How high will oil prices rise? And how much will it affect the rest of the economy? That is the question for consumers who now have to spend more on basic necessities. The good news is that the 2 sectors most affected by the economic slowdown—auto and home sales—account for just 7 percent of economic activity and 3 percent of payrolls, according to Business Week.
In fact, it is the credit crunch and high oil prices, which are causing car and home sales to languish. But in line with increased housing affordability that we documented in last week’s column, there is evidence that home sales are already increasing in some parts of the country.
The National Association of Realtors’ Pending Home Sales Index (PHSI), a measure of existing home purchases under contract but not yet closed, surged 6.3 percent in April. It’s the highest index since last October, yet remains 13.1 percent lower than April 2007.
Lawrence Yun, NAR chief economist, said pending sales contracts have picked up notably in areas undergoing significant price drops. “Bargain hunters have entered the market en masse, especially in areas that have experienced double-digit price declines, but it’s unclear if they are investors or owner-occupants,” he said. “Sharp price reductions are leading to a quicker discovery of price equilibrium points. The West is already seeing year-over-year gains in pending contracts.”
In fact, without auto and housing, the U.S. economy grew 2.8 and 2.5 percent, respectively, over the last 2 quarters, close to the long-term average. It is being powered by the ever-growing service-sector, which now provides nearly 60 percent of GDP growth, according to Business Week. And export orders are at a 4-year high, according to the Institute for Supply Management’s May manufacturing survey.
But as oil prices continue to climb, Bernanke and the Fed are beginning to worry about inflation. This is why Fed officials have been hinting at a possible Federal Reserve rate hike in the fall. Such a rate hike would certainly damage any prospects of an economic recovery this year.
UNEMPLOYMENT—The May jobless rate of 5.5 percent was mainly due to students flooding the summer job market, according to some economists. But 49,000 additional payroll jobs were lost in the more dependable Establishment survey, bringing the total this year to 324,000 payroll jobs lost. We doubt the Fed will or can raise interest rates as long as jobs continue to be lost.
RETAIL SALES—Another indicator of consumer health was the 1 percent rise in May’s retail sales, which caused stocks to rally and interest rates to rise. But sales are unadjusted for inflation, which suggests that ‘real’ retail sales are falling when the 4 percent CPI inflation rate is taken into account.
Any hike in interest rates could harm a housing recovery, as we said, since default and foreclosure rates are still increasing, putting pressure on banks to lend less, which further exacerbates the problem.
The pending sales figures do give some hope that housing sales are in a recovery model. The PHSI in the West rose 8.3 percent to 98.8 in April and is 4.0 percent higher than April 2007. In the Midwest, the index jumped 13.0 percent to 83.7 in April but remains 13.1 percent below a year ago. The index in the South increased 4.6 percent to 88.8 but is 22.5 percent below April 2007. In the Northeast, the index declined 1.9 percent in April to 79.3 and is 12.2 percent below a year ago.