KEY DATA: Pending Sales: +3.3%; Year-over-Year: -2.1%/ GDP: 4.2% (from 4.0%); Corporate Profits: +8.0%/ Claims: 298,000 (down 1,000)
IN A NUTSHELL: “If the housing market really is getting better, then there are every reasons to believe the strong growth seen in the second quarter can be repeated.”
WHAT IT MEANS: Housing took a big hit in the winter and the spring was better but not great. However, it appears that conditions are beginning to really improve. We saw that existing home sales hit their highest sales pace this year in July, housing starts surged and builder Confidence continued to pick up. Today’s report showing pending home sales increasing just added to the impression that housing has thrown off its winter-induced lethargy. While these are contracts not closings, they do point to more home sales ahead. Granted, the level is still slightly below what we saw in July 2013, but they are coming back nicely. The only recent negative housing report was new home sales and that looks like an aberration. Developers don’t develop and builders’ confidence doesn’t rise if demand is weak.
In other reports, the economy grew even more strongly than initially estimated and the robust increase in activity led to a jump in corporate profits. The good news is that firms are using some of the money to invest in equipment, software and even new plants. What they are still not doing is paying their workers more and they will continue to do that as long as they can get away with it. But the time to pony up may be getting near. Unemployment claims eased last week and seem to be settling into a range that puts it at the lowest in history if you adjust for the size of the workforce. The level points to a potentially very strong August employment report, which we get at the end of next week. I would not be surprised if job gains around 275,000 and we could even see the unemployment rate at 6%.
MARKETS AND FED POLICY IMPLICATIONS: Today was a good day for economic numbers, which should mean a good day for investors. Of course the economy often takes second place to geopolitical concerns and the situation in Ukraine continues to be worrisome. Vlad the Invader seems to be at it again and that is not good news. But domestically, the economy is in good shape and getting better. If the August employment report is as good as I believe it could be, the screeches coming from the hawks will get awfully loud. Janet Yellen
conceded that conditions may improve faster than expected. While a robust gain in payrolls and a drop in the unemployment rate will not likely cause the Fed Chair to come out and make that admission just yet, it will likely give her pause. The interesting question is how will investors react to the Fed moving closer to hiking rates? Since tightening will only come when Chair Yellen and her band of merry low-raters think the economy is really strong and the labor market is becoming an issue, a rate hike should be viewed positively. But that is just an economist talking.