Friday, August 17, 2007

Housing Starts Fall More Than Expected, Jobless Claims Jump Unexpectedly


8/16/2007 10:50:41 AM Some disappointing economic data has been released Thursday morning, with government reports showing bigger than expected drops in July housing starts and building permits as well as a bigger than expected increase in weekly jobless claims. The data has added to the recent concerns that problems in the credit markets could impact the economy as a whole.

While the weaker than expected data also added to optimism that the Federal Reserve may consider cutting interest rates in the near future, recent comments from St. Louis Federal Reserve Bank President William Poole have helped to dash those hopes.

Earlier this morning, the Department of Commerce released a report showing that housing starts fell 6.1 percent to an annual rate of 1.381 million units in July from the revised June estimate of 1.470 million units. With the decrease, housing starts were down 20.9 percent year-over-year and at their lowest annual rate since January of 1997.

Economists had been expecting a somewhat more modest decrease to a 1.405 million unit rate compared to the 1.467 million unit rate originally reported for the previous month. The bigger than expected drop in housing starts was partly due to a notable decline in starts in the South, which fell 11.0 percent. Housing starts fell 3.7 percent in the West and 1.3 percent in the Northeast, while starts in the Midwest edged up 2.6 percent.

As mentioned above, the Commerce Department also said that building permits fell 2.8 percent to an annual rate of 1.373 million units in July from the revised June rate of 1.413 million units. The decrease contributed to a 22.6 percent drop compared to July of 2006. Building permits are seen as an indicator of future housing demand. The drop in building permits exceeded the estimates of economists, who had expected building permits to fall to a 1.400 million unit rate compared to the 1.406 million originally reported for the previous week.

The weaker than expected data added to recent concerns about the outlook for the housing market, which have been aggravated by the recent subprime mortgage woes and tightening lending standards. The housing market has been slumping for much of the past after experiencing a prolonged boom.

In related news, mortgage lender Countrywide Financial (CFC) announced on Thursday that it has supplemented its funding liquidity position by drawing on an $11.5 billion credit facility. Countrywide noted that funding liquidity for the mortgage industry has become constrained along with reduced liquidity in the secondary market.Separately, the Department of Labor said that jobless claims rose to 322,000 from the previous week's unrevised figure of 316,000.

The increase came as a surprise to economists, who had expected jobless claims to edge down to about 315,000. The report also showed that the less volatile four-week moving average rose to 312,500.Recent employment data has painted a negative picture of the labor market, as last week's jobless claims report showed that claims increased by more than economists had been expecting.

Earlier this month, a report from the Labor Department showed that non-farm payroll employment increase by a smaller than expected 92,000 jobs in July. Economists had been expecting a more significant increase of about 135,000 jobs.

The report also showed that the unemployment rate unexpectedly edged up to 4.6 percent in July from 4.5 percent in June. With the increase, the unemployment rate reached a six-month high, although it remains at relatively low levels.

Despite the troubling data, however, St. Louis Fed President William Poole said that there have not been any indications that the problems in the subprime mortgage market are negatively impacting the broader U.S. economy.

“It's premature to say this upset in the market is changing the course of the economy in any fundamental way,” Poole said in an interview with Bloomberg. “Obviously, there could be an impact, but we have to rely on some real evidence.”Poole said that there was no need for the Federal Reserve to enact an emergency interest rate cut, barring a “calamity.”

Some speculated that Poole's remarks also indicated that the Federal Reserve is unlikely to cut rates when it meets on September 18th.In spite of Poole's comments, the Federal Reserve has been among the central banks injecting funds into the banking system in an attempt to avoid a credit crisis.

On Thursday, the Fed injected another $17 billion into the system for a total of $88 billion in the past week.

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