Today’s News: Home Prices and [Lack of] Confidence

Two pieces of news were released today: the Case Schiller Index of home prices, and the Conference Board’s consumer confidence survey. The message: very mixed.

The good news is that for the first time since 2006 there was a slight increase in home prices across the country. Prices in the twenty city index rose 0.5% in May, the latest month covered, compared with a 0.6% drop in April. This slight pick up had the effect of slowing the annual decline: for the year ending in May the same index shows a decline of 17.1%, whereas the decline for the year ending in April was 18.1%.

The message here seems to be that the bottom of the housing price cycle may not be too far away. Whether there are one-time effects at work distorting the figures we will have to wait and see next month: for instance, the activity created by recent tax credit for first time home buyers may have produced a slight firming in prices. Nonetheless when we add this data point to the decent new home sales figures yesterday the overall tone of the real estate sector does seem to be improving. This is a long way from a recovery – and there are plenty of reasons to hope we don’t get back to the way we were a few years back – but at least the dizzying descent appears to be drawing to a close.

That is not the message we get from consumer confidence which dropped unexpectedly last month. The index now stands at 46.6, whereas it had been 49.3 in June and 54.8 in May. So clearly there has been a significant souring in the public’s mood over the past two months. The importance of this is clearly linked to consumption: as long as consumers feel less confident they will tend to spend less. That will undermine any incipient recovery.

In all likelihood we will see the end of the recession later this year for the simple reason that inventories will need replenishing and that drives GDP upwards – just as any investment does. Whether there is enough activity to maintain growth into next year is now the question. The optimists are still calling for overall GDP growth in the 2% range during 2010, a series offadingconsumer confidence figures and we have to question that optimism. With real estate investment unlikely to recover much strength, and with businesses still waiting for stronger signs of consumer activity before the commit to re-hiring the best guess for GDP next year is slow – perhaps closer to 1% than to 2%. That will have all the hallmarks of stagnation: a poor employment market along with very low growth.

We really need the employment picture to change quickly if we are to avoid such a stagnation. It is very hard to see why consumers would suddenly start to spend much again without a decent job outlook.

Anecdotally the stimulus is now kicking in by stemming job losses, and we are getting the first proper analyses supporting that view. If that turns out to be a true trend then the hope is for the rising tide of job loses to taper off later tis year. Unemployment will still keep rising, but the damage to consumers will abate as they realize they have weathered the storm. Once the tide turns in the job market the rest of the economy can fall into place.

We will get a better handle on that later this week with the weekly initial claims data. Then on Friday we will get our first look at second quarter GDP, which should come in around at a decline of 1.5% – the first quarter saw a decline of 5.5%. If that is the case then this will be a rare four quarters in a row of decline, but it will also give us hope that the third or fourth quarter will see a return to growth.

Stay tuned.