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Tuesday, May 01, 2007

ISM Manufacturing UP; Pendings Down

ISM Manufacturing for April is out and is quite positive. Customer inventories were reported decreasing, new orders were way up, backlog of orders was way up, and employment was up. Exports were up substantially more than imports! The strength of this report would tend to forecast another strong report for May.

The worst news in this report was that commodity prices were also way up. This does not look like inflation is due to drop any time soon. The last few months of ISM price indices:
Jan: 53; Feb: 59; Mar: 65.5; Apr: 73
But it cannot be stressed enough that the PMI for manufacturing came in at 54.7 overall, which matched the previous 12 month high (May 2006). Both employment and order backlogs shifted from contracting to a healthy growth between March and April.

This is particularly good news to me because the last PCE report seemed to show a contraction in consumer spending on services. Service, overall, are a much higher proportion of the economy than manufacturing. If consumers are pressured enough to cut back on spending on services, then we need business services to expand. The weaker dollar might be kicking in for manufacturers.

Pending Home sales (pdf) were down in an unambiguous manner. Most pending home sales close in the two months following the report, so this is not good new for expected April and May home sales.

If you look at the seasonally adjusted figures, this is the trend:
Dec: 113.3
Jan.: 108.5
Feb: 109.7
Mar: 104.3
That looks like the housing market is worsening instead of getting better. Seasonal adjustments sometimes obscure rather than clarify, especially in changing markets. A YoY comparison of non-seasonally adjusted figures gives:
Feb 2006: 107.2; Feb 2007: 98.2 (revised) = (8.4% decline YoY)
Mar 2006: 134.5; Mar 2007: 118.8 (should be revised up a bit) = (11.7% decline YoY)
No help there. It's hard to see how the housing market could be stabilizing. I doubt the Fed is prepared to concede the point yet, but they are going to have to give on this one before they end up with a reputation similar to Lereah's.

Another way to look at this is that these YoY pending changes (I'll use -10%), applied to last year's actual sales for April/May, seem to forecast something like this in existing home sales:
April 2006: 560,000; April 2007: 504,000?
May 2006: 642,000; May 2007: 578,000?
March actual sales for 2006 were 554,000, pendings were down about 8.4% Y0Y in February 2007, and March actual sales for 2007 came in at 482,000 (-13%), so the above extrapolation is not unreasonable. This extrapolation is perhaps somewhat optimistic, but I am expecting the credit markets to adapt and more homeowners to get financing from GSE (agency) sources, so I think the downward trend should slow a bit.

Given the shocking news that overall homeowner vacancy rates increased again to 2.8% in the first quarter of 2007, with vacancy rates inside principal cities given as 4.0% and inside MSAs (metropolitan statistical areas) as 2.9%, it is impossible to see how building won't have to drop from its current rate. Vacancy rates for rental housing moved up over 10. The pace of multi-unit starts is going to have to slow as well.

Historically speaking, the homeowner vacancy rate of 2.8% is wildly in excess. From 1995 to 2000 (some good years economically!) the median was 1.6% and the high was 1.7%. Homebuilding is not going to recover in 2007, because we are too far into the year to make much of a dent on excess inventory . It may not recover in 2008. Certainly we can't expect metro areas to see a whole lot of price appreciation, and most reasonable observers would have to look at the numbers for new homebuilding, the vacancies, and the pace of sales so far in 2007 and project further price declines in some major cities.

All of this, of course, is not good for borrowers who are underwater and creditors holding their mortgages.

ISM is a diffusion index; follow the housing numbers.
Granted, and mfrg is a smaller portion of GDP than building. Nonetheless, it's nice to see that we're not giving up without a fight.
Search your feelings Mama. You know we need a recession to cure the excesses.
I am probably psychologically incapable of believing that the majority of people are fundamentally irrational.

NY Times wrote an article on the ratings firms getting tough with CMBS. Aren't people going to be shocked when they really figure out what is happening?
Well, the Emperor still has his clothes while the wall of money is still rolling into LBO, Private Equity and Hedge Funds. I took my wife ( who, contrary to your next post has not held me back) to the SOHO pied a terre for a couple of days. Did some shopping, big time restaurants, long walks. Know what? No one speaks English! German, Russian, French(YUK!), Italian, Japanese. The NYC economy is going to be good for a while. I really wanted to go sit on the beach, but your comment about people flying on their jets wasting gas and hurting the environment put a damper on that one....
Currency. I hear the shopping's great on the Euro too.

You've got that strange working thang going on, which is why your wife hasn't "held you back". If you were doing your best to achieve bankruptcy and bumhood, no doubt she would be doing her best to hold you back. Wives are funny like that - most of them care rather sincerely about their husbands.

I don't care if you fly around the world, as long as when you get back you DON'T suggest raising gas taxes so that people making $10 an hour can be forced to make you feel like an environmentalist.
Ah, the Bob Rubin rich Democrat thing. Now that i've got mine, I need to keep you from getting yours....
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