Housing starts totaled 582k in June, much stronger than consensus (530k) expectations. There were also upward revisions to starts in April and May. In addition, the rise was focused in the less-volatile single-family sector, and was matched by a significant gain in building permits. Thus, these figures look like a genuine upward surprise, and support the view that housing construction activity is bottoming out.

Construction spending unexpectedly rose 0.8% m/m in April, largely above consensus expectations for a 1.5% decline. The upward surprise was once again in private nonresidential construction spending, which rose 1.8%, marking the third consecutive monthly gain. The increase was driven by a jump in spending on power, communication, and manufacturing structures. This more than offset a decline in construction of commercial real estate and office buildings. We continue to argue that this increase in nonresidential construction spending is not sustainable and expect a downturn in the nonresidential construction sector over the next several quarters. Nevertheless, the gain over the past few months kicks off 2Q to a healthy start, suggesting nonresidential investment in structures will decline by a small amount, or even increase, in 2Q after a record decline in 1Q .

New home sales inched up 0.3% m/m to 352,000 in April, below expectations. The report also included annual benchmark revisions that moved new home sales slightly lower at 351,000 in March versus the previous estimate of 356,000. Sales fell 3.8% in the West as builders struggled to compete with the overhang of distressed properties for sale. Sales increased 1.9% in the South and held steady in the Northeast and Midwest. Inventory of homes for sale fell 4.2% to 297,000, roughly half of the inventory at the peak in April 2007. Most of the decline has been in inventory of homes under construction, but over the past several months, inventory of completed homes has started to edge lower. The decline in inventory reduced months supply to 10.1, the lowest since July of last year. The new home market has started the painful process of normalizing owing to aggressive construction cuts.

Existing home sales rose 2.9% m/m to 4.68mn saar in April, in line with expectations. This partially offsets the 3.4% drop in March, keeping existing home sales roughly stable since the end of last year. Sales increased 3.5% m/m in the West, which translated to a 19% y/y rise. The large presence of foreclosures in parts of the West, particularly in California, Nevada, and Arizona, has enticed bargain hunters and boosted sales. Sales also gained 11.5% m/m in the Northeast and 1.8% in the South but declined 2.0% in the Midwest. In all three of these Census divisions, home sales are down about 10% y/y. The apparent leveling off in national existing home sales owes to deep discounting and lower mortgage rates, which have lured first-time buyers into the housing market. Indeed, according to the National Association of Realtors, first-time buyers make up about 40% of total transactions.

US consumer confidence jumps in May

The Conference Board’s index of consumer confidence surged to 54.9 in May from 39.2 in April. The improvement was primarily driven by a 21.3 surge in the expectations index to 72.3, the highest reading since December 2007. This marked the biggest monthly gain in the expectations index since April 2003. An increase in this index is typical at the end of recessions and is therefore consistent with the view that the economy will emerge from the recession in Q3. The present situation component also rose, albeit slightly, to 28.9 from 25.5 in April. This improvement is in line with the small increases seen in the labor differential and the index of present business conditions. Buying conditions for automobiles and major appliances also edged higher, with the percent of respondents planning to purchase an automobile in the next six months at the highest since April 2008.
S&P Case-Shiller US home prices down 32% from the peak

A number of questions have arisen regarding a recent article by San Francisco Fed economists called “U.S. Household Deleveraging and Future Consumption Growth” (available at link below). The article argues that “households may need to undergo a prolonged period of deleveraging, whereby debt is reduced and saving is increased,” and that this “could result in a substantial and prolonged slowdown in consumer spending, relative to pre-recession growth rates.”

Did you notice how quickly this year is going? Thinking back on these last few months, I believe that I’ve learned something. See if you can relate.

People are changing their lifestyles. Items that we would have bought without a second thought a year or two ago are skipped now. In a recent TDS poll, nearly 60% of those responding said that they were making changes that would be permanent even if the economy got better. Another 20% said that they were making spending changes, but expected to go back to their spendier ways later. That’s 80% of the people who have changed spending levels.

Lacker and Hoenig (two relatively hawkish FOMC officials) yesterday warned that Fed balance sheet must at some point be curbed