Economic Highlights for the Week Ending July 27, 2007

Monday, July 23rd
Based on solid economic indicators excluding the housing sector, fed funds futures traders expect key short term rates to stay at 5.25% when the Fed meets in August. Traders are pricing in a 90% chance that the Fed will remain on hold at the October 30 meeting, up from 85% last week. In the second half of this year, mortgage equity withdrawal declines and slower consumption growth could keep the economy below its long-term potential of slightly below 3%.
Tuesday, July 24th
National mortgage lender leader Countrywide Financial revealed that more good credit borrowers are lagging on loan payments, and a housing market recovery may not start until 2009 because of housing prices declines not seen in decades. Countrywide's stark assessment signaled a change in how housing executives are publically describing the market. The comments initiated a steep stock market sell-off today, the most volatile in a year.
Wednesday, July 25th
Existing home sales fell 3.8% in June to an annual pace of 5.75 million, shy of an expected 5.87 million pace. Rising mortgage rates combined with tightening lending standards are quashing demand for homes. Inventories declined but at the weakened sales pace, the month's supply of homes for sale remained unchanged at 8.8. Median prices rose slightly for the first time in 11 months gaining 0.3% over the past year to $230,100. Credit market distress and a still high level of inventories mean that the correction in the housing market will continue.
The Fed's survey of economic conditions in the twelve Federal Reserve Banking Districts known as the beige book was mostly positive with most areas reporting moderate activity in June and early July. Gains in manufacturing and commercial real estate were offset by the drag from residential housing. Demand for loans also weakened. Consumer spending was modest with some districts reporting mixed results while labor markets remained strong. Cost pressures were evident across the board with almost every single region reporting higher oil and gas prices. Survey results showing a steady economy and contained inflation means the Fed will remain on hold when they meet next month and possibly through the remainder of this year.
Thursday, July 26th
New home sales plunged 6.6% in June to an annual rate of 834k. Expectations were centered on an annual rate of 900k. Over the past year sales have declined 22.3% and are 40% lower than their July 2005 peak. Regionally, home sales plunged in the Northeast, Midwest and West but climbed higher in the South. Inventories were unchanged last month but because of the reduced sales pace the month's supply rose to 7.8 from 7.4 in May. Home prices were mixed with median prices down 2.2% to $237,900 and average prices climbing 3.7% to $316,200. The housing market is still searching for the trough. New home sales are expected to decline going forward as builders work off high inventory levels under weakened demand.
Bleak housing market demand and credit market risks placed downward pressure on rates this week. Housing demand is being stymied by tighter lending standards and a 40 basis point jump in average 30-year fixed rates in June. Rates eased this week though with 30-year fixed rate mortgages averaging 6.69% this week compared to 6.73% last week according to Freddie Mac's mortgage market survey.
Friday, July 27th
Economic growth rebounded in the second quarter as GDP grew at a 3.4% annual rate, compared to an anemic pace of 0.6% in the first quarter. Less of a drag from housing, robust inventory building and stronger exports all contributed to the revived growth rate. Consumer spending however, slowed sharply. An economy wide inflation gauge slowed to 2.7% last quarter from 4.2% in Q1.