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Claims continue to decline

The above chart compares the unadjusted claims data from this year to the same dates last year. Claims in recent weeks are running about 10% below claims from the same date last year. June claims typically rise because of temporary retooling layoffs at auto plants.

The number of people receiving unemployment compensation is down 21% from the same time last year, a trend that has been in place for more than three years. As I've been saying repeatedly, this is one of the biggest and most positive changes on the margin in today's economy, since it involves changing the incentives of millions of people—encouraging them to find and accept a job offer. 

This chart shows the seasonally adjusted level of claims, which are down 10% from year-ago levels.

Claims data is timely and not subject to significant revisions, and so far there is no sign of any deterioration in the health of the economy or the jobs market. This has major implications for those who hold cash in anticipation of a deterioration in the economy. Given the almost zero yield on cash and the much higher yields available in alternative investments (see chart below), holding cash as a hedge against a weaker economy is an expensive proposition—and so far a losing one.

As long as the economy fails to deteriorate, the prices of risk assets are likely to continue to rise as the world attempts to reduce its (relatively large) holdings of cash in favor of higher-yielding investments.

Weak housing starts don't signal the end of the housing recovery

June housing starts were significantly below expectations (836K vs. 960K). Brian Wesbury argues that it was most likely due to weather: "18 states in the South and East had rain totals in June that ranked among their 10 wettest on record." He adds that "The vast majority of the decline (95%) was due to the very volatile multi-family sector." As the chart above shows, this series is notoriously volatile. With home builders' confidence up significantly, and with building permits in June (see chart below) running above starts (911K vs. 836K), it is reasonable to think that the recent decline in starts will reverse. In any event, it remains that case that starts are up over 10% in the past 12 months, and have they have surged 56% in the past three years.

It's possible that the recent rise in mortgage rates, which began in May, could be responsible for some of the decline in June starts. But it would be premature to conclude that the housing market recovery has come to an end—this is more likely just a pause.

New mortgage applications for home purchases have only declined marginally since mortgage rates started rising, suggesting that underlying demand for housing remains relatively strong.

Housing outlook still positive

The NAHB Home Builders' Market Index jumped in July to 57, much higher than the 51 that was expected. A majority of home builders now see conditions as "good."

To put this in perspective, the chart above compares the home builders' index to the level of housing starts (HT: Calculated Risk). The recent strength in the index suggests that we could see some very strong gains in housing starts in coming months.

As a counterpart to the strength in starts and home builder sentiment, many worry that the recent jump in mortgage rates will shut down the recovery in housing. I note that housing starts were doing just fine in 2000, when mortgage rates were 8%—almost twice as high as they are today, and the decline in mortgage rates since then did not prevent a housing market collapse. This is a reminder that higher interest rates don't necessarily cause housing weakness, just as lower interest rates don't necessarily result in a stronger housing market. The causality usually runs the other way: a strong housing market is more likely to result in higher interest rates, especially at a time like now, when mortgage interest rates are still very low by historical standards.

Retail sales post moderate gains

June retail sales were weaker than expected (+0.4% vs. +0.8%), but they increased at a 4.6% annualized rate, which is about the same rate of growth that has prevailed in recent years. In short, there's no news here. No improvement, no deterioration. But it is remarkable that sales have easily exceeded—both in nominal and real terms—their pre-recession highs, despite there being 2 million fewer jobs than there were at the pre-recession high. Ongoing productivity gains explain why, and that's a good thing because productivity is the source of rising living standards.

This chart gives you an idea of how much better things might be today if the number of jobs had recovered to its long term trend. Sales are over 10% less today than they might have been given the long-term trends in place prior to the last recession. GDP is also more 10% below where it might have been: the shortfall is measured in trillions of dollars. That's what is so unfortunate about this recovery.

But it is nevertheless a recovery, and it continues.