[S&P's weekly notes can be seen here for the week ending April 24.]

Despite all the talk in the press suggesting the worst downturn since the 1930s, the first quarter real GDP growth to be announced Wednesday now seems likely to be positive. We still expect this episode to be classed as a recession, but it will look like a very shallow, but extended "U." Economic releases this week included:

• Orders for durable manufactured goods fell 0.3% in March, because of a 19.8% drop in defense orders.
• Existing home sales fell 2.0% in March, to an annual rate of 4.93 million. New home sales dropped more sharply, by 8.5% to 526,000.
• The Office of Federal Housing Enterprise Oversight (OFHEO) reported that home prices rose 0.6% in February, but remain down 3.1% from their April 2007 peak.
• Commercial real estate prices rose 0.3% in January, and are up 7.0% from a year earlier, according to the S&P/GRA Commercial Real Estate Index.
• Consumer sentiment fell to a 25-year low of 62.6 in April from 69.5 in March, according to the University of Michigan Survey Research Center.
• U.S. initial jobless claims fell 33,000 to 342,000 in the week-ended April 19. Continuing claims fell 65,000 to 2.934 million in the week-ended April 12. The insured unemployment rate held at 2.2%. The four-week moving average fell 7,250 to 369,500, but has been clearly rising over the past two months. The data confirm that the recent spike was caused by seasonal adjustment issues caused by the early Easter. Claims data continue to be stronger than usual during an early recession stage.
• Bank of Canada cut its overnight lending rate 50 basis points (bps) to 3%, citing weaker world, and especially U.S., growth.
• Oil prices rebounded to a new record of $120/barrel Wednesday, but fell back to $118 midday Friday.
• The 10-year Treasury yield jumped to 3.9%, but remains well below the 4.25% in early December. The rise indicates reduced expectations for a U.S. recession as well as more inflationary worries here and overseas. The dollar rose to $1.561/euro, and 104.5 yen, helped by the higher bond yields. Japanese bond yields jumped to 1.6% on higher inflation reports; the core CPI is now up 1.2% over the last 12 months.

Housing Dips Again

Housing data released this week were a bit better than expected, but still consistent with our view that the housing market is still heading downward. The most discouraging report was new one family home sales, which plunged 8.5% in March to an annual rate of 526,000. Sales are down 36.6% from a year earlier. The decline occurred in every Census region, with the South down the least in March and the Northeast the most. On a year-on-year basis, the declines have been 25.9% in the South, 39.3% in the West, 50.0% in the Midwest, and 64.6% in the Northeast.

The supply of new homes for sales dropped to 468,000 from 473,000 in February and 548,000 last March. However, because of the lower sales pace, the months' supply rose to 11.0 from 10.2 a month earlier and 8.3 a year earlier. The inventory of new homes is dropping earlier in the downturn than in past recessions, showing that builders are reacting more quickly. However, inventories are still not falling as fast as sales. Housing starts (released last week) dropped to 947,000 in March, down 36.5% from last March, in rough line with the drop in sales. We expect starts to drop further as builders try to cut the stock of unsold homes.

Existing home sales were down less than new homes, dropping 2.0% in March to an annual rate of 4.93 million units. Sales are down 19.3% from March 2007. Condo sales rose 3.6%, but that was more than offset by a 2.7% drop in single-family home sales. Condo sales are down 25.5% over the year, while single-family home sales have fallen 8.3%. The inventory of existing homes on the market rose 1.0% to 4.06 million, a 9.9 months' supply.

Home prices were surprising up 0.6% in February, according to OFHEO. Prices remain down 2.4% from last February, and are 3.1% below their April 2007 peak. The OFHEO home price index is less volatile than the S&P/Case-Shiller index, which was down 10.7% from a year earlier in January. The February Case-Shiller data will be released next Tuesday. Winter data are always suspect for the housing sector, and we expect prices to continue to decline through early 2009. Compared with last February, prices have dropped most in the Pacific states (down 9.2%). The next-worst region is the South Atlantic (down 3.7%), while the West South Central region is up 2.3% and the East South Central is up 0.6%.

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