"Kee" Points with Jim Kee, Ph.D.

Jobs and Housing: Jobless claims – the number of new U.S. unemployment benefits claims – fell to a four-year low last week, a continuing sign of recovery for the world’s largest economy. On the other hand, housing data last week continued to be a mixed bag. Housing starts and existing and new home sales fell in February, though January’s numbers were revised upwards. And distressed transactions and contract failures declined for the month, which is a good sign. So is the fact that investor-driven all cash sales remained strong (33% of all transactions – Wells Fargo Securities). Interestingly, the inventory of homes available for sale jumped 4.3 percent. These could be signals of a housing recovery, and here’s why:

The existing inventory of housing on the market and the “shadow inventory” (people wanting to put their house on the market as soon as they think they can sell it) could keep prices down for some time. In any market, demand is met through either price or quantity (volume) adjustments. In housing, typically price does most of the adjusting in areas where supply – for whatever reason-is relatively fixed. That would include the populous areas of the East Coast (because available new development is limited) and the West Coast (because new development is discouraged, e.g. California’s land restrictions). When the economy expands and the demand for housing increases along with it, housing prices in these areas tend to rise. On the other hand, in areas where available land is cheap and development restrictions are few, quantity does most of the adjusting because supply is not fixed. An increased demand for housing leads to an increase in the quantity supplied, thus quantity does most of the adjusting. This latter scenario is what characterizes a lot of the housing market today, so I’m watching for increased sales volumes, not necessarily increased housing price indexes. Housing experts are really eyeing this Spring season closely.

By the way, this same supply responsiveness (“elasticity”) concept is used by economists to shed light on seemingly unrelated topics such as wages and executive compensation. The argument is that careers and positions with stagnant wages are typically characterized by elastic supply where quantity does most of the adjusting. That is, any slight increase in wages/salaries due to an increase in demand leads to quick entry by new workers from other areas. But when supply is relatively fixed or rare, like the supply of professional athletes or entertainers – and yes, even CEOs – it is price that does most of the adjusting, and so you see high wages and salaries.

In Europe, declines in the Eurozone purchasing managers’ indices and a rise in Spain’s borrowing costs (interest rates) has stirred up some renewed angst there. The market’s reaction to this has been relatively muted thus far, reflecting (I hope) a lessening of the market’s sensitivity to European news due to decreasing concerns of financial contagion and of a global financial crisis repeat.

But Europe does impact China, because Europe is China’s single biggest export partner. Manufacturing activity in China shrank for the fifth straight month in March (Reuters). Chinese analysts had expected that the Lunar New Year (China’s biggest holiday event) had disrupted manufacturing for the first two months of the year, so the lack of a March rebound was a disappointment.  Emerging markets, particularly commodity intensive ones like Brazil, Australia, and Russia, tend to have the highest “China betas,” meaning that they are particularly sensitive to China’s growth. But most analysts expect that loosening monetary policy there will keep growth in the 7% range. This is something that China has already initiated, beginning somewhat subtly in October (Goldman Sachs). Hong-Kong based GaveKal is not “losing much sleep over this,” their argument being that China’s economy is so large now that you don’t need 10% growth there to get large absolute demand from China. By the way, China’s economy is now about half the size of the U.S. economy.  In fact, the more optimistic (but sober) views of China contend that it is switching from targeting the “quantity” of growth to the “quality” (more capital efficiency). Nevertheless, we are paying very close attention to China here at STMM.

Well, I’m also headed to the National Association of Business Economics 2012 Economic Policy Conference this week. Fed Chairman Ben Bernanke is one of the Keynote speakers. I’ll let you know what I hear in next week’s Kee Points!