COMMERCE BANK ECONOMIC REVIEW - October 2006

The economy’s up, the economy’s down, the economy is all over the town

By Joel L. Naroff, Ph.D.

The last month has seen the economic picture muddled in ways that would cause even a two-handed economist to wonder. Is job growth weak or strong? A question raised by two polar opposite employment reports. We thought the consumer had decided to close up shop, but then the chain stores told us they did great. The housing market seemed to be crashing and then new home sales rose. And most disconcerting, the Mets, as expected, cruised into the playoffs, while the Phillies fell short again. What’s going on here?

The most troublesome segment of the economy is the housing market. Although the data were somewhat inconsistent, there really is little doubt the downslide is continuing. Existing home sales fell in August and are off double-digits since August 2005. Worse, prices were down, the first year-over-year decline in eleven years. Yes, new home sales did eke out an increase, but the sales pace was more than 17% lower than the previous year and prices also are down. Worse, there are so many homes on the market now that prices are likely to fall further and construction is plummeting. This sector is hurting.

On the other hand, there is the consumer. August retail sales barely inched up. But the headline number was not a cause for alarm. Households shopped ‘till they dropped in July and most economists expected retailing to suffer badly in August. It didn’t. Indeed, buyers even visited the vehicle showrooms and sales improved. And when you add in the fact that prices fell for a number of goods and there were major clearance sales going on, consumers really did continue their spending ways.  But what really opened eyes were the October chain store reports. Most retailers did extremely well. That’s the best news we could have as it implies that households are still out there emptying their wallets.

So we have a weak housing sector, but consumers are spending. What does that all mean?  It depends upon whether the shopping spree can continue. And that depends upon income and job growth, which is really uncertain. The September employment report was ugly.  Well, maybe. Payroll gains were miniscule, but the unemployment rate fell and wages rose. It also turns out that in August, firms added a ton of new positions. So, is the economy a lean, mean, job machine or have companies closed their hiring departments? It is likely that neither is the case. The labor market is very tight and firms are having trouble finding suitable workers. More than likely, that is the major reason for the slow job growth. Nevertheless, we need more people finding positions if the economy is to grow rapidly.

Really now, what are the data telling us? The economy is slowing, but not falling apart.  The tight labor market points to mounting wage gains but also potentially higher inflation. So although the Federal Reserve may no longer be increasing rates, it may be awhile before it starts reducing them. And as long as short-term rates remain relatively high, they will continue to restrain growth. 

Joel L. Naroff, Ph.D., is Chief Economist for Commerce Bank. Commerce Bank, America’s Most Convenient Bank, is a leading financial services retailer with 400 convenient stores in New Jersey, New York, Connecticut, Pennsylvania, Delaware, Washington, DC, Virginia and Southeast Florida. Commerce Bancorp (NYSE: CBH) is headquartered in Cherry Hill, NJ and has $45 billion in assets. For more information about Commerce, please visit the company’s interactive financial resource center at commerceonline.com.