August Consumer Confidence and June Housing Prices

KEY DATA: Confidence: +5.5 points; Expectations: +5.2 points/ Home Prices: +0.3%; Over-Year: +6.2%

IN A NUTSHELL: “Consumers remain exuberant and that bodes well for continued solid spending in the months to come.”

WHAT IT MEANS: Maybe the 4% growth we saw in the second quarter will not be sustained, but that doesn’t mean growth will falter significantly in the near future. The Conference Board reported that its consumer confidence index rose in August to the highest level in nearly eighteen years. The details of the report were generally upbeat. A rising proportion of the respondents think business conditions are good and that it is getting easier to find a job. Actually, it is hard to understand why over twelve percent of the respondents still think jobs are hard to get, but that is a different story. The strong job market, coupled with improving expectations about the ability to find a job fed through into increased belief that income will rise. Still, just over twenty-five percent think they will see their incomes increase in the next six months, which is somewhat disconcerting. It shows that workers may think labor market conditions are strong but they still don’t expect to benefit from that situation. Unfortunately, if workers think their incomes will remain stagnant, they don’t tend to spend more.

With housing sales ebbing, it should not be surprising that the surge in prices is fading as well. The S&P CoreLogic Case-Shiller national home price index rose modestly in June. Over the year, prices are still going up solidly, but it looks like the rate of gain may have peaked. As for metro areas, I guess gambling on housing remains fun as the fastest increase in prices over the year was in Las Vegas. Seattle and San Francisco are not that far behind, but the rise in costs in those two areas seems to moderating.

MARKETS AND FED POLICY IMPLICATIONS: As long as consumers are confident, and they really are right now, they will continue to spend money. So there is little reason to expect that the economy will falter the rest of the year. Something significant would have to happen to put the brakes on growth. But the question remains as to whether strong growth can be sustained. Workers are just not seeing wages rise and now there seems to be a growing trend toward promoting people without any salary bump. Boy, that sounds like a strange way to reward people. Congratulations, you did a great job, you now have more responsibility but your pay is the same. And businesspeople, economists and Fed members wonder why productivity is going nowhere. Do they really think that making people work more for the same pay creates an incentive to work harder? There was always a feedback between wages and productivity. If you worked harder and produced more, your pay increased. So why work harder if you don’t get paid more. Maybe I’m naïve, but I don’t think workers are dumb and are falling for the promotion trick. I think they just start looking for a way out. In any event, the high levels of confidence will likely be read as a positive for the economy. But the fact that relatively few workers think their pay will rise is something that should not be dismissed. It puts a damper on the willingness to spend.