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Weekly Economic Commentary

 
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Distortions Lead to a Sharp Drop of Initial Jobless Claims

July 12, 2012

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Initial jobless claims fell 26,000 during the week ended July 7 to 350,000. The sharp decline would be bullish if in fact it was not distorted by the July 4 holiday and fewer summer auto plant shutdowns. Typically in the summer, auto plant shutdowns and return of auto workers causes wide swings in jobless claims numbers. The latest weekly numbers reflect a smaller number of layoffs compared with prior years. Continuing claims, which lag initial jobless claims by one week, declined 14,000 to 3.304 million. The labor market is the foremost concern of the Fed at the moment. But, we need to wait for clean numbers to assess the latest developments of the labor market.

DEC 7/12/2012 Chart 1

Housing Market: Share of Underwater Homes Trending Down

The recovery of the housing market is another major concern of the Fed in addition to the labor market. Three years of economic recovery is yet to result in a meaningful turnaround of the housing sector. One of the pressing issues is the prevalence of home mortgages with negative equity. Negative equity (often referred to as homes with underwater mortgages) means that homes are worth less than what borrowers owe on their mortgages.

CoreLogic reported today that 23.7% (or 11.4 million) of all residential properties with a mortgage were in negative equity at the end of first quarter of 2012. The magnitude of underwater homes itself is worrisome but the good news is that it is trending down (see Chart 2). A reduction of underwater mortgages implies fewer mortgage defaults in the quarters ahead. Improving home price numbers, fewer foreclosures and short sales, and growth in employment in the first quarter have been factors contributing to the reduction of underwater mortgages.

DEC 7/12/2012 Chart 2

 

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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.
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