A Frigid February for New Home Sales

A government report shows that sales fell to the slowest pace in 13 years, while durable goods dropped unexpectedly

by BusinessWeek, Standard & Poor's, and Action Economics staff

Reports released Mar. 26 show that two key segments of the U.S. economy—housing and manufacturing—continue to take it on the chin amid the ongoing U.S. slowdown. The reports helped send major equity indexes lower on Mar. 26, with the Dow Jones industrial average down nearly 1% in late-morning trading.

Optimism engendered by a better-than-expected report on February existing home sales released Mar. 24 was not supported by data on sales of newly built single-family dwellings during the month. According to a government report, U.S. new home sales fell 1.8% to a 590,000-unit annual rate in February, down from an upwardly revised 601,000 in January (up from 588,000 before) and a 13-year low. Markets expected a drop in sales, to 579,000.

New home sales were down 29.8% from last February.

Good News for Housing?

Sales were down in the Northeast and Midwest, but up in the South and West. The supply of unsold homes held at 9.8 months-worth. The median sale price rose to $244,100 from a revised $225,600 ($216,000 before), but was down 2.7% from last year.

The new home sales report was good news for the housing sector despite the drop in sales in February, says Action Economics. "[T]he downdraft in these figures is diminishing, while the price figures sharply outperformed our assumptions."

Bear Stearns (BSC) economist John Ryding was less optimistic. The report "shows no signs of stabilization in the new home sales market as sales have fallen for four straight months and the three-month rate of decline in home sales is little different from the 12-month change," he wrote in a Mar. 26 note. "Inventories of unsold homes in relation to sales are at levels not seen since the 1981-82 recession."

Durable Goods: No Rebound

The factory sector is also feeling the effects of a softening economy. A government report showed that new orders for manufactured durable goods unexpectedly dropped 1.7% in February, following a 4.7% January drop. The market had expected a 0.8% rebound.

A 13.3% drop in machinery orders and a 10.1% decline in defense orders dominated the month's data. Non-defense capital goods excluding aircraft, the key indicator for future business investment, fell 2.6% after a 1.8% January drop. Shipments, a more stable indicator, were also down, by 2.8%, after rising 2.3% the previous month.

The only real strength in the month's report was in defense and non-defense aircraft, up 4.3% and 5.4%, respectively.

The report shows worsening problems for manufacturing and for capital spending specifically, says S&P Economics. "The data confirm that the economy is still heading downward."

"[T]hese numbers are notoriously volatile and, unfortunately, it will take a few months of data to determine the trend through the monthly swings," says Action Economics.

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