After a relatively upbeat third quarter, October has started off rocky with stock indices down, and today’s employment release showing greater than expected losses. Housing markets and consumer confidence have had mixed results of late, after several months of hopeful signs of stabilization.

Leading the current batch of gloomy news, the U.S. economy shed 263,000 jobs in September which was significantly worse than most analyst expectations while the unemployment rate rose to 9.8%, the highest it has been since June 1983. The Institute of Supply Management index showed that manufacturing experienced its first decline in past eight months. Personal spending soared due to the government’s “Cash for Clunkers” program, but given lackluster auto sales following the end of the program, that trend is not likely to last. It will be important to keep an eye on the market in October, which has traditionally been a weak month for equities, to see if momentum from the previous six months will carryover into the final quarter of the year.

Despite all the major stock indices on tap to post three consecutive days of losses as of today, equities closed out the third quarter with another strong performance. The broader S&P 500 index was up roughly 14.5% in the third quarter while both the Dow Jones Industrial Average and the tech-heavy NASDAQ Composite Index also posted gains of roughly 15%. Stocks have surged since hitting lows in March and continue to be driven by better economic news and stabilization in housing and financials. The economy is expected by many to start expanding again during the second half of the year while the future of housing depends on whether Congress will renew the homebuyer tax credit that is expected to expire at the end of November. Auto sales dropped off significantly after the “Cash for Clunkers” program ended and it is a concern that housing may suffer the same fate if the tax credit is not extended.

The Fed kept their target Federal Funds rate unchanged at their rate-setting meeting last week. The Federal Funds rate remains at a range of 0-0.25% and is expected to stay at those levels until at least the middle of next year. However, the Fed statement was a little more upbeat after this past meeting, stating that “economic activity has picked up following its severe downturn.” And also stating that, “Conditions in the financial markets have improved further, and activity in the housing sector has increased.” Inflation does not seem to be a concern at the time especially because of falling real estate prices and weaker wage growth. With the Fed’s Treasury purchase program expected to come to an end soon, mortgage rates may see some upward pressure in the last three months of the year.

The Economy
Total non-farm employment fell by a seasonally-adjusted 263,000 payrolls in September. After experiencing its tamest month of job losses last month since August 2008, many economists were hoping job losses would stabilize in September. Continued losses in the labor market will limit efforts for an economic recovery. Job losses accelerated in many major sectors of employment including construction, services, and retail in September. The unemployment jumped to 9.8% in September which is the highest it has been since June 1983.

Gross Domestic Product fell 0.7% in the final second quarter report which is better than the 1.0% decline reported in both the advance and preliminary reports. This is the tamest pullback the economy has experienced since the second quarter of last year when the economy reported 1.5% expansion. The 6.4% contraction in the first quarter was the worst since the first quarter of 1982. This is the first time on record that GDP has recorded declines in four straight quarters. Rising unemployment and reduced consumer spending continued to hurt the economy in the second quarter. Upward revisions in most of the major consumption categories helped improve GDP from preliminary estimates.

The Consumer Confidence Index declined marginally in September following a rebound in confidence last month. The index fell to a reading of 53.1 in September from a revised August figure of 54.5. Both component indexes also declined in September. The Present Situation Index dropped from the previous month to a reading of 22.7 from 25.4 last month. The Expectations Index declined slightly to 73.3 from 73.8 in the previous month. Although the Consumer Confidence Index eased slightly in September, it held relatively stable following gains in the previous month which suggests sentiment is still fairly positive going forward.

In August, personal incomes in the United States increased 0.2% from the previous month to $11,973.0 billion. Personal incomes are down 2.6% from $12,298.4 billion in August of last year. This month marks the eighth consecutive month of annualized personal income declines.

Housing Market
New and existing home sales moved in separate directions in August. Prices in both housing segments continued to decline last month.

New home sales increased for the fifth straight month in August which has been fueled by attractive builder incentives, low mortgage rates, falling prices, and the government’s homebuyer tax credit. Seasonally-adjusted new home sales increased 0.7% from the previous month to an annual rate of 429,000 units. New home sales for the previous three months were also revised higher by 9,000 units. The annual pace of new home sales is now at their highest levels since September 2008.

In August, the median new home price declined to $195,200 from an upwardly revised figure of $215,600 in July. Median new home prices are down 9.5% from last month and are 11.7% lower than the same year-ago period. Increased competition from the existing home market, especially foreclosures and short sales, has caused the median new home price to fall to its lowest levels since October 2003. The median new home price has now recorded eight straight months of year-over-year declines.

New home inventories declined to 261,000 from a July figure of 271,000 on a non-seasonally adjusted basis. The number of new homes for sale continues to decline and have not recorded a monthly increase since May 2007. Seasonally-adjusted inventory of unsold homes have declined for 28 straight months to 262,000 units. Declining inventory levels and increased demand for new homes in August helped months of inventory improve to its lowest levels since January 2007. Seasonally-adjusted months of inventory declined from last month to 7.3 months of supply on a seasonally-adjusted basis which is down from 7.6 months of inventory in July. With units of inventory on the decline and demand remaining steady, months of inventory is falling back towards the 5-6 months of inventory that is considered normal in a healthy housing market.

Existing home sales in August fell for the first time in five months despite favorable mortgage rates and lower prices. Annualized sales of total existing homes in August declined 2.7% from July levels to 5.10 million units. Existing single-family home sales declined 2.8% from last month to 4,480,000 units while condo and co-op sales were down 1.6% from July to 620,000 units. However, sales of existing homes are still up 3.4% from their same year-ago levels of 4.93 million units. This is the second straight month that existing home sales have recorded year-over-year increases.

The median existing home price in August declined to $177,700 from $181,500 in July. This is the second straight month that existing home prices have declined and the lowest they have been since May. Existing home inventory dropped to its lowest levels since January last month. Inventory of existing homes dropped 10.83% to a preliminary 3,622,000 units from 4,062,000 units in July. Months of existing home inventory dropped last month due to the drawdown in units for sale despite the slowdown in sales pace in August. At the current sales pace, there are 8.5 months of supply of existing homes on the market. Months of existing home inventory are now at their lowest levels since April 2007.

National average mortgage rates declined from the previous week to 4.94% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on October 1st. Rates have not recorded a weekly increase since the end of August. Mortgage rates are now at their lowest levels since the end of May. In the week ending September 25th, the MBA’s seasonally-adjusted purchase index dropped 6.2% from the previous week and was down 11.35% compared to the same time last year. This is the lowest the purchase index has been since the second week of August.