October Consumer Confidence, September Durable Goods Orders and August Home Prices

KEY DATA: Confidence: up 5.5 points/Orders: -1.3%; Excluding Transportation: -0.2%/Home Prices (Monthly): -0.1%; Year-over-Year: +5.6%

IN A NUTSHELL:  “The highest confidence level in seven years shows that it’s the economy that really matters and for many, it looks like it is getting better.”

WHAT IT MEANS: Ebola may be all people are talking about but it doesn’t seem to be getting a lot of us down.  The Conference Board’s Consumer Confidence Index jumped in October to its highest level since October 2007.  While the current conditions index moved up at a modest pace, expectations surged.  Fears of a job slowdown are fading rapidly and that is triggering a belief that incomes and business activity will be on the rise. 

The manufacturing sector has become a bit of a question mark.  For the second consecutive month, demand for durable goods fell.  Excluding transportation, it was the second decline in three months.  Still, the fall off has not been that sharp, so I am not yet worried about it.  As for the details, the biggest drop was in civilian aircraft.  Orders are still up by about 40% compared to last year.  There was also a huge reduction in communications equipment orders but more moderate declines in computers and machinery.  Vehicle demand was essentially flat.  Despite the sluggishness in orders, backlogs are growing and that creates expectations that production will have to be ramped up.

The steady deceleration in home price increases continued in August.  The S&P/Case-Shiller 20-city index declined as twelve of the twenty metropolitan areas were down.  Over the year, the increase slowed to 5.6% from 6.7% in July.  Prices are back to where they were in spring, 2005.

MARKETS AND FED POLICY IMPLICATIONS: The surge in confidence was the real eye opener in today’s reports.  It’s not as if the world is spinning along merrily.  It actually seems to be spinning out of control.  But that is not affecting the outlook for the future, especially when it comes to jobs and incomes.  And that is critical, since people tend to make spending decisions based on their financial situation, not because world events or vague threats of a disease outbreak.  The sharp decline in gasoline prices, undoubtedly, is helping, but since most of the gain came from expectations, not current conditions, it is likely that gasoline is just one factor in consumer thinking.   With outlooks brightening and more money being left in the wallet after filling up the tank, there are real hopes that this holiday shopping season could be very good.  I suspect that investors will grab onto that possibility.  As for the Fed, the FOMC is meeting and will issue a statement tomorrow.  Let’s wait and see what they say but I don’t think there is a consensus yet for changing much in the statement.