Wednesday, November 24, 2010

Unemployment Rate: Indicator of Economic Activity?

“New claims for jobless benefits last week dropped to their lowest level in more than two years while consumer spending rose in October, pointing to a moderate strengthening in economic activity.”
The problem with using the headline unemployment rate is that it doesn’t give an accurate picture of the labor market itself, ie., it says nothing about the actual dollar size of the labor market and its contribution to the economy. 
This gives you the approximate number of how many people are employed, and what their weekly earnings are, in order to arrive at the dollar value of the labor market.  3rd quarter 2009 total employed was 99.125 million people, paid an average of $741/week ($38,532 per year) for a total value of $3.819 trillion dollars.  3rd quarter 2010 total employed was 100.291 million people, paid $745/week, or $38,740 per year, for a total value of $3.885 trillion dollars.  The labor market value increased $6.6 billion dollars over the course of a year, a 1.7% increase in value.  
The big thing to take away from this is that the Dow Jones industrials have increased 11.8% over that same period, indicating that the correlation between the labor market and the stock market (another often used indicator of economic activity) is fairly weak. 

New Home Sales: An Alternative View

As a companion to yesterday’s piece, today we’ll look at the new homes market.
Total sales have dropped from 396K in October 2009 down to 283K in October 2010. 
Again, total sales only tell half the story:
If you take the 2009 average price of $270,900 and adjust it to the 3rd quarter 2010 price index vs. the 3rd quarter 2009 price index, you end up with an average sale price of $267,453.
Therefore, the total new homes market has dropped from $107.28 billion in October 2009 down to $75.69 billion in October 2010, a $31.59 billion (29.4%)  drop in total value in a year.

Tuesday, November 23, 2010

Existing Home Sales: An Alternative View

Existing home sales were reported to be "slightly down":
But per their data source:

Existing home sales dropped from 5,980,000 in October 2009 (at $172,000 median price) down to 4,430,000 in October 2010 (at 170,500).  The total existing home sales market size therefore dropped from $1.029 trillion down to $755 billion dollars, a $274 billion (26.6%) dollar drop in market size in one year.

It's important to look at the economic value of the housing market, particularly on a timeline longer than month-to-month, in order to get an accurate read of where the market is when making decisions on whether to invest in companies within this line of business (such as ZIPR), as this is what affects their actual earnings. 

A comparable analysis can be completely for the new homes market, and can be used as a more accurate way of assessing the homebuilders sector.  Both existing homes and new homes economic value data can be used as supporting information along with MBA mortgage applications to provide a solid read of the current and near future (2 or less year timeline) home mortgage market.