FX (fka )

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Daily Economic Update

U.S. existing home sales fall; inventories of unsold homes rise

Existing home sales in September fell 8% in the month to an annualized 5.04 million units. The decline was greater than expected by the market. Weakness had generally been anticipated following earlier reports of plunging pending home sales. The decline followed a 4.7% drop in sales in August (previously reported as a 4.3% decline).

The weakness in sales was broadly based with single family home sales down 8.6% and the condominium component off by 4.3%. Inventories increased in September, although the increase was a relatively modest 0.4%. The measure of months' supply of unsold homes increased to 10.5 months from 9.6 months in August, the highest level for this measure since records began in 1999.

For the third quarter as a whole, existing home sales were an annualized 29.4% below their second-quarter average. Although inventories are down from their July peak, which represented the highest inventory level in the history of the series spanning back to 1999, they still remain highly elevated. Hence, construction activity will have to continue to be scaled back. This is consistent with our forecast that residential investment will move lower through next year, although we anticipate that the rate of decline should start to ease in 2008.

Declining activity in this sector alone is unlikely to undermine overall growth in the economy. However, the risks of a more pronounced moderation in GDP will rise if declining house prices start to weigh on household spending. Although consumer spending looks to have advanced at a fairly robust pace in the third quarter, our forecast assumes that consumer spending will advance at a more moderate pace closer to 2% in coming quarters.

Short lull in Canada's data flow

After yesterday's very positive retail sales report for August, there will be a lull in Canada's economic data releases today and tomorrow. The Business Conditions Survey for October and employment earnings for August will be Friday's offerings.