KEY DATA: Conference Board Consumer Confidence: -2.2 points/ Case-Shiller (September, Over-Year): +5.5%/FHFA (Over-Year): +6.3%
IN A NUTSHELL: “The softening in consumer confidence and housing prices portends a similar moderation in economic growth.”
WHAT IT MEANS: The economy boomed in the spring, was strong over the summer and now it looks like it is growing solidly in the winter. That slow, but steady moderation in activity reflects the same pattern in consumer attitudes and the housing market. Households remain confident, but their irrational exuberance is wearing off. Today, the Conference Board reported that confidence fell in November, though the decline was not large. Indeed, respondents believe the labor market is strong and getting better, which led to an increase in the current conditions index. It was the future that is starting to trouble people. A fairly similar pattern was seen in last week’s University of Michigan Consumer Sentiment Index, which also eased. The current conditions measure fell less than the future conditions measure, though again, neither was down significantly. But a slow and steady drop in hopes about the future could signal a softening in consumer spending.
As for the housing market, it too is on a softening trend. The S&P CoreLogic Case Shiller national home price index posted a limited gain in September and the rise over the year continued its steady deceleration from the peak reached in the spring. Similarly, the Federal Housing Finance Agency’s Home Price Index rose more moderately in the third quarter and the rise over the year also was off from the early year peak. The results were consistent with other indicators, such as housing starts and sales, which point to a market that may be close to its peak.
MARKETS AND FED POLICY IMPLICATIONS: The economy is in good shape, but given how great things were, we are into the “what have you done for me lately” approach to economic growth. And lately, things are not as strong as they had been, which should surprise no one, or at least no one that doesn’t have a political axe to grind. The rate of expansion during the spring and summer was unsustainable. Just about every economist has said that and will continue to say that. The issue was not whether we could keep up the strong pace, but how fast we would get back to a sustainable, roughly 2¼% growth rate. We could exceed that in the fourth quarter, but we should see the return of a 2-handle on the number. As we go through next year, growth should settle into the 2% to 2.5% range. Politically, that would be viewed as a disaster. But that is what most economists expected to see once the tax cut sugar-high wore off. Housing is leading the way slower and I expect business investment growth to decelerate next. If the trade war heats up further, don’t expect exports to bail us out. That leaves government spending, which at the federal level is once again out of control. The U.S. budget deficit could approach one trillion dollars this fiscal year and maybe even exceed it if growth decelerates faster than expected. So much for the tax cuts paying for themselves. So, let’s hope we can settle into a reasonable growth range because the risks, especially if the trade situation deteriorates, is for a lot slower not faster growth by the end of next year or first half of 2020.