I can get as excited as anyone else about the possibility that the Fed may cuts interest rates, but I still think the media should have given a bit more attention to the two big economic reports released yesterday and perhaps a bit less to the hints coming from the Fed. For those who missed it, both existing home sales and durable goods orders fell in October. Which report is considered worse probably depends on what you had been expecting, but neither is good news. Existing homes sold at a 4.97 million annual rate in October. This is down 1.2 percent from September and 20.7 percent from the year ago level. Sales are down by more than 30 percent from their peak levels in 2005. The worst news was probably on the price side. The median house price for October was $207,800, down by 5.1 percent from year ago levels. The median house prices in the South and West were 6.7 percent and 6.9 percent below year ago levels, respectively. The price decline is worse than it looks for two reasons. First, the indexes measure contracted prices. These days there is frequently money going from sellers to buyers at closing (e.g. for repairs, closing costs etc.) that will not appear in the contracted price. The second reason that the price situation is worse than it looks is that the collapse of the subprime market should make the median home sold today somewhat more upscale than the median home a year ago. The subprime buyers were disproportionately at the low end of the market. If a large portion of these buyers get knocked out of the market, then the median home is pushed higher up the distribution. We have indexes that hold the mix constant (the Case-Shiller index and the House Price Index), but we won't have October data for at least a month. In the mean time, the picture from this release is not good. With house prices falling year over year, anyone who bought a place last year with little or no downpayment now has negative equity. The Census Department reported that new orders for durable goods were down by 0.4 percent in October, following sharp drops the prior two months. Excluding transportation, orders were down by 0.7 percent. New orders for non-defense capital goods, the category that corresponds to equipment investment in the GDP accounts, were down by 3.1 percent for the month, 2.1 percent if aircraft orders are excluding. For the year to date, new order are up by 2.8 percent from year ago levels, while shipments are up by just 0.5 percent. (These numbers are nominal, but inflation in this sector has been close to zero.) Excluding aircraft, new orders are down by 1.7 percent and shipments are down by 0.5 percent. The two reports together give us a story of housing in a full-blown collapse and investment stagnating, if not actually declining. It is hard to reconcile this data with a story of a healthy economy. With the savings rate already near zero, there is not going to be another consumption boom, so this only leaves trade as an engine of growth. It had a very large contribution to GDP growth in the 3rd quarter (1.4 pp), but it is hard to believe that the recent rate of improvement in the trade deficit can be sustained. In short, it looks like we have some very serious problems ahead, even if the Fed cuts interest rates.
--Dean Baker
