Sales of existing homes fell more than expected (down 2.6% month-over-month compared to the consensus call for a 1% decline) to 4.86 million units, a marginal new low in the time series, which goes back to 1999. The series had stabilized in the 4.89-5.03 million range since late 2007.

The weakness in sales was concentrated in the single-family component, which dropped 3.2% in the month. This more than offset a rise of 1.7% in the multiples component. The median sales price increased in the month by 3.5%, although it continued to decline by 6.1% on a year-over-year basis. This annual rate does represent some easing from a recent trough of 8.5% recorded in April.

The news on inventories was not encouraging with the number of unsold hold inching up 0.2%. With sales activity dropping in June, the inventory of unsold homes as measured in terms of months' supply moved up to 11.1 from 10.8 in May and only slightly below the recent record peak of 11.2 in April.

Sales activity fell 0.8% through the second quarter, matching the 0.9% drop in the first quarter, although this represented a marked easing from the average quarterly decline of almost 8% that prevailed during the last three quarters of 2007.

This provides some tentative signs that a floor is possibly forming in sales activity. However, inventories remain close historically high levels. As a result, construction activity will likely continue to be cut back to help work down the stock of unsold homes. Thus, we expect that residential investment will likely continue to be a drag on overall GDP growth. This factor weighs in favour of the Fed holding interest rates unchanged despite concerns about inflation pressures building in the system.

U.S. jobs picture worsening
Initial jobless claims spiked to 406,000 for the week ended July 19, a high since March. Although July prints do tend to be somewhat volatile due to plant retooling, this print appears to represent a true worsening of the jobs picture.

Michigan and Kentucky actually reported declines in initial claims due to fewer auto industry layoffs. In contrast, claims in other states such as South Carolina, North Carolina, Georgia and Tennessee stemmed from layoffs in manufacturing, textiles and other goods-producing industries, while California experienced layoffs in the service industry and New York experienced layoffs in construction, transportation and public administration.

The Bureau of Labor Statistics reported yesterday that employers had taken 1,643 "mass layoff" actions that resulted in 165,697 unemployment insurance filings, the highest level of such activity since 2003.

Consequently, the spike in claims appears due less to seasonal volatility and more to the economic slowdown. This provides more support for the notion that U.S. consumers are stretched and weakening and that, as the tax rebate spending wears off, retail sales and consumption will sag.