Pending home sales jumped 3.2% m/m in July to the highest level since June 2007, exceeding expectations. Home sales have increased for six consecutive months, the first time this has occurred in the history of the series which dates back to 2001. The sharp upturn in home sales has been driven by the combination of greater affordability, a brighter economic outlook, and the first-time homebuyer tax credit. On a regional level, pending home sales jumped 12.1% and 3.0% in the West and the South, respectively. However, sales fell 2.0% and 3.0% in the Midwest and in the Northeast, respectively. Home sales are up y/y in all four Census divisions, with the most notable improvement of 12.1% in the West. On balance, this was a decidedly positive report, showing that the housing recovery is very much under way.

Gain in US residential construction spending offset by decline in nonresidential

Construction spending slipped 0.2% m/m in July while the data were revised down in June and May. The composition of spending in July was largely as expected - an increase in single-family residential construction spending was offset by a decline in multi-family and non-residential construction expenditures. New construction of single-family homes surged 7.0%, following a 3.1% gain in June and helping to counter the 81% plunge in spending from February 2006 through May 2009. Construction spending on multi-family homes fell 3.3% while spending on home improvements slipped 0.2%. This left total private residential construction spending up 2.3%. This was offset by a 1.2% drop in nonresidential construction spending, owing to notable declines in the cyclical components such as lodging, office, and commercial, which are all down sharply on a y/y basis (-35%, -26%, and -35%, respectively).

Today’s report has implications for our GDP tracking estimates. The downward revisions to residential and nonresidential construction spending in June and May leave Q2 GDP tracking -1.2% versus -1.0%. In addition, we now see considerable upside risks to the forecast for residential investment to increase 5% in Q3 but see downside risks to the forecast for nonresidential structures investment to decline 10%. In our view, nonresidential structures investment should serve as the biggest drag to GDP growth in Q3.

St. Louis Fed President Bullard says fed funds rate hikes unlikely soon

In an interview with Market News International, St. Louis Fed President James Bullard, who we consider one of the more hawkish on the FOMC, said Monday that the Fed must at some point renormalize rates, but that such a move was unlikely soon. Taking a different interpretation than some others on the FOMC, he noted that easy policy earlier in the decade “contributed” to the housing boom and bust, and that “we will be a lot more conscious about this notion that you would renormalize interest rates at some point.” However, he thinks renormalization is “a ways away-maybe quite a ways away.” Once the time for normalization comes, he was skeptical of the 25bp per meeting pace of the last tightening cycle, saying “I don’t think there was any theory that told you that you were supposed to go up a quarter point at every single meeting.” Although he does not see rate hikes coming soon, he contradicted San Francisco Fed President Yellen’s assertion that the federal funds rate may stay at zero “for several years.” In contrast, Bullard said “if the federal funds rate is at zero several years from now we’ll be in a Japanese style deflation trap or a very low inflation trap. The goal is to avoid that outcome in 2009.”