KEY DATA: Confidence: +6.5 points/ Orders: -3.7%; Excluding Aircraft: -1.2%; Capital Spending: -0.2%/ FHFA Prices (Over-Year): +6.7%/ Case Shiller (Over-Year): +6.3%
IN A NUTSHELL: “Consumers are exuberant and hopefully that will translate into more spending as firms don’t seem to be cranking up their investment activity.”
WHAT IT MEANS: There are lots of smiles on the faces of consumers these days. The Conference Board’s Consumer Confidence Index jumped in February, reaching the highest reading in over seventeen years. That was when the dot.com bubble started to burst in everyone’s face. The views on both current and future conditions were up sharply, a very positive sign. We will find out Thursday, when the January consumption numbers are released, if the good feelings are translating into better spending.
I suspect that sometime in the future, businesses will spend some of the massive increase in after-tax earnings on capital goods, but as of now, there are no signs that is actually happening. Durable goods orders crashed in January, but that was due to a huge drop off in commercial aircraft purchases. Don’t worry, Boeing is doing just fine. But aircraft was not the only weak sector. Demand was also down for machinery, electrical equipment, appliances and primary metals. Purchases of computers and communications equipment did jump and orders for vehicles edged upward. But the closely watched measure of capital spending, orders for non-aircraft, nondefense capital goods, declined for the second consecutive month and have really gone nowhere for the past three months. Maybe firms were waiting for the tax law to pass and it is taking them time to determine exactly what they should spend their profits on, but it would be nice if this measure were actually rising.
Two reports on housing prices were released today and both tell basically the same story: Housing prices are rising sharply. The Federal Housing Finance Agency’s December and fourth quarter data indicated that prices rose modestly in December but were up quite strongly over the year. The S&P CoreLogic Case-Shiller National Index was up slightly less over the year, but the difference was not huge given the way prices are measured.
MARKETS AND FED POLICY IMPLICATIONS: Feeling good is nice and having corporate coffers filled to the brim could also be good, but those two things have to actually lead to additional business and consumer spending if the economy is to grow more rapidly. So far, there is little indication that has happened. Of course, it has not been that long since the tax bill passed, so we need some patience. Increasing capital spending only makes sense if it increases earnings and exactly how to invest is not a simple decision. Similarly, for most workers, the increase in after-tax pay will kick in slowly over the year. So don’t expect a sudden surge in either consumer or capital spending. And with the new Fed Chair making it clear that market volatility will not deter the Fed from its rate and balance sheet normalization plan, look for rates to continue to rise. When that is combined with sharply rising housing prices, the outlook for construction becomes a little clouded. In other words, growth this year should be strong, maybe even in the 3% range, but to get there, current business and consumer spending patterns have to change.