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Weekly Economic Commentary


Case-Shiller Home Price Index – Confirms Improvements Reported Elsewhere

June 26, 2012

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The seasonally adjusted Case-Shiller Home Price Index increased 0.67% in April, marking the third consecutive monthly increase. This is the first sustained gain since the recovery began three years ago, excluding the gains seen when the temporary first-time home buyer credit program was in place during an extended part of 2009 and 2010. Among the twenty metro areas tracked, seventeen of them showed an increase in the home price index, while home price gauges of Boston, Detroit, and New York slipped.

Chart 1 - 06 26 2012

On a year-to-year basis, the Case-Shiller Home Price Index is approaching positive territory, with year-to-year decline in April at 1.9%. As Chart 2 shows, the Core Logic House Price Index of April and the median sales price of an existing single-family home in May, reported by the National Association of Realtors, both show stronger improvements. The stability of home prices is a noteworthy development in recent months. However, the housing sector remains “depressed” as the Fed continues to convey in its policy statements.

Chart 2 - 06 26 2012

Consumer Confidence Slips in June, Labor Market Indicators Warrant Close Tracking

The Conference Board’s Consumer Confidence Index declined to 62.0 in June from 64.4 in May. The Present Situation Index moved up slightly (46.6 vs. 44.9 in May) but the Expectations Index (72.3 vs. 77.3 in May) fell. The preliminary University of Michigan Consumer Sentiment Index for June (74.1 vs. 79.3 in May) also fell.

Chart 3 - 06 26 2012

The Conference Board’s survey includes questions about the labor market that are useful indicators. The percentage of respondents reporting that “jobs are plentiful” fell in June to 7.8% from 7.5% in May. At the same time, a larger percentage indicated that “jobs were hard to get” in June (41.5% vs. 40.9% in May). The net of these two indexes has a strong positive correlation with the unemployment rate (see Chart 4), which increased in June (33.7 in June vs. 33.4 in May) to the highest level since February 2012. Based on this relationship, it will not be surprising to see a higher unemployment rate in June, which will be published on July 6. The unemployment rate in May stood at 8.2%.

Chart 4 - 06 26 2012

The Brave Mr. Noda

by Ieisha Montgomery

On the surface there is not much about Japan’s current Prime Minister Yoshihiko Noda that lends itself to comparison with Junichiro Koizumi, the longest-serving PM in the last 20 years. He lacks his predecessor’s charisma, popularity, and signature hair; however, in one area the two are very similar: their dogged determination to force their countrymen to wake up to their fiscal problems. For his dedication, Noda will very likely become the sixth consecutive prime minister to serve a year or less in office, but unlike the others he can say he achieved the near impossible by defying the status quo, public opinion, and his own party to secure passage of a consumption tax increase.

In order to gain the support of the opposition Liberal Democratic Party (LDP) and New Komeito parties – which is essential to passage in the upper house – the Prime Minister was forced to reshuffle his cabinet and shelve a number of social welfare measures that were the pillars of his Democratic Party of Japan’s (DPJ) election platform in 2009. Noda might have also sacrificed the existence of the DPJ in its current form, as it possible that party powerbroker and staunch critic of anything not of his own doing, Ichiro “the Destroyer” Ozawa, will form a splinter party. Ozawa was extremely critical of the tax hike and rallied 57 party members to vote against the bill, while another 16 abstained. If Ozawa manages to convince 53 members to leave the DPJ, the party would lose its majority in the lower house and trigger a LDP call for a no-confidence vote once the tax legislation clears the upper house in August. This would result in the PM’s resignation or dissolution of parliament and the calling of elections. However, due to his current lack of popularity with the public, Ozawa is likely to stay in the ruling party despite his threats and attempt to boot out Noda during party meetings in September.

The actual consumption tax increase is fairly modest and will still see Japan rank near the bottom of the table in terms of tax rates among advanced economies. The legislation calls for a phased implementation of the tax rise from 5% today to 8% in April 2014 and finally to 10% by October 2015. The increases are dependent on the economy growing by 3% in nominal terms and 2% in real terms. It is important to note that Japan has not achieved two consecutive years of real growth above 2% since 1991, so there is a good possibility that implementation will be delayed or altered. Yet, the true importance of the bill lies in the nearly irreversible momentum towards fiscal consolidation that it has created. It also signals a decisiveness that has not been evident since Koizumi’s bruising campaign to privatize the monolithic Japan Post. The government badly needed to show its ability to work across party lines to tackle its budget deficit and send public debt levels on a downward trajectory.

Japan has a long way to go to solving its fiscal mess and the tax increases approved today are the just the beginning. The government still has to find ways to cut spending and stimulate growth, both of which will require a number of structural shifts. However, the point is that the consumption tax legislation represents a crucial beginning, and actual progress towards tackling issues cannot be taking for granted in Japan. His tenure as PM may prove to be short, but Mr. Noda has likely ensured his legacy. The Japanese will thank him later.












The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.