KEY DATA: Confidence: -7.4 points/Housing Prices (National): +0.5%; Year-over-Year: +5.6%
IN A NUTSHELL: “Whether the sharp decline in consumer confidence is the result of rising international concerns or a slowing economy makes a big difference, so it is premature to start worrying.”
WHAT IT MEANS: With the September jobs report on the horizon, we are looking for signs that the economy could be either stronger or weaker than expected. Today’s reports were not particularly great, though they may not be as worrisome as the headlines imply. First, there was a huge drop in the Conference Board’s Consumer Confidence Index. That was a shocker as the August reading was the highest in nearly seven years. The details were not particularly pretty either, as current conditions were down, though at only half the pace that future expectations dropped. It is that difference that raises real questions about what is going on. A cratering in confidence usually is caused by an event but there has been no major negative economic crisis. Indeed, with gasoline costs falling, the logic would have been for consumers to feel better. However, the emergence of ISIS/ISIL and the need to get militarily involved again in the Middle East was a very negative political event and that could be behind the drop. If that was the driving force, the impact on spending should be limited as political issues usually don’t change consumption patterns significantly for any extended period.
As for housing, the S&P/Case-Shiller national index of home values rose but the pace of gains is slowing. The year-over-year rise was the smallest in a couple of years. Also, the 20-City Index of large metropolitan areas declined over the month. Only three areas, Las Vegas, Miami and San Francisco, rose by double-digits since July 2013. The deceleration is not bad as the last thing we want is for bubbles to start forming again. Prices need to continue rising moderately so homeowners’ equity can increase and the normal churn in the market can return.
Two other reports released today point to modest September growth. The Paychex-IHL Small Business Jobs Index showed slowing small business hiring while the ISM-Chicago manufacturing index moderated. So far, the September numbers have not been anything stellar.
MARKETS AND FED POLICY IMPLICATIONS: I will wait on the confidence issue as the Middle East worries may be dominating. But any slowdown in spending would not be helpful as we need job growth to be strong and the unemployment rate to continue falling. Of course, we will know more on Friday, but until then, we can only speculate, which is the most fun. As for investors, the confidence drop has to hurt and given the unrest in Hong Kong, it is hard to see how any rational investor could feel great today. Note, I said rational. Remember, markets may be efficient by they don’t have to be rational.