Wednesday, January 31, 2007

Unexpectedly Great GDP Number and Falling Inflation

So we have great news on the economy this morning. The fourth quarter GDP number came in much better than expected and the inflation number dropped more than it had in 50 years. So strong growth, low inflation, As Larry Kudlow put it "Goldilocks Lives".

Excerpts from the Wall Street Journal

U.S. Economy Grows 3.5%; Inflation Gauge Falls Sharply

"The U.S. economy resurged at the end of 2006, overcoming a slump in housing as consumers, sustained by lower energy prices, ramped up spending.

Gross domestic product climbed at a seasonally adjusted 3.5% annual rate October through December, the Commerce Department said Wednesday in its first of three readings on fourth-quarter GDP. That was up from 2% in the third quarter. A price inflation gauge within the report posted its biggest drop in 52 years.

For the whole year, GDP, which acts as a scoreboard for the economy by measuring all goods and services produced, advanced 3.4%, compared to a 3.2% increase in 2005 and 3.9% growth in 2004.....

.....Inflation gauges within the GDP report indicated prices softened significantly during the fourth quarter. The government's price index for personal-consumption expenditures actually fell, slipping by 0.8% after rising 2.4% in the third quarter and 4.0% in the second quarter. The decrease was the biggest since 1.2% in third-quarter 1954."

And below gives the Fed room to duck and cover........

"The PCE price gauge excluding food and energy rose 2.1%, after increasing 2.2% in the third quarter. The price index for gross domestic purchases, which measures prices paid by U.S. residents, inched 0.1% higher, after going up 2.2% in the third quarter. The chain-weighted GDP price index increased 1.5%, after rising 1.9% in the third quarter."

By Jeff Bater - WSJ

Tuesday, January 30, 2007

Housing Market Stabilzation

Dr. James Hamilton has some very insightful analysis on what he called a few months ago the bottom and stabilization of housing. Though it has almost become nauseating attempting to debunk the housing bubble devils, it is such a big part of the American psyche and perceived mantra that I feel it is my duty to shed some light on their one sided ponent views.

Decide for yourself by reading the link below.

(The housing market and the Federal Reserve)

Sunday, January 28, 2007

Silicon Valley Has Most Job Growth since 2001

As I have noted in two of my previous posts (Bay Area "Percolating" With High Paying Jobs) and (Venture-capital funding best in five years) the job juggernaut in the bay area that is Silicon Valley is on a comeback. From information technology and Web 2.0, to going green and energy innovation, the bay area is in the first inning of a long nine inning ball game of growth.

Excerpts from the Sunday San Jose Mercury News Story.

Silicon Valley on the rebound, report says

Silicon Valley is back to creating new jobs and delivering fatter paychecks, a new report shows.
The technology hub has ``rebooted,'' putting the post-crash doldrums in the past, according to the latest Silicon Valley Index, an annual economic assessment by Joint Venture: Silicon Valley Network, an alliance of business and community institutions.

With big tech firms recovering and start-ups flowering, the valley added 33,000 jobs in 2006 -- the first increase since 2001. The region's median household income also registered its first increase since the downturn, climbing 6.5 percent in 2006 to $76,300 -- a reversal of a 13 percent decline from 2001 to 2004.

...The theme of the latest assessment is strongly positive. In the January 2006 report, ``we saw the first evidence the downturn was behind us,'' with the economy stabilizing and hiring flat, said Russell Hancock, Joint Venture's president and chief executive.....

``This year we see quite clearly that Silicon Valley has done it again -- we've reinvented ourselves.'' He cited the growth in renewable energy ventures and so-called Web 2.0 start-ups, such as YouTube, that harness the Internet....

...Recent job growth, the economist said, reflects a new confidence. Before, ``productivity gains weren't showing up in job gains. That's not the case anymore.''...

..Another plus, he said, is a dramatic surge of venture funding into ``clean technologies'' that address pollution and the affect of greenhouse gases. The ``cleantech'' funding to valley firms soared from $141 million in 2005 to $516 million in 2006....

...``There's a lot of excitement about the green economy. I think it's real,'' Henton said. Venture funding, he said, is a leading indicator of economic performance that should stimulate later job growth....

By Scott Duke Harris
Mercury News

Saturday, January 27, 2007

Businessweek Business Outlook - All is Well and No Inflation

If you don't subscribe to Businessweek you should. It's revamped organizational format makes for an easy read. Though I don't pay a great deal of attention to the cover stories which to me are just shock value for media reach, I do regulary enjoy their columnists. The first section I turn to each Friday is the Business Outlook by James C. Cooper. He provides a concise analysis of current economic issues as well as relevant data and enlightening graphs. You can link to his post in the blog link section above if you are a Businessweek subsriber.

This week Mr. Cooper brings to our attention that it is possible to have strong economic growth with stoking the fires of inflation. This is largerly due to corporate cost control and productvity. Read below.

U.S. : A Stronger Economy? Yes. Higher Inflation? No
The rules have changed. Business is focused on cost control, not prices

Ask investors, especially those in the bond market, where they think inflation is headed in 2007, and they will most likely say down. They are probably right, but maybe not for the reasons they think. Many expect the economy to be weak enough to allow core inflation, which excludes prices for energy and food, to fall. The twist is that the economy is already proving stronger than anticipated, but despite that vigor, inflation may well decline anyway.

There is still a sense in the markets that a strong economy means higher inflation, and a weak economy means lower inflation. But over the past decade, the growth/inflation relationship has become a lot fuzzier, because the processes that influence inflation have changed drastically. A lot of market folks still haven't caught on, which can lead to misguided expectations about Federal Reserve policy and interest rates....

...In the past, labor costs have been a central factor pushing companies to lift prices, but this time the pressures may not be as intense. For example, although job markets were tightening last year at the same time energy costs were soaring, pricing power made only limited gains. Still, profit margins widened to record levels...

....The latest industry survey by the National Association for Business Economics shows margins continued to make steady improvement heading into 2007....

....One of the biggest problems in assessing the inflation outlook is knowing which measure of labor cost tells the true story. Right now, the most worrisome-looking gauges are the least credible..... Take the gains in average hourly pay for production workers.... that measure is not adjusted for the changing mix of jobs surveyed, which in recent years has favored higher-paying industries, such as business services and health care, thus lifting the average.

The Labor Dept.'s employment cost index, a more comprehensive measure of hourly wages, is not affected by changes in composition. It shows annual growth of only 2.5% in 2005 and 3.1% through the third quarter of 2006.

Another case is unit labor costs, or compensation adjusted for productivity. The Labor Dept. offers two versions: one for the nonfarm business sector and one for the nonfinancial corporate sector. The former shows unit costs through the third quarter up 2.9% from the year before, while the latter has risen only 0.5%. Many economists, even some at the Fed, believe the tamer-looking cost measures are closer to the truth.....

Excerpts from James C. Cooper Businessweek, Feb 5 , 2007

Friday, January 26, 2007

New Home Sales Better than Expected, Durable Goods Orders Strong

So two bits of good economic news today. Durable Goods (those lasting more than three years) orders were up last month as well as new home sales. New home sales were also adjusted up for November and inventory in December fell below 6 months, a number that many consider a balanced market. Could we have had a bottom in November? Time will tell..........

From the WSJ

New Homes

"New-home sales finished 2006 on a positive note, rising a second straight month in December....In the home-sales report, sales of single-family homes increased by 4.8% to a seasonally adjusted annual rate of 1.120 million, the Commerce Department said Friday. November sales rose 7.4% to 1.069 million, revised from a previously estimated 3.4% advance to 1.047 million. Economists had expected a 1.2% increase to an annual rate of 1.060 million last month......

.....New-home inventories fell in December, a sign builders are getting supply under control. There were an estimated 537,000 homes for sale at the end of the month -- the lowest level since 522,000 in January 2006, the government data showed. That represented a 5.9 months' supply at the current sales rate. An estimated 542,000 homes were for sale at the end of November, a 6.1 months' inventory....

....The median price rose to $235,000 last month from $232,200 in November but was lower than the year-earlier level of $238,600.

Spending on Durable Goods Climbs

Orders for durable goods, big-ticket items such as cars and appliances meant to last three years or more, advanced 3.1% last month to a seasonally adjusted $221.87 billion, the Commerce Department said Friday. Durables rose 2.2% in November, revised from a previously estimated 1.6% increase. For all of 2006, durables rose at a not seasonally adjusted 7.0%, after rising 8.6% during 2005.

Orders for commercial planes increased 26.5% last month, while military aircraft orders rose 20.5%. Overall, transportation orders were up 4.8%, after rising 10.2% in November. However, a key barometer of business-equipment spending -- orders for nondefense capital goods excluding aircraft -- increased by 2.4%, after falling 1.0% in November."

By Jeff Bater - WSJ

Sunday, January 21, 2007

Don't Ever Count Out the U.S. Consumer

With the barrage of positive economic news this week, I've become even more optimistic about the U.S. economy in 2007......

"NEW YORK (Reuters) - U.S. consumer sentiment improved to a 3-year high in early January, propelled by falling gasoline prices and a favorable view of personal finances and economic growth, a survey showed on Friday.

The Reuters/University of Michigan Surveys of Consumers said its preliminary January reading on consumer sentiment index rose to 98.0 from 91.7 at the end of December.

This was the highest since 103.80 in January 2004 and well above the 92.5 median forecast of analysts polled by Reuters.

The surveys' gauge of current consumer conditions was 112.5 against a final December reading of 108.1, while its measure of consumer expectations was 88.7 versus 81.2.

Consumers, while generally upbeat, remain worried about inflation. The surveys' one-year inflation index edged up to 3.0 percent from 2.9 in late December, and its five-year index stood at 3.0 percent for a third straight month. "

Thursday, January 18, 2007

Low Inflation, Low Unemployment, and Strong Housing Starts - Good News Comes in 3's Today

There is a lot of data this morning regarding the health of the U.S. economy. Three of the major indicators were quite positive.

Excerpts from the Associated Press

Inflation is Tame

"WASHINGTON -- The Labor Department reported Thursday that consumer prices rose by 2.5 percent in 2006, the best showing since prices had increased by just 1.9 percent in 2003. The improvement came in spite of the fact that consumer prices jumped 0.5 percent in December, as gasoline prices staged a momentary rebound."

Jobs are Strong

In other economic news, the number of newly laid off workers filing claims for unemployment benefits fell to a seasonally adjusted 290,000 last week, the lowest level in 11 months and an indication that the labor market began the new year in good shape in spite of weakness in housing and auto manufacturing.

Housing Continues to Rebound

Meanwhile, the Commerce Department reported that construction of new homes rose by 4.5 percent in December to a seasonally adjusted annual rate of 1.642 million units, raising hopes that the worst of the housing slowdown may be coming to an end.

Tuesday, January 16, 2007

Venture-capital funding best in five years

California receives about 47% of all U.S. venture capital. So this is strong indicator for future job growth in the state and confidence in the economy........

From the Sacramento Business Journal

Venture-capital fund raising in the United States reached its highest level in five years in 2006, despite a fourth-quarter slowdown.

In 2006, 200 venture-capital funds raised a total of almost $28.6 billion, compared with the 214 funds that raised $28 billion in 2005, according to data released Tuesday by Thomson Financial and the
National Venture Capital Association.

The fourth quarter saw a considerable slowdown, though, with 37 venture-capital funds raising $2.83 billion, down from the $5.43 billion raised in 66 funds in the third quarter and the $13.8 billion raised by 66 funds in the second quarter.

The report didn't include breakdowns by regions or states.

NVCA President Mark Heesen said the decline in private-equity fund raising in the fourth quarter was expected. "On the venture side, we are coming to the end of the current fund-raising cycle as most firms are now turning their attention to investing the funds raised in the last three years," Heesen said.

Monday, January 15, 2007

Businessweek - Housing May Have Bottomed

Housing: The Best Indicators Of A Rebound

"Has the home market hit bottom? That is the key question for the U.S. economy in 2007. According to some housing indicators, there is some light at the end of the tunnel for homebuilders, but that cautious optimism comes with caveats.

To get the most reliable signal that the housing recession is over, keep an eye on the average monthly supply of new homes for sale and the average mortgage rate each quarter. Analysis by Goldman Sachs U.S. economist Edward McKelvey of eight pieces of housing data widely used as leading indicators of the housing cycle showed those two series are better than quarterly averages of new and existing home sales, housing starts, mortgage applications, housing affordability, and homebuilder confidence. In housing market upturns, all eight indicators do a good job of forecasting market peaks by two to five quarters. However, "a contraction is swifter and more cathartic," says McKelvey. That places a premium on indicators that give a more consistent signal.

The monthly supply of homes--a ratio of new home inventories and home sales--has peaked one quarter before residential investment bottomed every time since 1961. Mortgage rates are nearly as consistent over that same period and have a similar lead time.The supply of new homes for sale in the fourth quarter should decline after a November reading of 6.3 months, from 6.7 in October and the recent peak of 7.2 months last July. Mortgage rates also fell in both the third and fourth quarters of 2006......"

By James Mehring - Businessweek

Tuesday, January 09, 2007

Cool Phone: Good for Nor Cal Economy

Phone looks great, as was anticipated. This will also benefit the bay area and Sacramento economies where Apple has a large presence.......

For Story Link click here(Apple iphone )

Saturday, January 06, 2007

Interesting Links

Posted below are some interesting economic links worth perusing

Economic Links

(Greenspan says U.S. Economy Expanding)

(Healthcare for all Californians) ..................That will send jobs packing

(Oil Prices Going Down?)

Housing Market Bottomed?

(CBIA 2007 Housing Forecast)

(NAR 2007 Housing Forecast)

( UK Housing Forecast )

( Sacramento Housing Bottom )

More Jobs than expected, Goldilocks Lives

A surprise leap in job gains
Employers add many more jobs than expected, unemployment rate remains unchanged.

NEW YORK ( -- Employers added more workers in December, as a government report Friday showed a labor market that was much stronger than forecasts.

The report showed a net gain of 167,000 jobs on U.S. payrolls in December, up from the 154,000 increase in November, which was also revised higher. Economists surveyed by had forecast only a 100,000 rise in payrolls in December.

The unemployment rate stayed at 4.5 percent, in line with economists' forecasts.
Wages also came in higher than expected, as the average hourly wage was up 8 cents, or 0.5 percent, to $17.04. Economists had forecast only a 0.3 percent increase in wages. The November wage gain was also revised higher......

The wage gain left the average hourly wage up 4.2 percent from a year earlier. That's well above the pace of inflation, which rose only 2 percent in the 12 months ended in November, according to a separate government reading.....

Forecasters Upbeat for 2007

From the Wall Street Journal

Economy PoisedFor '07 Rebound, Forecasters Say
"The U.S. economy is poised to shake off the housing slump and regain momentum by the end of this year, and the credit goes to techies, bankers, chefs and shoppers, according to a Wall Street Journal survey of economists.

The panel of 60 economists who participated in the Journal's latest semiannual economic forecasting survey offered an optimistic outlook for 2007: The service sector should keep humming along as the recent weakness in housing and manufacturing abates and the Federal Reserve begins to reduce interest rates. That would allow the economy to expand at a rate fast enough to keep investors happy, but slow enough to keep inflation at bay.....

...On average, the economists predict that inflation-adjusted gross domestic product, a broad measure of economic activity, will grow at an annualized rate of 2.3% in the first half of 2007 and 2.8% in the second half. That's up from a sluggish 2% in the third quarter of 2006, but still far below the robust annual growth rates of 3.2% for 2005 and 4.1% for early 2006....

....The rapid expansion of technology companies such as Google Inc. and the huge bonuses lavished on New York investment bankers are just a couple of signs of the service sector's strength. Across the country, restaurants, hospitals, software makers and consulting firms are growing and hiring. All told, service businesses, which make up about 80% of the nation's economy, added 1.1 million jobs from May through November."

And Inflation is not a threat as I've said repeatedly....

"The economists surveyed expect year-to-year inflation to decline to 1.7% in May from 2.0% in November. As a result, they expect the Fed to shift its focus from fighting inflation to helping the economy grow, lowering short-term interest rates to 4.75% by the end of 2007 from the current 5.25%.

That's a big change from six months ago, when forecasters saw the Fed's battle with inflation as the greatest challenge facing the economy. "The Fed was hoping to slow the economy down enough to take the wind out of inflation without triggering a recession," says Nariman Behravesh, chief economist at
consulting firm Global Insight in Waltham, Mass. "So far it looks like it has succeeded."

By Mark Whitehouse - WSJ

Monday, January 01, 2007

Salad and Garbage

What is the difference between salad and garbage?...................the answer is timing. I found and interesting article from Fortune Magazine (Here) published in March of 2002 predicting that the housing bubble was about to burst. If anyone followed that advice they'd had left anywhere from 50-150% appreciation on the table pending their market. Below are some interesting excerpts to give us a little perspective for the New Year............................................

Fortune Magazine - March 28, 2002.

The Economy: Is Housing the Next Bubble?

...So is that it? Have we just had something like a 15-minute recession, and is it all smooth sailing from here? Not so fast, says a chorus of economists--plenty can still go wrong. Leaving aside such nightmare scenarios as further terrorist attacks, all-out war in the Middle East, or an oil embargo, the thing that spooks some economists the most is housing....

....In fact, housing didn't just hold its own during the slump. It zoomed. Activity has been so strong that sales of new and existing homes hit all-time records last year. Not exactly what you'd expect when around two million people were losing their jobs, is it? What's more, we've seen record growth in mortgage refinancing, and annual home-price increases between 6% and 8% nationally for three years in a row. "That's unsustainable by any measure,'' says David Levy, chairman of the Jerome Levy Forecasting Center. "Especially now that mortgage rates are on the rise." And that's the problem, according to Levy and others. The one sector we've relied on to keep the economy afloat is unlikely to hold up much longer. Worse still, housing could even turn out to be the next bubble--and we all know how that usually ends....

And one really bad prediction from permabear Mr. Shiller.......Mind you.......this is 2002...........

Certain regional markets may already be in trouble. According to data from Case Weiss Shiller, home prices in San Francisco have been dropping precipitously. In the first quarter of 2001 the average price of a single-family home there rose 4%, but by the end of the year had fallen 7%. "We're seeing a bubble bursting right now in San Francisco," says Robert Shiller, an economics professor at Yale University and partner at Case Weiss Shiller. "We've never seen such a sharp drop, and we're expecting it to fall even more." (Actually not quite Mr. Shiller - Santa Clara County median home prices rose from about $450k in early 2002 to currently approx $750k )

So despite short to medium term corrections in market, long term fundamental always eventually win out.