Reality Check

After a week with seemingly conflicting numbers, the upcoming week will likely only add to the confusion about the state of the economy. Look for leading indicators Monday and the Chicago Fed National Activity Index Tuesday to reinforce suggestions of an economic downturn or recession. We'll also be reminded of the ongoing struggles in the housing market this week, with reports from the Office of Housing Enterprise Oversight Thursday on home price values and from the National Association of Realtors Friday on existing home sales Friday.

Those struggles – particularly home values – have resulted in some lenders trimming or freezing home equity lines of credit, further compressing consumer spending.

The OFHEO report is also a critical indicator because some banks use it to develop forecasts which they employ to estimate loan losses and writedowns -- forecasts which may be overly optimistic. According to a recent report in The Wall Street Journal, the Case-Shiller index may be more realistic. “In recent weeks, Wachovia and WaMu have cited housing data from OFHEO when detailing their exposure to the U.S. housing market. A different index relied on by other banks, the S&P/Case-Shiller Home Price Indices, is gloomier.” (The Case-Shiller Index for March is due out on May 27, five days after the OFHEO report for the same month.)

The reports in the coming week will follow a week of data releases in which some of the detail was far less positive than the headlines, and, in some instances, seemed unrealistic. Take, for example, the Consumer Price Index report on Wednesday. The report itself was relatively benign. Overall inflation was 3.9% in April, down from 4.0% in March and the “core” inflation rate (excluding food and energy) was 2.3%, down from 2.4% one month earlier.

The dip in the inflation rates indeed supported contentions by the Federal Open Market Committee that inflation expectations are contained. It also supported arguments that the economy is in recession since recessions are inflation killers.

Within the report though were a couple of gems. For example, the report noted a seasonally adjusted 2.0% decline in the price of gasoline in April even as the Energy Information Administration reported a 21.4-cent, or 6.6% increase, in the average price of a gallon of regular gasoline in the same month.

The CPI report also revived an old joke: “What should we make for dinner?” “Reservations.” According to the CPI data, the year-over-year change (inflation rate) of “food away from home” was 4.1% while the inflation rate for “food at home” was 5.9%. Reservations are cheaper!

Similarly, Friday’s report on housing permits and starts seemed to show a revival in the housing sector with an unexpected uptick in both housing permits and starts. The increase though was due primarily to increased multi-family, not single-family, activity. The continued drop in single-family construction activity is both good and bad news. Fewer homes being built will allow builders to cut into the inventory of unsold homes, but at the expense of construction. And, as builders seek to sell homes by offering incentives and price cuts, they might meet some resistance from buyers who will wonder if prices will be dropping further. That certainly contributed to last week’s further decline in the National Association of Home Builders’ Housing Market Index.

For the week upcoming, the report next Friday on April existing home sales will likely be disappointing. The report is based on closings, thus reflecting economic conditions two months earlier when deals were struck. In February, consumer confidence dropped and purchase mortgage application activity fell sharply.

Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president at Washington Mutual, where he was manager of economic analysis and research. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He has a degree in Economics from the Wharton School of the University of Pennsylvania.