3Q2010 Gross Domestic Product: Advance Estimate

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The Bureau of Economic Analysis reported that the rate of growth in real U.S. gross domestic product (GDP) accelerated slightly in 3Q2010. The U.S. economy expanded at a 2 percent annual rate, up from 1.7 percent in the previous quarter.

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The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment and nonresidential fixed investment (both part of private domestic investment or “PDI”), federal government spending, and exports. Those positive contributions were partly offset by negative contribution from residential fixed investment (another PDI component) and imports.

“We need to do better than this to get a real recovery in the labor market,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The report leaves everything in place for more asset purchases by the Fed.”

August 2010 International Trade

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volumes in August rose by 1.5 percent from the previous month, following a downwardly revised decrease of 1.0 percent in July. The rise in imports was broad based, while on the export side emerging economies outperformed advanced economies; the Euro Area was the only major advanced-economy block to achieve positive export growth. Japanese import and export volume declined substantially. The volume of world trade has returned to within 2 percent of previous peak reached in April 2008.

Prices also rose by just under 1 percent in August, remaining slightly below the peak of last January and more than 15 percent off the peak of July 2008. Prices seem to have lost a strong sense of direction since early 2010, wandering rather aimlessly instead in a gradual downward trend.
 

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Turning to the United States, the U.S. trade deficit widened to $46.3 billion in August (from $42.6 billion in July), thanks in part to a record pace of Chinese imports. Total August exports amounted to $153.9 billion, and imports $200.2 billion. The real goods deficit, which strips out prices, widened to $51.2 billion in August from $47.3 billion in July, showing that the larger deficit is not entirely a function of a weaker dollar. The increased deficit dims prospects for third quarter U.S. GDP as trade is unlikely to contribute much to growth.
 

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U.S. exports of wood pulp, paper and paperboard took another breather in August when dropping by 131,000 metric tons (-4.3 percent) relative to July. Exports are also slightly below August 2009’s level. Imports gained slightly in August and remain above year-earlier levels.
 

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Softwood lumber exports gained a little momentum (7.2 percent) in August and stood nearly 32 higher than in August 2009. Lumber imports weakened relative to both the previous month (-9.7 percent) and year (-7.8 percent).
 

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With the U.S. dollar weakening in September against a basket of other currencies, we would not be surprised to see the September trade gap tick higher. 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.

September 2010 Industrial Production, Capacity Utilization and Capacity

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Industrial production decreased 0.2 percent in September after posting increases during 13 of the previous 14 months. For 3Q2010 as a whole, total industrial production rose at an annual rate of 4.8 percent after having advanced about 7 percent in both 1Q and 2Q2010. The index for manufacturing decelerated sharply in the third quarter: After having jumped at an annual rate of 9.1 percent in the second quarter, factory output gained 3.6 percent in the third quarter. At 93.2 percent of its 2007 average, total industrial production in September was 5.4 percent above its year-earlier level.
 

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Industrial production among forest products manufacturers was mixed in September; Wood Products lost 0.1 percent while Paper gained 0.1 percent. September’s industrial production at the all-industries level was 5.4 percent higher than a year earlier, Paper gained only 3.4 percent and Wood Products was 1.3 percent lower.
 

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The capacity utilization rate for total industry edged down to 74.7 percent, a rate 4.2 percentage points (5.9 percent) above the rate from a year earlier but 5.9 percentage points below its average from 1972 to 2009. Capacity utilization rates among both Wood Products and Paper rose 0.2 percentage point.
 

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Capacity at the all-industries level nudged higher in September, but continued to fall in both Wood Products and Paper sectors.

September 2010 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in September on a seasonally adjusted basis. Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment.

Increases in food indexes and another rise in the gasoline index contributed to the all items seasonally adjusted increase. Four of the six major grocery store food group indexes increased in September as the food index posted its largest increase since October 2008. The gasoline index rose again in September, leading to a third consecutive increase in the energy index despite a decline in the index for household energy.

The seasonally adjusted Producer Price Index for Finished Goods (PPI) increased 0.4 percent in September; intermediate goods moved up 0.5 percent, and the crude goods index fell 0.5 percent.
 

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Details at different stages of processing include:

Finished goods -- The broad-based increase in the index for finished goods can be traced primarily to higher prices for finished consumer foods, which rose 1.2 percent. The indexes for both finished energy goods and for finished goods less foods and energy also contributed to this increase, moving up 0.5 percent and 0.1 percent, respectively.

Intermediate goods -- The September rise for the intermediate goods index was broad-based, with prices for foods and feeds climbing 2.1 percent. The index for intermediate goods less foods and energy moved up 0.2 percent and prices for energy goods advanced 0.7 percent. On a 12-month basis, the intermediate goods index increased 5.6 percent for September, its tenth consecutive year-over-year rise.

Crude goods -- The monthly decrease was due to the index for crude energy materials, which fell 8.8 percent. By contrast, prices for crude foodstuffs and feedstuffs advanced 5.0 percent, and the index for crude nonfood materials less energy increased 5.5 percent.
 

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With the exception of Pulp, Paper & Allied Products, the main indices related to forest products manufacturing have retreated from their highs earlier this year -- on both monthly and annual percentage change bases. Pulpwood appears poised for another increase.
 

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“We’re kind of in a zone where neither inflation nor deflation is an overly significant concern,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, in reaction to the PPI report. “Core prices remain in check as demand remains subdued.”

Restricting analysis to “core” items might one to agree with Mr. Price, but consumers don’t live “at the core.”

“As is often the case, there is a big difference between what the government statistics are reporting and what’s going on in the real world,” wrote Casey Research’s Jake Weber. “According to the most recent inflation reading published by the Bureau of Labor Statistics (BLS), consumer prices grew at an annual rate of just 1.1% in August.

“The government has an incentive to distort CPI numbers, for reasons such as keeping the cost-of-living adjustment for Social Security payments low. While there’s no question that you may be able to get a good deal on a new car or a flat-screen TV today, how often are you really buying these things? When you look at the real costs of everyday life, prices have risen sharply over the last year. For simplicity’s sake, consider the cash market prices on some basic commodities.
 

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“On average, our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October.

“You probably aren’t buying new linens or shopping for copper piping at the hardware store every day, but I included these items to show the inflationary pressures on some other basic materials that will likely affect consumer prices down the road.

“The jump in gold and silver prices illustrates that it’s not just supply and demand issues driving the precious metals higher -- the decline in purchasing power of the dollar is also showing up in the price of physical goods,” Weber concluded. “It is because stashing wheat and cotton in the garage is an impractical way to protect purchasing power that investors are increasingly looking to protect themselves with the monetary metals -- a trend that is now very much in motion.”

September 2010 U.S. Treasury Statement and August TIC Flows

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Federal outlays of $279.7 billion and receipts of $245.2 billion added another $34.5 billion to the U.S. federal budget deficit in September…
 

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…bumping the cumulative deficit to $1.294 trillion during the entire fiscal year (which ended on September 30). This deficit was the second largest on record for the United States, coming in slightly below last year’s deficit of $1.416 trillion.
 

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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, net foreign inflows fell back to nearly $39 billion in August (from $63.3 billion in August), which helped pull the most recent three-month average rate up to the $33.0 billion mark. While August’s increase is encouraging, the three-month average 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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Almost $30 billion of August’s net inflows went into short-term securities (e.g., Treasury bills).

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Net inflows into long-term public debt (e.g., Treasury bonds) skyrocketed (from $47.3 billion in July to $121.8 billion in August) -- below the $130.8 billion peak of March. The three-month average rate jumped to $73.5 billion. Flows into private equities grew more slowly than in July; nonetheless, the three-month average rose almost to $8 billion in August.
 

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The amount of U.S. public debt held by foreigners continued its march upward in July. The United Kingdom “loaded up” the most ($74 billion), followed by China ($21.7 billion).

Central banks hold the “lion’s share” of Treasury securities, although the private sector has become much more active during the past several months. Private holdings have increased by more than 64 percent during the past year and now represent over one-third of total foreign holdings of Treasury debt.
 

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What these charts do not indicate, since they are oriented toward inflows of foreign money, is that the Federal Reserve is now the second largest owner of U.S. Treasuries. The Fed overtook Japan earlier in October, leaving China as the only country with greater ownership of U.S. debt. Since the Fed is “printing” money to buy Treasuries, we believe inflation will become much more of an issue as time progresses.

October 2010 Macro Pulse -- The “Fat Lady” Sings, but it’s a “Great Disappointment”

In opera circles, the saying goes that the show isn’t over until “the fat lady sings.” Although the horned helmet and metal breastplate were undoubtedly left on the shelf, the “fat lady" -- in this case the National Bureau of Economic Research’s Business Cycle Dating Committee -- last month determined a trough in business activity occurred in the U.S. economy in June 2009. This trough marked the end of the recession that began in December 2007, and the beginning of an expansion....

Although the recession may be over in a technical sense, it certainly does not feel that way. If the period between December 2007 and June 2009 constituted the “Great Recession,” said David Rosenberg, chief economist at Gluskin Sheff, “the period since then can be labeled the “Great Disappointment.”

The greatest disappointment so far has been....

Click here to read the entire October 2010 Macro Pulse.

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.

September 2010 Employment Report: Sinking Deeper

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The U.S. economy lost 95,000 nonfarm jobs in September as local and state governments shed positions faster than the private sector added them. Despite the net job loss, the official unemployment rate remained steady at 9.6 percent because fewer new workers joined the labor market than in the previous month.
 

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Private-sector payrolls rose by 64,000 in September, down from the upwardly revised August estimate of +93,000 (originally +67,000). The government sector lost 159,000 jobs including 77,000 temporary Census workers. State and local governments took the brunt of the public-sector firings (-83,000), while on net, the federal government added 1,000 (presumably permanent) jobs. Although somewhat difficult to see on the graph above, private sector hiring has increased by 0.6 percent on an annual basis while government job rolls have shrunk by 1.1 percent.

The reduction of census employment has distorted the payroll figures for months as the government dismissed workers it no longer needed. For that reason the change in private payrolls is a better gauge of the state of the labor market. Only about 6,000 census workers remain on the job, indicating September may be the last month the jobs data will be distorted.
 

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As of September, the U.S. economy has lost 7.75 million (5.6 percent) of the jobs that existed at the peak of employment in December 2007.

"The private-sector growth is somewhat heartening but in total you have to expect that state and local and government jobs are going to be a drag for a number of months and perhaps a number of quarters," said Bill Gross, co-chief investment officer at Pacific Investment Management Co. in Newport Beach, California.

The jobless rate has equaled or exceeded 9.5 percent for 14 consecutive months, surpassing the 13-month period from mid-1982 to mid-1983 as the longest span of elevated joblessness since monthly records began in 1948.

"If we're only creating jobs at this pace, the unemployment rate is going to go higher," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. "We aren't creating enough jobs to keep it steady."

As we have indicated in the past, at least 100,000 jobs need to be created each month just to keep up with population growth. Since nonfarm employment bottomed out last December, job creation has averaged just over 68,000 per month. Thus, the pace of hiring will have to increase dramatically to not only keep up with new workers entering the work force for the first time, but also to once again make those 7.75 million displaced workers productive.

August 2010 Personal Income and Outlays, Retail Sales and Consumer Debt: The Myth of The Deleveraging Consumer

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Bureau of Economic Analysis data revealed that growth in disposable personal income (DPI) outpaced personal consumption expenditures (PCE) in August. DPI increased by $52.0 billion (0.5 percent) while PCE rose by $41.3 billion (0.4 percent) relative to July. The advance in DPI was the largest so far this year, but it was largely propelled by a resumption of extended and emergency unemployment benefits rather than improved private sector hiring.

"[Consumers] are not retrenching, but neither are they splurging," observed Sal Guatieri, a senior economist at BMO Capital Markets Inc. in Toronto. “The recovery is on track, but remains lackluster."
 

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Retail-sale activity paralleled PCE in August, rising 0.4 percent compared to July as back-to-school discounts and tax holidays lured consumers to stores. "The tax-free holidays really gave a boost," said Ken Perkins, president of Retail Metrics. "Retailers came out of the gates strong on the promotional front in the last week of July and that carried through for basically the entire month of August."

Same-store sales, considered a key indicator of retailers’ health because they exclude results from new and closed locations, rose 3.5 percent. As we have argued in the past, however, this metric can provide deceptively strong signals because closed stores concentrate customers into the fewer remaining locations, thereby boosting their sales figures.

Another noteworthy item is that the annual percentage growth in retail sales has slowed dramatically from the heady pace seen in April. This development bears watching.
 

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Total consumer debt outstanding declined in August as the retreat in credit-card purchases more than offset a small rise in non-revolving debt. Total credit decreased 1.75 percent (SAAR); revolving credit fell by 7.25 percent while non-revolving credit increased by 1.25 percent.

A recent Wall Street Journal article questioned the assumption that consumers have been deleveraging voluntarily as a way of eliminating debt. By looking at the Federal Reserve’s Flow of Funds report, WSJ found consumers have instead been aggressively leveraging more and more until the banks put them into involuntary bankruptcy, cutting off the money spigot.

Of the $600+ billion in deleveraging that has occurred since mid-2008, WSJ found that only about $20 billion was voluntary. Contrary to what has been the “received wisdom,” it appears a large proportion of consumers do not, in fact, moderate their spending while still in possession of credit; on the contrary, they accelerate spending until breaching the lender’s charge-off threshold -- at which point all credit is cut off. “This is a startling realization,” said Tyler Durden, whose blog brought this analysis to our attention. “[It confirms] that the average American is actually ‘hyperleveraging’ to the point where all available credit is forcefully eliminated by a lender institution! The conclusion is that consumers do not pass a moderate ‘Go’ on their way to insolvency, they go from hyperleverage straight into bankruptcy.”

September 2010 ISM Reports: Manufacturing Stumbles; Services Speed Up

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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With a 1.9 percentage point decrease in its PMI, manufacturing expanded at a noticeably slower pace in September. "While the headline number shows relative strength this month as the PMI reading of 54.4 percent is still quite positive, the overall picture is less encouraging,” said Norbert Ore, chair of ISM’s Manufacturing Business Survey Committee. “The growth of new orders continued to slow, as the index is down significantly from its cyclical high of 65.9 percent (January 2010). Production is currently growing at a faster rate than new orders, but it typically lags and would be expected to weaken further in the fourth quarter. Manufacturing has enjoyed a stronger recovery than other sectors of the economy, but it appears that weaker growth is the expectation for the fourth quarter. Both the Inventories and Backlog of Orders Indexes are sending strong negative signals of weakening performance in the sector."

ISM’s manufacturing report points to "an economy that is growing but not growing very rapidly," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. "We may see a cooling off in manufacturing in the next few months."

After exhibiting no changes for two months, Wood Products reported some movement in September; unfortunately, most of those changes were disappointing. Paper manufacturing, on the other hand, lengthened its string of positive changes.
 

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Growth in the service sector picked up speed in September, nearly offsetting the PMI decline; the non-manufacturing index rose by 1.7 percentage points (to 53.2 percent). None of the service industries we track showed much change. One Construction respondent indicated that the "general state of the business has not changed in the last three months. The market is still soft for new sales due to financing requirements."

"This is slow and steady growth," remarked Anthony Nieves, chair of ISM's non-manufacturing survey. "There's still this cautiousness about whether or not things are turning the corner but people want to remain optimistic."

Input prices paid by manufacturing industries jumped at a significantly faster pace (9 percentage points), but the rate of increase slowed slightly (-0.2 percentage point) for the service sector. Relevant commodities whose prices increased in August included: corrugated containers, diesel fuel and paper. No relevant cmmodities were down in price. Coated groundwood and coated freesheet were commodities listed in short supply.

August 2010 Manufacturers’ Shipments, Inventories and New Orders: Digging below the Headline for a Little Encouragement

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Shipments, inventories and new orders at the total manufacturing level posted mixed results in August, according to the U.S. Census Bureau.
 

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Shipments, down three of the last four months, decreased $2.5 billion (0.6 percent) to $415.1 billion. This followed a 1.2 percent July increase. The decline was led by a $3.1 billion (5.8 percent) retreat in transportation equipment. Greater shipments of manufactured nondurable goods -- especially chemical products (up $0.4 billion or 0.7 percent) -- offset some of the fall-off in shipments.

Shipments from solid wood manufacturers declined by 4.3 percent while paper manufacturers saw a 0.1 percent increase.
 

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Interestingly, data from the Association of American Railroads indicate a general increase in the amount of rail traffic during August – especially shipments of lumber and wood products. The 1 percent decrease in the Ceridian-UCLA Pulse of Commerce Index (which measures diesel consumption of over-the-road trucking) for August was more consistent with the Census Bureau’s shipment values.
 

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Inventories inched higher ($0.7 billion, or 0.1 percent, to $526.4 billion) again in August. Transportation equipment had the largest increase, at $0.6 billion (0.8 percent), while petroleum and coal products led the decliners (down $1.2 billion or 2.9 percent).

Solid wood inventories fell by 0.8 percent while paper remained unchanged.
 

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New orders constitute the forward-looking portion of the Census Bureau’s report, and give an indication of what may be in store for the manufacturing sector. As such, the report’s headline numbers did not provide much encouragement, because new orders for manufactured goods decreased $2.2 billion (0.5 percent) to $408.9 billion. Transportation equipment -- especially aircraft -- had the largest decrease among durable goods ($5.3 billion or 10.2 percent). Excluding aircraft, however, durable goods orders increased by a much healthier-sounding 0.9 percent; this result indicates at least some companies are replacing outdated equipment. New orders for nondurable goods increased $0.7 billion or 0.3 percent to $217.1 billion.

September 2010 Currency Exchange Rates: A Paler Shade of Green

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The U.S. dollar depreciated “across the board” again in September: by 0.7 percent against Canada’s “loonie,” 1.5 percent against the euro and 1.2 percent against the yen. On a trade-weighted index basis, the dollar gave up 1.0 percent against a basket of 26 currencies.
 

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Canada: The loonie edged toward parity with its southern cousin despite revelations of a fall-off (-0.1 percent) in Canadian gross domestic product (GDP) during July -- the first monthly decline since August 2009. Manufacturing, retail and wholesale trade, construction and forestry all posted decreases. Increases were recorded in the mining sector and, to a lesser extent, in some financial industries and the public sector.

Europe: The euro strengthened against the dollar as expectations that the U.S. Federal Reserve will engage in quantitative easing overshadowed concerns about conditions in Europe. "Investors have turned bearish on the greenback as speculation mounts that the Fed will increase the monetary base to stimulate the U.S.'s lackluster economic recovery," wrote Brian Dolan, chief currency strategist at Forex.com. "We're left with an environment [in which] bad U.S. news is met by further dollar-selling as the likelihood of additional Fed easing increases, and good U.S. news is similarly met by dollar-selling as risk assets are bought."

The euro gained momentum in early September when European Central Bank chiefs began “jawboning” their way toward an exit from emergency lending measures (as opposed to taking concrete actions), and maintained that inertia despite new problems in Ireland’s banking system, warnings of “contagious effects” on Europe’s banks from sovereign debt risks, and slowing growth of Eurozone economic activity.

“Global growth appears to be slowing and domestic demand is likely to be limited in a number of euro-zone countries by tighter fiscal policy,” said Howard Archer, an economist at IHS Global Insight in London. Contractions in Spain and Ireland “highlight the divergent performance of the euro zone.”

Japan: Unilateral intervention in the currency markets by Japanese officials tempered, but did not reverse, the yen’s rise against the greenback. On a monthly average basis, the yen has been stronger only once before in the past 40 years -- in April 1995. Even Japan’s shrinking trade surplus and industrial production, and expectations of additional quantitative easing by the Bank of Japan were insufficient to significantly pare the yen’s lofty valuation.

September 2010 Monthly Average Crude Oil Price: High Inventories, Tame Price

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The monthly average U.S.-dollar price of West Texas Intermediate crude oil retreated by $1.51 (2.0 percent) in September, to $75.31 per barrel. That price decrease occurred despite a weaker dollar, consumption of nearly 19.3 million barrels per day (BPD) in July -- the highest levels since October 2008, but in conjunction with persistently high crude stocks.

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Recent oil-related developments include the following:

· The U.S. Export-Import Bank, an independent federal agency, loaned more than $1 billion to the Mexican state oil company PEMEX in 2009 to support the company's oil drilling in the southern Gulf of Mexico. The bank has another $1 billion in loans in the pipeline for 2010 that, like the 2009 loans, would result in PEMEX employing U.S. oil contractors and engineers for both on-shore and off-shore oil production.

Mexico is the United State's second largest source of foreign oil, according to the Energy Information Agency, accounting for 1.2 million barrels per day in imports -- 200,000 more barrels per day than from Saudi Arabia. Because the United States accounts for a large share of Mexico's oil exports, it is inevitable that the country will import oil produced as a result of federal loans, meaning that the U.S. federal government loaned money to the Mexican government to produce oil so that we could import it.

The Bank's activities are not affected by the Obama administration's ban on offshore drilling because that ban applies only to deepwater (500 meters of water or deeper) drilling and the PEMEX projects financed by the Ex-Im Bank are shallow-water projects.

· The Obama administration will require oil and gas companies operating in the Gulf of Mexico to plug nearly 3,500 non-producing wells and dismantle about 650 production platforms that are no longer used.

More than 27,000 abandoned oil and gas wells lie beneath the Gulf of Mexico, and more than 1,200 oil rigs and platforms sit idle. An Associated Press investigation showed that many of the wells have been ignored for decades, with no one checking for leaks.

The order requires operators to plug wells that been inactive for the past five years. Production platforms and pipelines must be decommissioned if they are not being used for exploration or production, even under an active lease. Current federal regulations require idle structures to be decommissioned - a process that involves plugging wells and dismantling and removing platform structures and pipelines - within one year of the lease's expiration date.

August 2010 U.S. Construction: Private Construction Spending Disappoints

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Overall construction spending posted an unexpected gain of 0.4 percent in August after tumbling during July to the lowest level in a decade. The entire August advance occurred in the public sector, thanks to government stimulus outlays for public works. By contrast, spending among all private categories -- especially non-residential -- retreated in August.

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Repeating a pattern seen in July, the number of total housing starts rose by 10.5 percent in August despite a decline in the value of private construction put in place. Even so, starts remained near the lowest levels since the Census Bureau began collecting data in 1959; also, the increase was concentrated in the multi-family sector.
"While the volatile multi-family sector was responsible for the overall level of starts in August being higher than expected, the more important single-family component remains severely depressed," noted Joshua Shapiro, chief economist of MFR Inc.

Nor is the market providing signals of a dramatic improvement. Although total permits rose 2.1 percent, permits for single-family structures -- which accounts for 75 percent of the housing market -- fell by 0.7 percent. "This marks the fifth consecutive monthly drop [for single-family permits] and is indicative of deterioration in demand for new homes," economist Michelle Meyer of Bank of America/Merrill Lynch said. "Even though single-family starts moved in the right direction, there is still weakness evident in the single-family data," added Daniel Silver, an economist at JPMorgan Chase. "The level of starts relative to permits indicates growth in housing starts may not be sustained."

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Even if starts do retreat further, we think that fall-off will be fairly modest and short-lived. It appears that 500,000 starts marks the “baseline” level of nationwide building activity. "The housing market has found a bottom, and we're bouncing along here," concurred Thomas Simons, an economist at Jefferies Group Inc. Simons warned, however, that "the market is challenged by supply, and until that is cleared out, it will be tough for the homebuilders."

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Because of flat new-home sales (matching the second-lowest level on record), the ratio of starts to sales remained elevated in August. Granted, this ratio is something of an apples-to-oranges comparison, since starts include all activity while sales include only houses built on a speculative basis (i.e., excluding homes built on contract). Nevertheless, it gives an indication of the balance (or lack of same) between supply and demand.

"There is no upside momentum in housing, period," said Eric Green, chief market economist at TD Securities Inc. "Unemployment is so high, consumer confidence is so low, household wealth is eroded and the psychology remains negative."

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A comparison between completions and sales tells much the same story. Interestingly, however, the number of single-family dwellings for sale and months of inventory dropped slightly despite a rise in completions -- mainly in the multi-family sector.

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August’s 7.6 percent increase in sales of existing homes recouped a bit of July’s 27.2 percent plunge, and helped to whittle away at both months of inventory and the absolute number of existing homes. Nonetheless, the residual effects of the federal home buyers’ tax refund remain very evident in the resale market. “We should have relatively low expectations of what the housing sector should be able to achieve over the next few years,” opined Zach Pandl, an economist at Nomura Securities International. “You have too many homes and too many mortgages and it’s going to take a long time to work through that overhang.”

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The median new home price dropped by 0.6 percent in August, to the lowest levels (on a nominal basis) since January 2004. Price erosion was even greater for resales (-1.9 percent), which resulted in greater affordability for a second consecutive month.

Strangely, although the seasonally adjusted S&P/Case-Shiller home price indices rose in only three metropolitan statistical areas (MSA) between June and July, the 10-city composite index somehow managed to eke out an increase.

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“Home prices crept forward in July. Ten of the 20 cities saw year-over-year gains and only one -- Las Vegas -- made a new bottom, as the impact of the home buyer program continued to fade away,” said David Blitzer, Chairman of the Index Committee at Standard & Poor’s. “The year-over-year growth rates for 16 of the cities and both Composites weakened in July compared to June…. The next few months may give us an idea of the true strength of the housing market, as the temporary economic stimuli will have ended. Housing starts, sales and inventory data reported for August do not show signs of a robust market, and foreclosures continue.”

Blitzer’s contention of annual price increases is disputed by the Federal Housing Finance Agency (FHFA). FHFA reports that home prices dropped 3.3 percent in July from a year earlier. Our research into similar past disparities between these two sources revealed that different sampling techniques explain the opposing results.

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