July 5, 2012
Three pivot points for the world economy — U.S. housing, Europe’s conundrum and oil prices
ALEX CARRICK
Chief Economist, CanaData
In April, for the first time in eight months, the S&P Case-Shiller existing homes sales price indices — both the 10- and 20-city composites — increased.
The month-to-month change was an identical +1.3%.
Also notable was the breadth of the advance. In 19 of the 20 major cities monitored by Case-Shiller, there was an improvement in prices.
The only city to register a decline was Detroit, -3.6%.
The upward march was led by San Francisco (+3.4%), followed by Washington (+2.8%), Phoenix (+2.5%), Atlanta and Cleveland (both +2.3%), and Portland and Seattle (both +2.0%).
Notice that three of the seven above-mentioned cities are on the Pacific Coast.
Not all high-tech firms are bursting at the seams with business. But the ones that are meeting with success are profiting beyond the norm.
Those companies are also the source of the new hires among recently graduating engineers and programmers from computer sciences courses at colleges and universities.
The West Coast is home to some of the largest and most successful companies in IT.
U.S. resale home prices in April did remain down on a year-over-year basis. But the percentage declines, -2.2% for the 10-city composite and -1.9% for the 20-city equivalent — were less than the month before.
In March, the year-over-year performances were -2.9% and -2.6% respectively.
And while the annual change may have been negative for the 20 cities as a whole, exactly half (10) of the entries recorded increases.
The cities with the largest annual rates of resale home price increases were Phoenix (+8.6%), Minneapolis (+3.8%), Miami (+3.2%), Dallas and Denver (both +2.8%).
The only city with a double-digit percentage decline in April was Atlanta, at -17.0%. It wasn’t that long ago that numbers worse than -10% were quite prevalent among the 20 urban centers.
The better existing-homes price performance combines with several other indicators to provide upbeat economic-health news. The U.S. housing market is dispensing with its wheelchair and starting to walk again, albeit with crutches.
Home starts in May were over 700,000 units whereas they’d been down around 480,000 in the worst of the recession. Plus previous monthly starts figures for March and April were revised up substantially.
Residential building permits, which lead starts by a month or two, were near 800,000 units in May. And the number-of-months of unsold new home inventory finally returned to its historical norm of about 4.5, after being as high as 12.0 at one point (January 2009).
The U.S. housing market is more likely to contribute to U.S. growth moving forward than take away from it.
That doesn’t mean we’re out of the woods yet. The primary problem continues to be a European economy that is vastly underperforming versus its potential.
Out of control sovereign debt continues to dominate the headlines. Greece, Portugal and Ireland have required rescue packages so far and destabilizing speculation has now moved on to Spain and Italy.
Spanish 10-year bonds have risen to near 7.00%, the benchmark level that forced several other nations to cry for mercy. At such a level, repayment schedules become too punishing.
The large sizes of the Spanish and Italian economies have elevated the danger. In another interesting development, the focus of the struggle has shifted from governments to the banks.
To date, nation states have been provided with assistance money to prop up their budgetary shortfalls while they make structural changes to their labour markets, particularly in the public sector.
In the case of Spain, it’s the banking sector that has precipitated the crisis. Bailing out some of its biggest banks will take a financial commitment Madrid cannot afford.
A loss of confidence in the banking sector raises a host of other issues. There is a leakage of funds from the very countries that need investment dollars the most — to improve productivity, restore growth, and lead to tax increases that will eventually break the backs of their deficits.
But who’s going to invest in nations where the expectation is that the currency will fall — dramatically in Greece if it leaves the Euro or in slow motion in the rest of the Euro-zone as the economy continues to stumble and falter?
Ensuring the strength of individual banks is currently the responsibility of the nation where they’re incorporated. A bank failure, however, has repercussions that extend beyond borders.
There are several ways to stop the decay in the banking sector. A central agency to oversee financial institutions is a starting point. Probably housed within the European Central Bank (ECB), this would provide the means to spot and deal with potential flash points at an early stage.
Other measures call for deposit insurance across the Euro-zone, to diminish chances for “runs” at the banks, and a provision to allow bail-outs of banks directly rather than through the present intermediary process that sees the money go to national governments first.
Much of Europe backs implementing such measures. Berlin does not. Germany, almost alone, stands in opposition.
Germany has no quarrel with stronger oversight, as long as it doesn’t mean an assumption of greater liability. As the continent’s strongest economic pillar, Germany has the final say.
When the evidence increasingly suggests that what is being done isn’t working and nearly everyone but the Germans says to try something different, one has to wonder how the situation can turn out any other way than badly.
If Germany were to relent an inch or two — or say even a millimetre — with respect to its hard-line stand, stock and bond markets would leap with joy.
So what about Canada? What else besides the U.S. housing market and Europe’s ongoing soap opera should we be keeping an eye on?
Most of the rest of the world is probably happy with the direction world oil prices have taken of late. They’ve fallen by nearly one-quarter in the last couple of months.
Lower gasoline prices help promote retail sales across a broader spectrum of goods than simply basic transportation. As such, they tend to stimulate the consumer spending side of the economy.
In Canada, many of our mega energy resource projects — with associated major investments in such regions as the Oil Sand of Alberta and the waters off the coast of Newfoundland — benefit from a crude price that has some lift to it.
The expectation among global commodity observers is that $80 U.S. per barrel oil won’t last. As of July 1, Europe will begin to impose its sanctions on Iranian oil imports.
Europe is the second largest customer for Iranian oilfields after China. The embargo is meant to increase the pressure on Iran to abandon its nuclear weapons ambitions.
Also, other Middle Eastern producers are expected to soon fine-tune the market (i.e., lower output) in order to raise the price-point.
Saudi Arabia can’t be happy about the low dollar amount it’s currently receiving for its “bread and butter” export.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com
