The Visible Hand

Despite a few negative reports, a bevy of positive economic data was released this week, including some encouraging housing data.

Both existing and new home sales rose sharply last month, trumping analysts’ expectations by a wide margin; existing home sales were up 10.1 percent, while new home sales grew 6.2 percent.

Existing home sales reached their highest level since February 2007, as falling prices in many regions of the country, lower mortgage rates and an extension of the homebuyer tax credit continued to lure purchasers out of the woodwork. Existing home sales reached an annual pace of 6.1 million units, with distressed properties making up 30 percent of sales. New home sales came in at 430,000. Currently, there’s a seven-month supply of existing homes on the market, down from eight months in September; the total supply of unsold homes is approaching historical norms.

National house price data released by the Federal Housing Finance Agency showed that prices firmed up modestly on a national basis. Despite remaining flat month over month, prices were up 0.2 percent on a quarterly basis, thanks in part to 1.9 percent increase on the West Coast.

The major question is whether this improvement in the housing situation represents a true pickup in demand or if the tax credit is creating an artificial incentive to buy. I suspect that, absent government intervention, we’d see a much different picture.

Consumer spending rose 0.7 percent in October, and personal incomes were up 0.2 percent. The real question is how are consumers financing this greater spending? Consumer credit continues to contract, and bank loan balances recently posted their largest decline on record. Where is the cash coming from? Although improving consumer confidence suggests that people more willing to part with their money, many households are likely retrenching and deleveraging.

The recent revision to gross domestic product provides an excellent case in point. The Bureau of Economic Analysis released revised third-quarter GDP data, taking the measure down to 2.8 percent growth from the previously reported 3.5 percent. Weaker- than-estimated consumer spending, modest investment in building and stronger imports all contributed to the falling estimate.

Although the revised GDP reading still represents a solid improvement, most of the positive contributing factors stem from government intervention. That means much of the current improvement is likely coming at the expense of future growth.

That’s not the invisible hand of market forces self-correcting; that’s Uncle Sam wielding a really big stick. That’s all well and good, assuming the government scales back spending and the Federal Reserve hikes interest rates at the right time. But we all know the government’s track record in that department.