RTTNews - The past week's economic reports reinforced the view that the housing market is on the mend. Although this isn't an incredible feat, given the sharp correction the market has undergone over the past three years, it is certainly a welcome development, as the economy battles to emerge from the shackles of a deep and wide recession that has been termed as one of the severest since the Great Depression of the 1930s. Conditions just look ripe for a rebound, with affordability reaching an all time high due to the steep decline in house prices and inventory of new homes having now slipped back below its long run average.

According to Danske Bank, a turnaround in sales and residential construction is on the cards in the second half of the year. However, the job market is a dark horse. Unless labor market conditions improve, affordability cannot improve further. That said, home prices may not increase in 2009. Danske Bank estimates that housing may contribute 0.2-0.3 percentage points to growth in the coming six quarters after deducting about 1.5 percentage points from growth in the past three quarters.

The lagged impact from the decline in household net wealth caused by falling home prices will exert a negative influence on consumers throughout 2010. Consumer spending will continue to be constrained by an increase in personal savings rate, difficult labor market conditions and the reluctance of banks to advance loans, as they strive to increase their capital and lower their risks. Net-net, the U.S. economy may flounder again or fall into a period of slow growth after a strong rebound that is expected in the second half of this year.

Last week, the S&P Case-Shiller home price survey showed that the 20-city home price index fell 15.4% year-over-year in June. On a monthly basis, the index rose 1.4%, moving up for the second straight month. Barring Detroit and Las Vegas, all cities recorded monthly increases. The $8,000 tax credit seems to be benefiting sales and in turn prices.

At the same time, new home sales rose to a seasonally adjusted annual rate of 433,000 in July, up 9.6% from a revised 395,000 rate in June, with gains witnessed in the Northeast, South and West. New home sales were at their highest level since September 2008. The months supply of new homes fell to 7.5 in July from 8.5 in the previous month, with new home inventories declining by 9,000 to 271,000. The median price of new homes was down 11.5% year-over-year.

Meanwhile, the Conference Board's consumer confidence survey showed that the consumer confidence index rose to 54.1 in August from 47.4 in July. Economists had expected a more modest increase to 47.9. The bulk of the improvement was in the expectations index, which jumped 10 points, while the present situations index rose merely 1.6 points.

The Reuters/University of Michigan's consumer sentiment survey showed that final reading of the consumer sentiment index for August came in at 65.7, above the preliminary reading of 63.2 and also higher than the consensus estimate of 64. However, the index was slightly below July's reading of 66. The current conditions index declined 4 points compared to a 1.8 point-rise in the outlook index.

Preliminary second quarter GDP estimates revealed that the U.S. economy contracted at an unrevised pace of 1% compared to expectations for a 1.5% decline. The impact of downward revisions to inventories and investment was offset by upward revisions to government spending and exports. The GDP price deflator was revised upwards to a flat reading from the previously reported 0.2% increase.

The personal income and spending report showed that personal income was unchanged in June compared to expectations for a 0.1% increase, while personal spending edged up 0.2% compared with the previous month. The savings rate fell to 4.2% from 4.5% in the previous month. The core PCEI was up 0.1% month-over-month and rose 1.4% year-over-year, marking the lowest level since September 2003.

The Treasury auction of $42 billion worth 2-year notes produced a lukewarm reception. The bid-to-cover ratio at 2.68 was the lowest since February and indirect buyers accounted for 49.37% of the total, while at the same time the yield was at 1.119%. However, the results of the Treasury's 7-year note auction were encouraging, as the yield came in at 3.092% and the bid-to-cover ratio was above average at 2.74.

The most important economic report of the unfolding week will be the Labor Department's non-farm payroll employment report for August, which is due out on Friday. Additionally, traders may closely watch the Institute for Supply Management's manufacturing and services sector survey reports and the results of the ISM-Chicago's manufacturing survey.

The pending home sales report of the National Association of Realtors, the Commerce Department's construction spending report for July and the minutes of the August FOMC meeting are also likely to be on the radar. Apart from these, the other reports scheduled to be released during the week include the Commerce Department's factory goods orders report for July, the final second quarter productivity & costs report and the regularly scheduled weekly jobless claims and oil inventory reports. Traders may also evince interest in the results of the Treasury's 30-year bond, 3-year note and 10-year note, all due on Thursday.

Notwithstanding July's numbers showing a lesser-than-expected drop in payrolls, the initial jobless claims data released for August does not hold out much promise for the non-farm payroll numbers. Further improvement is unlikely. Economists expect job declines of the same magnitude as in July and the jobless rate may edge up slightly.

In line with the improving trend, the pending home sales are likely to increase for the sixth straight months. At the same time, the construction spending report may reveal that spending on single-family construction as well public spending improved from the month-ago levels, while multi-family construction spending may act as a drag.

Light vehicle sales to be reported by the nation's automakers are likely to show that auto sales rose at an annualized rate of 12 million, marking the first time they are above the level since September 2008. The cash-for-clunkers program has had a positive impact on sales.

The Institute for Supply Management's manufacturing purchasing managers' index is likely to rise above the boom-bust demarcating level of '50' for the first time since January 2008. Inventory depletion that resulted from extended plant shutdowns and the clash-for-clunker sales seems to have jumpstarted auto production at least transitorily.

Meanwhile, the minutes of the FOMC meeting could highlight the recent improvement in data points. Sherry Cooper from BMO Capital Markets is of the view that the FOMC minutes could give details on how much committed the Fed is to agency repurchases, given the stabilization in the housing market and the steady reduction in other bank borrowings from the Fed.

Monday

The results of the Institute of Supply Management-Chicago's business survey for August are scheduled to be released at 9:45 AM ET. Economists expect the business barometer index based on the survey to come in at 47.2.

The purchasing managers' index came in at 43.4 in July, almost in line with the expected reading of 43, but higher than 39.9 in June. The July reading marked the highest level since September 2008. While the new orders index rose 6.4 points to 48, the index of order backlogs fell 5.5 points to 32.1. Inventories slipped to 25.4, its lowest level since 1949, from 34.2 in June. At the same time, the employment index climbed 6.4 points to 35.3.

Tuesday

Individual automakers will report their sales, comprising unit sales of domestically produced cars and light duty trucks.

The results of the manufacturing survey of the Institute for Supply Management, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET. Economists expect the index to show a reading of 50.2 for August.

The index rose to 48.9 in July from 44.8 in June, with the latest month's reading marking the highest since August 2008. The new orders index climbed above 50 to 55.3 from 49.2 and the backlog of orders index rose 2.5 points to 50. On a positive note, the employment index rose about 5 points to 45.6. Despite a 2.7 point-increase, the inventories index is still at depressed levels at 33.5, while the prices paid index rose 5 points to 55.
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The Commerce Department's construction spending report to be released at 10 AM ET is expected to show a 0.2% decline in spending for July.

Construction spending showed a 0.3% increase in the spending for July. Public construction spending climbed 1%, helping to offset a 0.1% drop in private construction spending. Single-family construction rose for the first time in 40 years, while multi-family construction declined again. In the private category, non-residential construction declined 0.5%.

Data on Pending Home Sales, which is a leading indicator of housing market activity released by the National Association of Realtors, is due out at 10 AM ET. A pending sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale.

Pending home sales climbed 3.6% month-over-month in June. Economists had estimated a mere 0.7% increase. The measure indicates contract signings and is a leading indicator for existing home sales. The gains were much pronounced in the South and West, which saw a significant number of foreclosure sales.

Wednesday

The ADP National Employment report, which sheds light on non-farm private employment, is scheduled to be released at 8:15 AM ET. The report is usually released two days prior to the Labor Department's employment report. The private sector is expected to have lost 246,000 jobs for August.

The U.S. Labor Department is also scheduled to release its final report on second quarter non-farm productivity and unit labor costs at 8:30 AM. The consensus estimates call for a 6.1% increase in non-farm productivity.

The Commerce Department is due to release its report on factory goods orders for July at 10 AM ET. Orders for manufactured goods are likely to have increased 1.5% in the month.

A report on durable goods orders, which makes up the bulk of the factory goods orders, showed a 4.9% month-over-month increase in orders for July, with the climb better than the 3% growth expected by economists. The increase was mainly due to a 107.2% jump in the orders for non-defense aircrafts and a 0.9% increase in orders for vehicles and parts. Excluding transportation, new orders were up 0.8%. Non-defense capital goods orders, excluding aircrafts, a measure of capital spending fell 0.3% following increases in each of the past two months. Shipments of durable goods rose 2%, while inventories fell by 0.8%.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET.

The weekly oil inventory data showed that crude oil stockpiles rose by 0.2 million barrels to 343.8 million barrels in the week ended August 21st. Inventories of crude oil were above the upper boundary of the average range.

Distillate stockpiles rose by 0.8 million barrels and remained above the upper boundary of the average range. Meanwhile, gasoline inventories fell by 1.7 million barrels, and yet they were still in the upper boundary of the average range. Refinery capacity utilization averaged 84% over the four weeks ended August 21st, even with the previous level.

The Federal Reserve is scheduled to release the minutes of its August 11th-12th meeting at 2 PM ET.

While toeing along the expected lines with respect to interest rates at its August meeting, the FOMC said in its post-meeting policy statement that economic activity is leveling out, an improvement from its previous opinion that the pace of contraction is slowing. There weren't any major changes to the references the committee made towards other measures.

Regarding its Treasury securities purchasing program, the central bank said the committee would gradually slow the pace of these transactions. The central bank anticipates the full amount of $300 billion to be purchased by the end of October. The FOMC reiterated its commitment to retain interest rates at exceptionally low levels for an extended period.

Thursday

The Labor Department is due to release its customary weekly jobless claims report for the week ended August 28th at 8:30 AM ET.

First time claims for unemployment benefits fell in the week ended August 22nd. The four-week average as well as continuing claims also showed declines.

The report showed that initial jobless claims fell to 570,000 from the previous week's upwardly revised average of 580,000. Economists estimated claims to have fallen to 565,000 from the 576,000 originally reported for the previous week. Meanwhile, the continuing claims for the week ended August 15th fell 11,000 to 6.133 million.

The ISM is scheduled to release the results of its non-manufacturing survey at 10 AM. The non-manufacturing index is likely to show a reading of 48 for August.

The non-manufacturing index fell to 46.4 in July from 47 in June. The business activity index declined 4 points to 42 and the new orders index moved down 0.5 points to 48.6, while the prices paid and the employment index dropped 1.9 points and 12.4 points, respectively.

Friday

The Labor Department is scheduled to release its monthly non-farm payroll report at 8:30 AM. The report sheds light on the number of paid employees working part time or full time in the nation's business and government establishments, the number of hours worked in the non-farm sector, the basic hourly rate for major industries and the number of unemployed as a percentage of the labor force. Economists estimate that the U.S. economy lost 225,000 jobs in July and look for an unemployment rate of 9.5%.

Non-farm payroll employment fell by 247,000 in July following a downwardly revised decline of 443,000 in June. Economists had expected a decrease of about 325000 jobs compared to the decrease of 467,000 originally reported for the previous month.

The continued decrease in jobs reflected declines in employment in both the good-producing and service-providing sectors. While goods-producing sectors lost 247,000 jobs, service-providing sectors lost 119,000 jobs, a slower pace of decline than the 220,000 rate in the previous month.

At the same time, the Labor Department said that the unemployment rate edged down slightly to 9.4% from 9.5% in June. The rate came in lower than the 9.6% rate expected by economists.

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