VERSACE: So go jobs, so goes housing

ANALYSIS/OPINION:

After six weeks of week-over-week declines, the S&P 500 is poised to deliver an up week even though economic and geopolitical concerns continue to grow.

The purported catalysts for this late-week “rally” are slightly better than expected weekly jobless claims and May housing data — housing starts and building permits — ahead of expectations. Looking back at the longer term, the supposedly better than expected figures do not change the trend line in any of these data streams. Initial jobless claims have remained above 400,000 for 10 straight weeks, and housing starts have not topped the 600,000 seasonally adjusted annual rate mark since January and remain well below the 1.2 million homes per year that must be built to sustain a healthy housing market.

As I have mentioned previously, one of the key leading indicators of a healthy housing market is job growth. We all know that employers added only 54,000 net jobs in May, which was slower than the average gain of 220,000 per month in the previous three months. It’s a tad early to tell whether more jobs were added in June compared with May, but odds are that June job creation will remain below the 125,000 jobs per month needed to keep up with population growth. This means the June unemployment rate is likely to be in line with the 9.0 percent to 9.1 percent range from April and May.

Roughly 250,000 additional jobs are needed per month to bring down the unemployment rate. With economists expecting only 1.9 million jobs to be added this year, according to an Associated Press economy survey this week, the outlook remains grim for the housing market even though mortgage rates are near record lows. Breaking down that AP survey data and taking into account job creation year to date, roughly 160,000 non-farm payroll jobs will need to be created each month for the balance of the year to hit that 1.9 million forecast.

What will make hitting this forecast more challenging is the manufacturing economy, which has continued to weaken in recent months. This week alone, the Empire State Manufacturing Survey and the Philadelphia Federal Reserve Bank business activity index fell into negative territory for June.

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated drastically in June as the index fell 20 points to -7.8, marking the first time the index has been negative since November. The Philadelphia Federal Reserve Bank said its business activity index fell from a positive 3.9 in May to -7.7 in June, the lowest level since July 2009. The new orders index associated with the Philadelphia Fed report also fell in June, coming in at -7.6 for the month versus a positive 5.4 in May. Although June marks the first time that these indexes have been in negative territory for some time, these indexes have been weakening since March.

One bright spot has been the trend in gasoline prices, which have fallen over the past few weeks even though they remain at lofty levels compared with this time last year. Although some expect this to free up the consumer wallet, we have to remember that gasoline prices have not been the only area to have hit the consumer’s pocket. Consumer price data reported by Bureau of Labor Statistics for May showed another sequential increase in prices for food, household energy and apparel. Regarding food prices, the index for meats, poultry, fish and eggs rose 1.5 percent and the cereals and bakery products index increased 1.0 percent in June.

I always find it funny that food is not considered part of the core for either consumer or producer prices. Not eating would long be one solution to lower the unemployment rate, albeit a long-term one.

Up next: Corporate outlooks. Stay tuned.

• Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.