey to European policy makers China's confidence in the region's economy and currency. "We didn't sell any European bonds or assets, instead we bought quite a lot."

Sales by OPEC countries were also significant ($12 billion). Japan and the United Kingdom were net buyers ($16.9 and $12.2 billion, respectively) while the “other” countries picked up $55.9 billion.

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Central banks hold the “lion’s share” of Treasury securities, although the private sector has become a much bigger player during the past several months. T-bills are gradually becoming less attractive to central banks (not surprising given the almost-nonexistent interest being paid on those instruments).

Why should the forest products industry care about this topic? Because borrowing costs (interest rates) will remain relatively low and prices relatively stable as long as the United States can continue attracting foreign investment. If foreigners find more lucrative markets elsewhere (either because of interest rate differentials or because of a sudden loss of faith in the U.S.’s fiscal outlook) the United States will be forced to either pay higher interest rates to attract capital or risk price inflation by “printing” more money (most likely, both).

August 2010 Macro Pulse -- Downdraft

With growth of 2Q2010 real gross domestic product (GDP) coming in at only 2.4 percent – the second quarterly slowdown in the rate of growth – it appears the U.S. economy is caught in a downdraft and heading toward a period of mediocre growth or outright recession. The consumption-dependent U.S. economy is struggling because of drags from persistently high unemployment (especially among young adults) and households either paying down or defaulting on debt.

Foreward-looking manufacturing data provided conflicting views of the future, with various reports showing either shrinking and expanding new orders. New non-manufacturing orders, by contrast, grew at a faster pace in July. Regardless, a drop-off in the availability/desirability of credit is among the factors hampering the ability of businesses to expand operations and hire employees.

Builders completed a significantly higher number of homes in June but had few new projects to turn to. Prospects for a substantial improvement in housing are slim as total permits nudged barely higher in June. Sales of new homes were fairly brisk by recent standards, while resales declined.

Interest rates are presently at/near historic lows; but because of continued deficit spending and corporate re-financings, competition for credit will eventually drive interest rates higher.

A weaker dollar and realization the United States is no longer the world’s largest energy consumer pushed crude oil’s spot and futures prices higher in July.

Click here to read the entire August 2010 Macro Pulse newsletter, which contains an explanation of the graph shown above.

The Macro Pulse blog is a commentary about recent economic developments that affect the forest products industry. That commentary provides context for our 24-month forecast, which is contained in the monthly Economic Outlook newsletter available through Forest2Market. The monthly Macro Pulse newsletter summarizes and gives a convenient point of access to the previous 30 days of commentary available on this website.

July 2010 Employment Report: Lackluster

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Total U.S. nonfarm employment fell by 131,000 in July, the second consecutive monthly decline, but the unemployment rate remained unchanged at 9.5 percent, according to the U.S. Bureau of Labor Statistics (BLS). Federal government employment fell, as 143,000 temporary workers hired for the decennial census completed their work, while private-sector payroll employment edged up by 71,000.

Some observers argue that July’s job-loss figure was actually worse than it appeared, because the BLS revised June’s figure from -125,000 to -221,000. Had June’s number been left unrevised, July’s change in employment would have been -227,000 instead of -131,000 (-96,000 - 131,000 = -227,000).

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It is not unusual for employment numbers to suffer a setback or two during the economic recovery phase, but it is somewhat disconcerting to see back-to-back months of job losses. This is a census year, however, so perhaps this time is truly different.

One encouraging observation is that the annual percentage change in private employment returned essentially back to the break-even point in July. As one analyst put it, “at least we’re not dropping off a cliff anymore – at least temporarily.”

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Because 143,000 Census workers were given their “walking papers” but 202,000 government employees lost their jobs, that implies other (presumably, mostly full-time) employees were also let go. Indeed, as the table above shows, that is precisely what happened; the bulk of those lost government jobs occurred at the local level.

Other details from the employment report include:

• The number of unemployed persons (14.6 million) was unchanged.
• The number of long-term unemployed (those jobless for 27 weeks and over) was little changed at 6.6 million. These individuals made up 44.9 percent of unemployed persons.
• The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged over the month at 8.5 million but has declined by 623,000 since April.
• About 2.6 million persons were marginally attached to the labor force, an increase of 340,000 from a year earlier. These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the four weeks preceding the survey. Among the marginally attached, there were 1.2 million discouraged workers (those not currently looking for work because they believe no jobs are available for them). The remaining 1.4 million persons had not searched for work in the four weeks preceding the survey for various reasons
• The average workweek for all employees on private nonfarm payrolls increased by 0.1 hour to 34.2 hours.
• Average hourly earnings of those employees increased by $0.04 (0.2 percent) to $22.59 in July.
  

July 2010 ISM Reports: Manufacturing Sector Growth Slows – Again; Service Sector Growth Increases

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.

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"Manufacturing continued to grow during July, but at a slightly slower rate than in June,” said Norbert Ore, chair of ISM’s Manufacturing Business Survey Committee. “Employment, supplier deliveries and inventories improved during the month and reduced the impact of a month-over-month deceleration in new orders and production. July marks 12 consecutive months of growth in manufacturing, and indications are that demand is still quite strong in 10 of 18 industries. The prices that manufacturers paid for their inputs were slightly higher but stable, with only a few items on the short supply list."

The slowdown in the rate of manufacturing growth is troublesome, because the PMI’s trajectory often foretells the direction total private employment will take several months later. I.e., because the PMI rolled over in May, total private payrolls may begin shrinking again in 4Q2010.

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Most metrics of performance for paper manufacturing were positive in July but, strangely, Wood Products was not mentioned once in the report. We are unsure whether the missing data indicates no change in Wood Products’ situation or a lack of responses from that industry.

The service sector grew a bit faster in July than it had in June; the non-manufacturing index rose 0.5 percentage point (to 54.3 percent). Data was rather spotty for the individual service industries we track. Real Estate, Rental & Leasing led the list of industries reporting overall growth, while Construction led the list of contracting industries.

Input prices rose at a slightly faster pace for manufacturing industries and at a slightly slower pace for the service sector. Relevant commodities whose prices increased in July include: coated groundwood, corrugated containers/products, and both #2 diesel and gasoline. No relevant cmmodities were down in price. Coated freesheet and coated groundwood were two commodities listed as being in short supply.

July 2010 Monthly Average Crude Oil Price: Creeping Higher

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The monthly average U.S.-dollar price of West Texas Intermediate crude oil extended gains into July, ticking up by $1.02 (1.4 percent), to $76.37 per barrel. That price increase coincided with a weaker dollar, and occurred despite the lagged impacts of a slight setback in consumption of roughly 0.1 million barrels per day (BPD) in May, and crude stocks that remain above the average five-year range.

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After over 100 days since the well blowout and an estimated five million barrels of crude spewed into the Gulf of Mexico, BP appears to have essentially completed the process of capping its leaking Macondo well. The well pressure is now being controlled by the hydrostatic pressure of the drilling mud, which is the desired outcome of the “static kill” procedure carried out on August 3.

Interestingly, despite the seemingly immense volume of oil released by the accident, cleanup crews are finding little crude to deal with. Apparently, as ABC News put it, “The light crude began to deteriorate the moment it escaped at high pressure, and then it was zapped with dispersants to speed the process along. The oil that did make it to the ocean's surface was broken up by 88-degree water, baked by 100-degree sun, eaten by microbes, and whipped apart by wind and waves.”

It is entirely possible that the criminal and civil trials brought against BP could far outlast any environmental consequences of the accident.

July 2010 Currency Exchange Rates: U.S. Dollar Mostly Weaker

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The U.S. dollar depreciated in July against two of the three currencies we track: by 4.6 percent against the euro and 3.6 percent against the yen; but the greenback appreciated by 0.4 percent against Canada’s “loonie.” On a trade-weighted index basis, the dollar lost 1.7 percent against a basket of 26 currencies.

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Canada: That the loonie gave up ground against the greenback is a bit surprising, particularly in light of a rise in the price of oil in July, a resumption in GDP growth during May, a widening interest rate advantage relative to the United States, and diversification by central banks into Canadian dollars.

Europe: The currency markets appear to have shrugged off Moody’s downgrades of Ireland’s and Portugal’s bonds in mid-July and, instead, concentrated on the euro zone’s encouraging economic data. That data included:
* Positive results from the “stress” tests on European banks (only seven out of 91 banks failed the test);
* A rise in Markit’s preliminary July euro-zone composite purchasing managers' index to a three-month high of 56.7 instead of the expected decline to 55.2;
* An 0.8 percent increase in May industrial orders rather than the forecast of a flat reading;
* Euro zone confidence at its highest level in more than two years in July; and
* German unemployment at its lowest level since November of 2008.


Japan: As in the case of the euro, the yen’s July strength seems to have been the product of selective data sampling by currency traders. While it is true the Bank of Japan (BOJ) raised its outlook for the country's economic growth this fiscal year to 2.6 percent (from the previous estimate of 1.8 percent) and June exports beat expectations, unemployment inched up to 5.3 percent in June at the same time industrial production unexpectedly dropped 1.5 percent.

June 2010 Manufacturers’ Shipments, Inventories and New Orders: More Weakness

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Shipments, inventories and new orders experienced setbacks at the total manufacturing level in June, along with most performance metrics of solid wood and paper manufacturers.

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Shipments, down for a second month, decreased 0.8 percent (to $411.2 billion) on the heels of a 1.8 percent May decrease. Durable goods retreated 0.3 percent (to $195.1 billion), led by computers and electronic products. Nondurable goods fell 1.3 percent (to $216.1 billion), led by petroleum and coal products.

Shipments from solid wood manufacturers dropped by 6.9 percent (to $6.7 billion) in June, while those of paper manufacturers declined by 0.9 percent (to $14.0 billion).

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Interestingly, data from the Association of American Railroads showed that the volume of material shipped by rail not only jumped by double-digit percentages in June, but also is ahead of year-earlier levels across all of the components we track.

Given the noticeable rise in rail traffic in the face of an overall decline in shipments, one might conclude the trucking industry bore the brunt of the downturn. Indeed, the Ceridian-UCLA Pulse of Commerce Index (PCI), which is based on real-time diesel fuel consumption data from over-the-road trucking, suggests that was the case. The PCI tumbled 1.9 percent in June after an “impressive” 3.1 percent gain in May.

“While June’s number is substantially down, erasing two-thirds of May’s great gain, the daily and weekly activity on which the monthly PCI is based does not suggest that the economy is heading over a cliff,” Edward Leamer, PCI’s chief economist, explained. “Part of the apparent strength of May and weakness in June is the result of the Memorial Day holiday occurring on the last day of May, allowing the negative Memorial Day effect which is usually confined to May to leak into June. More importantly, the June weakness was confined to the first two weeks, and by the second half of June, we were seeing strong growth again.”

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Inventories, down two consecutive months, decreased 0.1 percent (to $520.0 billion) in June; the inventories-to-shipments ratio was unchanged at 1.26. Durable goods increased (by 1.1 percent, to $308.8 billion) for a sixth consecutive month, thanks to computers and electronic products; but nondurable goods more than offset that gain by decreasing 1.7 percent (to $211.2 billion). As with shipments, the retreat in inventories was led by petroleum and coal products.

Inventories of wood and paper manufacturers bucked the overall trend in June; solid wood inventories rose by 0.4 percent (to $9.0 billion) while paper inventories were unchanged at $14.1 billion.

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New orders are again providing fodder for concerns of a slowing economy. Down for a second month, new orders for manufactured goods decreased $5.1 billion (1.2 percent) to $406.4 billion in June. Excluding transportation, new orders decreased 1.1 percent. Durable goods orders dropped by 1.2 percent (to $190.4 billion), led by transportation equipment. Nondurable goods fell by 1.3 percent (to $216.1 billion).

June 2010 U.S. Construction: Treading Water

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Overall construction spending nudged higher (0.1 percent) in June thanks to help from the public component (mainly highways and other infrastructure projects). Both subcomponents of private construction declined. The annual percentage rate of decline in total construction spending continued to slow, however, and stood just shy of -8 percent.

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As indicated by the value of construction put in place, total housing starts fell by 5 percent in June -- the lowest level since November 2009. Most of the decrease occurred in the multiple-family component, which declined by 21 percent. Although total starts are up over 15 percent over their April 2009 bottom, they remain nearly 76 below the peak of January 2006.

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Even with the increase in sales of nearly 24 percent, builders started and completed more houses than are being sold. In June, single-unit starts exceeded sales by almost 38 percent, while completions were more than double the sales rate.

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Apparently many of the recently completed homes were built on contract (rather than on a speculative basis by the builder), because the higher sales rate caused the overhang of new homes to decline in both absolute and months-of-inventory terms. I.e., a number of homeowners took possession of the keys to their new homes even though those transactions were not considered “sales.” Completions are tallied for all homes, regardless of the reason for construction whereas sales are tallied only for “spec” homes. Were completions and sales tallied on a truly comparable basis, we would have expected completions to drive inventory higher in June.

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Although new home sales picked up by a respectable percentage, such was not the case for home resales; sales of existing homes declined by 5.1 percent. The combination of slowing sales from the expiration of the federal tax credit and banks putting more foreclosed units on the market bumped up the inventory of existing homes by nearly 100,000 units and raised the months of inventory by 0.6 month (to 8.9 months). Despite the fallback in home resales, new home sales still comprised only 5.8 percent of total home sales in June -- less than half the normal historical average of roughly 15 percent.

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Interestingly, even with the retreat in home resales, the National Association of Realtors’ (NAR) median existing home price shot 5.2 percent higher (to $183,700) in June. Affordability has suffered as a result. NAR’s nationwide median home price has been trending in the same direction as the S&P/Case-Shiller home price composite indices since March. Only five of the 20 individual markets covered by the Case-Shiller data experienced price declines in May (the latest data available), and six are lower on a year-over-year percentage basis.

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“While May’s report on its own looks somewhat positive, a broader look at home price levels over the past year still do not indicate that the housing market is in any form of sustained recovery,” said David Blitzer, chair of the Index Committee at Standard & Poor’s. “Since reaching its recent trough in April 2009, the housing market has really only stabilized at this lower level. The two [composite indices] have improved between 5 and 6% since then, but this is no better than the improvement they had registered as of October 2009. The last seven months have basically been flat.”

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Looking forward, Blitzer indicated that “there may still be some residual impact from the homebuyers’ tax credit, since they affect any purchase that closes through June 30. We need to watch where the housing markets will go after these temporary stimuli go away. June’s existing and new home sales and housing starts data do not show much real improvement in those statistics either. It still looks possible that the housing market might bounce along the bottom for the foreseeable future, before showing any real improvement that will filter through to the rest of the economy.”

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Updated data from Robert Shiller shows that real, inflation-adjusted existing home prices had been reverting to the long-term historical trend in place between 1946 and 1997 (i.e., prior to the housing boom) until the combination of the Home Affordable Modification Program, foreclosure abatements, and the federal homebuyers’ tax credit “kicked in” beginning in early 2009. The effectiveness of those programs is wearing off, however, and so we expect home prices to begin reverting to the trend yet again. That said, more recent affordability data from NAR suggests that real prices could levitate at least through 2Q2010 before succumbing to the inevitable.

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The number of vacant homes in the United States is another reason why we believe falling home prices are inevitable. About 18.9 million homes stood empty during 2Q2010, and the ownership rate (i.e., households that own their own residence) fell to 66.9 percent -- the lowest rate since 1999. “There are a lot of people losing their homes and either moving in with family or renting places to live,” said Patrick Newport, an economist with IHS Global Insight. “Foreclosures are still going up.”