New home building increases despite large overhang.  The Census Bureau reported that new single-family housing starts increased 14.4 percent from May to June to a seasonally adjusted rate of 470,000 starts per year.  June marked the fourth consecutive month where starts increased, though the new construction rate back in February (357,000 starts per year) was the slowest pace in the 50-year history of the data series.  While four consecutive months of increases is heartening for the beleaguered home building industry, skepticism remains that buyer demand is sufficient to whittle down both the overhanging unsold inventory of new homes and the new units about to come onto the market.  Though the data show new construction and new sales converging over the previous few years (See Chart), current sales rates suggest that it would still take more than 10 months to sell off the backlog of unsold new homes.  Factoring in the amount of existing homes for sale, the addition of newly built homes could have the unintended effect of extending oversupply and further holding down prices.

Industry sinks to another month of record low capacity utilization.  A survey of industrial activity showed that production fell 0.4 percent in June and capacity utilization fell for the eighth straight month to 68.0 percent, the lowest level since the series began in 1967.  Since the recession began, industrial production has declined 15.1 percent, driven mostly by a 17.5 percent decline in manufacturing output.  Production of durable consumer goods has fallen nearly 30 percent and may remain weakened given slack demand and still-substantial inventory levels.  While wholesale inventories of durable goods have fallen substantially, the May inventory-to-sales ratio of 1.8 is still higher than in recent years (2005-07 average = 1.5) and indicates that factory activity may remain depressed until either demand increases substantially or inventories are further depleted.

Retail sales edge up as gas station sales surge. Sales for retail trade and food services increased 0.6 percent in June, but were still 9 percent down from 12 months ago.  While June marked the second consecutive month of retail sales increases, gasoline station sales, increasing 5 percent for the second straight month, were again the primary factor driving monthly sales.  Absent that contribution, retail sales would have increased just 0.3 percent in June and less than 0.1 percent (versus an actual 0.5 percent) in May.  Sales for motor vehicle and parts dealers also increased substantially (+2.3 percent), though dealers are working up from sales levels that are about 25 percent lower than they were on the eve of the recession.

Federal Reserve projections offer mixed picture for the economic outlook.  The Federal Reserve has revised its economic projections to reveal a near-term picture of faster growth but with higher levels of unemployment.  Whereas the April forecast anticipated real GDP to decline between 1.3 and 2.0 percent in 2009, the current forecast sees a more moderate decline of 1.0 to 1.5 percent for the year.  Growth will be positive for both 2010 and 2011 and was revised up from April’s expected values.  However, unemployment will be worse than anticipated.  The Fed expects the unemployment rate to average between 9.8 and 10.1 percent in 2009, substantially higher than the 9.2 to 9.6 percent previously forecast.  Inflation expectations have increased, but are still seen to be well below trend.