This morning the Census Bureau reported that new home sales fell 16.6% in January to 937,000 units on a seasonally adjusted, annualized basis, the biggest month-over-month drop since 1994. Simultaneously, the Commerce Department announced that growth in Gross Domestic Product during last year's fourth quarter was revised downward from a strong 3.5% to a sub-par 2.2%. Neither of these numbers can be considered good news, but they do put the current economic picture into better perspective. And they help to explain why yesterday's unpleasantness in the stock market was a hiccup, not a crash.
Housing, as we all know, is in a slump, but the seemingly huge drop in new home sales this January was more a statistical quirk than a portent. The actual number of new homes sold--not seasonally adjusted and not annualized--in any given month is relatively small, particularly in the winter. Just 70,000 new houses were sold in January compared to 89,000 in January 2006. The big change was in the number of sales in the western states: 12,000 this year compared to 26,000 last year. Parts of California experienced unusually cold weather in January, which may have impeded house hunters, and many of the most speculative real estate markets in the last couple of years were in California, Nevada, Arizona and Utah. A more important barometer is existing home sales, which moved up to 6.46 million units (annualized) in January, having made a fairly clear bottom at about 6.3 million units (annualized) during the second half of 2006.
The decline in GDP from the inflated initial estimate makes it clear that the economy did slow late last year, but did not stall. After a torrid first quarter, annualized GDP growth was 2.6%, 2.0% and 2.2% in the last three quarters of 2006. In fact, we may actually be experiencing the elusive "soft landing" in which an over-heated economy slows down without tumbling into recession.
Federal Reserve Chairman Ben Bernanke told Congress this morning, "There's a reasonable possibility that we'll see some strengthening of the economy sometime during the middle of the year." He also noted that the financial markets "seem to be working well." This is a clear signal that the Fed will not, and need not, rush in to bail investors out. One never knows until long afterwards how well Fed policy worked, but we are beginning to believe that the Bernanke Fed knows what it's doing. More importantly, the markets are beginning to think so too.
Sources: www.census.gov & Bloomberg News