Year Ends With Hopeful Economic Data

 Though consumer confidence remains low amid continued high unemployment, the latest round of economic data, released today, may some hope for better times in 2011.

New claims for unemployment benefits, released every Thursday, showed a surprising drop this week. New applications fell by 34,000 to 388,000 for the week ending December 25, the lowest level in the last two years.

Assuming the decline in new claims is because more people have found jobs, not that they've given up looking, the data offers a long-sought bright spot in the economy. If that trend should continue, economists say, the stubbornly high unemployment rate will start to fall.

Analysts say recent increases in consumer spending may be encouraging businesses to hire additional employees and try to grow profits. Besides the weekly jobs figures, which tend to be volatile and may not be a reliable indicator, there was other encouraging news from businesses.

Business expansion

The Institute for Supply Management-Chicago Inc., a key source of business data, said its business barometer rose to 68.6 this month, exceeding the most optimistic forecast of economists surveyed and the reaching the highest level since July 1988. A reading greater than 50 signals future business expansion. Normally, when a business expands it hires additional employees.

Also today, the National Association of Realtors reported pending home sales, reflecting signed sales contracts, rose 3.5 percent in November. The index is 5.0 percent below a reading of 97.0 in November 2009. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.

Lawrence Yun, NAR chief economist, said historically high housing affordability is boosting sales activity.

“In addition to exceptional affordability conditions, steady improvements in the economy are helping bring buyers into the market,” Yun said. “But further gains are needed to reach normal levels of sales activity.”

Home sales jump in the west

The Pending Home Sales Index (PHSI) in the Northeast increased 1.8 percent to 72.6 in November but is 6.2 percent below November 2009. In the Midwest the index declined 4.2 percent in November to 78.3 and is 7.7 percent below a year ago. Pending home sales in the South slipped 1.8 percent to an index of 91.4 and are 7.2 percent below November 2009. In the West the index jumped 18.2 percent to 123.3 and is 0.4 percent above a year ago.

“If we add 2 million jobs as expected in 2011, and mortgage rates rise only moderately, we should see existing-home sales rise to a higher, sustainable volume,” Yun said. “Credit remains tight, but if lenders return to more normal, safe underwriting standards for creditworthy buyers, there would be a bigger boost to the housing market and spillover benefits for the broader economy.”

But the one damper on today's year-end economic news is the outlook for mortgage interest rates, which continue to rise. In the latest report, the average rate on a 30-year fixed rate mortgage is approaching 4.9 percent, still very low on a historical basis.

But rising mortgage rates will make homes less affordable, at a time when prices have yet to fully stabilize. Yun said he expects the 30-year fixed-rate mortgage to rise gradually to 5.3 percent around the end of 2011.