MARKET TRENDS: Manufacturing Tumbles, Labor and Housing Steady

The Philly Fed Index of manufacturing activity fell sharply in the month of July, indicating a slowdown of factory activities in the mid-Atlantic. The U.S. manufacturing sector had little contribution to the expanding economy, as the sector was hit hard by the stronger dollar and lower oil prices.

The Philly Fed Diffusion Index of current activity declined to 5.7 in July from 15.2 in the previous month, the Federal Reserve Bank of Philadelphia said on Thursday. However, the Index was still positive, which indicates a continued increase in regional manufacturing activity.

The Index was expected to show a much more modest decrease to 12.0. The steep decline in the headline Index was led by a fall in the New Orders and Shipments indices. Both sub-indices were still above zero, however, indicating growth.

Measures for employment and inventories dropped below zero, which signals contraction. Manufacturers are confident for the next half of the year as they recover from: the setbacks of harsh winter weather in the first quarter, a strong dollar hurting exports, and cheaper oil prices, reducing business spending by energy firms.

The labor market, meanwhile, showed strength. Initial jobless claims fell for the first time in the last three weeks, indicating stronger labor market conditions. Initial jobless claims declined 15,000 to a seasonally-adjusted 281,000 in the week ended July 11, the Labor Department said on Thursday. Such claims were expected to rise to 285,000 during the week.

About 296,000 claims were filed the week ended July 4, below the earlier estimate of 297,000. The four-week moving average, a better measure of the labor market trends, rose 3,250 to 282,500.

Unemployment benefits claims remain volatile in the month of July as automakers shut down factories for retooling. The number of people filing continuing claims for unemployment benefits, which are reported with a one-week lag, declined 112,000 to 2,215,000 in the week ended July 4. New claims have been under the key 300,000 level since late February.

The unemployment rate fell to 5.3% in June, the Labor Department said earlier this month. Going forward, the Fed is optimistic on the employment situation.

Another report on Thursday showed that the residential real estate market is gaining pace, which in turn will drive overall economic growth. The National Association of Home Builders (NAHB) Housing Market Index was at 60 in July, the highest level since November 2005. The Index was expected to fall in the range of 57 to 62 after a previously reported 59 in June. A measure above 50 means more respondents said conditions were good.

Historically lower mortgage rates and a steady improvement in the labor market are making home purchases attractive. Home builders remain confident on the sales outlook, expecting a pickup in construction that will further boost economic growth. The six-month sales outlook of 71 in July was the highest since October 2005.

The gauge of current single-family sales rose to 66 from 65. A measure of prospective buyer traffic eased to 43 from 44. Builder confidence climbed in three of the four U.S. regions. The Northeast showed the largest improvement – a 5 point gain to 52. Builder confidence also rose in the West and Midwest.

U.S. stocks surged higher, with the Standard & Poor’s 500 Index nearing its all-time high after Greek lawmakers passed a bailout agreement. The Greek government passed reform measures demanded by creditors in exchange for negotiating a third bailout package.

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