KEY DATA: Confidence: +3.7 points; Phil. Fed NonManufacturing: -4.3 points; Case-Shiller Prices (Over-Year): +6.0%; FHFA Prices (Over-Year): +6.4%
IN A NUTSHELL: “Consumers are delirious but are not bidding up prices of homes as much as they had been.”
WHAT IT MEANS: The third quarter is almost over and it looks like it was a good one. At least consumers think things are wonderful and will continue to be great. The Conference Board’s Consumer Confidence Index jumped in September. The index is beginning to take aim in on the high posted in 2000. There was a surge in expectations about the future even as the current conditions measure rose modestly. Critically, views on the labor market are not only upbeat but also keep getting better. Over 45% of the respondents said that jobs are “plentiful”.
Echoing the optimism of consumers is the outlook of business owners. The Philadelphia Fed’s September NonManufacturing index of regional activity eased a touch but respondents said their own businesses did better over the month. This seems to reflect the growing concern about the economy despite the gains being made by businesses. Indeed, the regional economic activity expectations index also fell but expectations about individual business activity were up.
The housing data are all saying the same thing: A slowdown is already here. We saw that in sales numbers, which have been slowly trending downward since early spring. And that has led to a deceleration in price gains. Both the Case-Shiller Federal Housing Finance Agency’s home price indexes rose modestly in July while the over-the-year increase moderated. Increasing prices and mortgage rates are reducing affordability and sales and that is translating into slower price gains.
MARKETS AND FED POLICY IMPLICATIONS: The Fed is meeting today and tomorrow and it is largely a done deal that there will be an increase in rates. The question is how much more do we have to go. That, of course, depends upon whether growth remains strong and inflation accelerates further. Right now, the Fed has achieved its economic and inflation targets. But the full impacts of the massive fiscal stimulus have not been felt, so we should be able to maintain 3% growth for a while. If that is the case, inflation should accelerate, forcing the Fed to keep raising rates. The probability of a December increase is extremely high and most economists have a minimum of two more increases next year. I have three to four. That would put the rate above 3% and likely above the rate of inflation. Except when oil prices collapsed, that has not been the case for the last nine years. That should create some interesting reactions in both the stock and bond markets. With the economy humming along, investors should start strategizing for when that happens.