March Consumer Confidence and January Home Prices

KEY DATA: Confidence: +9.5 points/ National Home Prices (Monthly): 0.6%; Home Prices (Over-Year): 5.9%

IN A NUTSHELL: “I guess people think that chaos in Washington is good as consumer confidence is soaring.”

WHAT IT MEANS: The politicians in Washington may have made a fine mess of health care reform, but that didn’t seem to bother too many people, at least not in the latest survey of confidence. Or, maybe people really didn’t like the reforms and they were happy they weren’t passed. Or, maybe the survey was done too early to capture the impact of the failure to repeal and replace Obamacare. Who knows, but the latest report on household attitudes by the Conference Board was incredibly strong. The Consumer Confidence Index hit its highest level since December 2000. Forget the housing bubble, things are even better now. Every component was up solidly as people thought that current conditions were a lot better, jobs were more available and they were easier to get. The future looks brighter as well and respondents are hopeful their incomes will rise.

The national S&P CoreLogic Case-Shiller Home Price Index rose solidly in January and over the year as well. The gains are accelerating and given the paucity of supply, they should continue to do so even as mortgage rates increase. Looking across the nation, only Cleveland posted a decline in January, and that was minimal. Over the year, the increases ranged from a low of 3.2% in New York to 11.3% in Seattle. Of the twenty large metro areas shown, twelve had year-over-year gains that were faster this January than a year ago. In other words, prices are rising, they are rising faster and they are doing so across the nation.

MARKETS AND FED POLICY IMPLICATIONS: “Happy days are here again, the skies above are clear again, so let’s sing a song of cheer again, happy days are here again.” I just don’t get this confidence report. Okay, maybe not as we need to see what people think now that the AHCA has gone down in flames. Economic growth looks like it will once again be lackluster, in the 1% to at most 2% range. Yes, the last two job numbers were strong, but with labor shortages growing, it is hard to believe we can sustain gains above 200,000 (the next report is April 7th). So, what is making people so happy? Got me, especially since about a third of the nation think we are on the right track, a third think Washington is a disaster and the final third are flipping coins. But at least we can say that home prices are rising. That is good because higher values are reducing the number of people who cannot sell because they don’t have enough equity. I don’t worry about first time home buyers and will not until the “churn” in the market, which comes from owners selling their current units and then buying different ones, returns to a normal pace. Absent that, supply will be limited and prices will rise, but the market will not be normal. As for investors, these reports hold out hope that consumer spending will prop up the economy until the government decides whether it is going to give us more money to spend and will spend more money itself. The Republican leadership is hoping to get a tax reform bill done by August. Given the CBO is likely to show that as usual, the tax cuts will explode the deficit, it should be interesting to see how the politics play out on that bill. And those numbers might not even include money for infrastructure spending. Will Rogers said he didn’t belong to any organized political party, he was a Democrat. I wonder if Republicans will start behaving like Democrats this year. And can Democrats keep their discipline and start behaving like Republicans? It just may turn out that 2017 is even wilder than 2016.

February Industrial Production and Leading Indicators

KEY DATA: IP: 0%; Manufacturing: +0.5%/ LEI: +0.6%

IN A NUTSHELL: “With manufacturing taking off, the economy is moving forward solidly even if consumers don’t want to spend.”

WHAT IT MEANS: It looks like the economic laggard, manufacturing, is now the economic leader. Industrial production was flat in February, but that was entirely due to a major decline in utility production. An exceptionally warm month has a tendency to do that. Wait until you see what the March numbers look like for utilities. They will probably be off the charts. But more importantly, the nation’s manufacturers are showing renewed vigor. The Federal Reserve reported that output surged for the second consecutive month, with both durable and nondurable goods production up sharply. The economy is also being helped by the recovery in the oil and gas sector, which was up for the ninth consecutive month. Oil rig counts are still rising, despite the recent softening in prices – or maybe the prices are softening as a consequence of the rising count. Regardless, this sector is doing better.

Will we see further gains in the economy? If you believe the Conference Board’s Leading Economic Index, the answer is absolutely. This measure of future activity has posted three large gains in a row and after six consecutive increases, it is now at its highest level in more than a decade. It was also reported that the gains were spread across the economy, which is pointing to moderate economic growth ahead.

The University of Michigan’s mid-month reading on consumer confidence was up slightly from the end of February. Given all the chaos in Washington, that was a bit surprising.

When the data were broken down by Democrats, Republicans and Independents, it became clear that the political divide is a chasm. Democrats think a recession is coming while Republicans believe that happy days are here again. Independents take the middle ground, which seems to be where we really are: Not hot, not cold but not really just right.

MARKETS AND FED POLICY IMPLICATIONS: As I like to say, as consumers go, so goes the economy. Well, wrong again, or maybe not necessarily. First quarter growth is like to disappoint, as households are just not doing a lot of shopping. But that is not the full economic story. There are other segments that are starting to pick up the slack. Manufacturing is making a major recovery, led in part by renewed activity in the energy sector. When oil prices collapsed and energy companies stopped spending, the companies that supplied goods and services to that segment of the economy got hurt. Turnaround is fair play and that is happening. The huge political divide raises serious questions whether the confidence measures have any economic meaning. I think it is best to simply recognize the rise in confidence but not assume it means anything as far as spending is concerned. And that should concern investors. Inflation-adjusted income is once again flat and if consumers are not going to spend strongly, there is an upper bound to growth. Europe is recovering, but it is hard to believe earnings will soar if domestic consumption is mediocre. That has implications for stock price valuations.

February Housing Starts, January Job Openings and March Philadelphia Manufacturing Activity

KEY DATA: Starts: +3%; Permits: -6.2%/ Openings: +87,000; Hires: +137,000; Quits: +135,000/ Phila. Fed: -10.5 points

IN A NUTSHELL: “The rising number of people leaving jobs is a further sign that the labor market is really tight.”

WHAT IT MEANS: Yesterday, the Fed made its first of what will likely be several rate hikes this year. A strengthening economy, rising inflation and significant fiscal stimulus could mean a greater total increase than the members seem to indicate. So, it’s time to get back to economic fundamentals, at least until the full details of the spending and tax proposals are released. First, the housing market is getting better. Earlier this week we saw that the homebuilders’ level of confidence was the highest in twelve years. That optimism led to a solid rise in housing starts in February. The single-family portion of the market did all the heavy lifting as multi-family construction eased. There was a warning in the report. Permit requests dropped sharply and are now running behind starts. We could see a modest, short-term slowdown in construction activity.

The huge rise in payrolls over the past two months has raised the specter of a really tight labor market. Yes, that may sound strange since businesses seem to be able to find the workers they need. But given the reality of labor force growth and the likely further decline in the participation rate as we transition from boomers to Millennials, strong job growth doesn’t look sustainable. According the Bureau of Labor Statistics’ closely followed JOLTS report, job openings rose in January, though not greatly. Much more importantly, the quit rate, which is a proxy for the willingness to tell management to take this job and shove it, is back at the high of this recovery and near the peak seen in the 2000s expansion. In other words, workers are starting to believe that they no longer need a new job before they leave their old one. That’s confidence.

The manufacturing sector has really made a turnaround and that appears to be continuing. The Philadelphia Fed’s current activity index did fall sharply in early March, but that was not a surprise given the huge surge posted in February. The level of the index remains extremely high despite the decline and the details were impressive. Orders are booming, backlogs are swelling, hiring is strong and workers are being worker harder and longer because firms cannot find suitable employees. Over sixty percent of the respondents to a special question said they were experiencing labor shortages. Over forty-five percent said they had to raise wages to attract skilled workers. Sounds like a tight labor market to me.

MARKETS AND FED POLICY IMPLICATIONS: Today’s key numbers centered on the labor market. The growing number of people quitting their jobs and the high percent of firms reporting they cannot find skilled workers and are having to pay up for the ones they get point to a labor market that may be hitting the wall. We are still not seeing that in the overall data, as inflation-adjusted wages are going nowhere. Until real wages start rising faster, overall consumer demand will remain moderate and the Fed will be able to sustain a slow upward path of interest rates. But the Philadelphia Fed and JOLTS report are warnings that businesses ability to hold the line on wages may finally be ebbing. As for investors, all eyes are turning toward the budget process. Today’s budget summary release is just the starting point for the discussion. We don’t have any tax changes or any infrastructure spending information. We may not know until May what the administration wants to do and then Congress has to actually pass something. Simply put, fiscal stimulus is months away.

March 14-15 2017 FOMC Meeting

In a Nutshell: “The Fed raises rates and reiterates it will continue to increase them gradually.”

Rate Decision: Fed funds rate range increased to between 0.75% and 1.00%

As expected, the Fed raised rates by ¼ percent today. Was this a ho-hum meeting? Not really. Yes, the FOMC made it clear it intends to follow up with two more hikes this year and three next year, but that doesn’t constitute aggressive behavior. It still leaves the Fed well below its projected long-term rate of roughly 3%. In other words, if people were worried that that rates were going to rise faster than expected, the Committee’s statement and Chair Yellen’s answers to questions at her press conference were all constructed to calm those fears.

There was also some important information in the dot charts that describe the members thinking on inflation, growth and interest rates. The nation’s central bankers and their staffs of hundreds of Ph.D. economists expect GDP to expand at an average of maybe 2% over the next few years. That is in line with their long-term growth forecast, but it is about half as fast as the Trump administration’s growth projections.

That sluggish growth outlook has some enormous implications for fiscal policy. Cutting taxes and increasing spending widen the budget deficit. The administration argues that the deficit increases will not be as large as most private sector economists forecast because they believe growth could reach 4%. If we only get 2% growth, the deficit would skyrocket. Indeed, if the Congressional Budget Office scores the proposed tax and spending changes using growth rates similar to the Fed’s, which they are expected to do, the deficit projections could be really ugly.

One final point when it comes to fiscal policy. Chair Yellen encouraged Congress to pass policies that increase the economy’s growth potential. That means promoting investment not spending. The tax cuts the Trump voters are hoping for don’t fall into the category of capital investment. They are on the consumer spending side and would be more inflationary.

So, what should we expect going forward? Today’s economic data support the view that the Fed will move cautiously but consistently. Consumer inflation, as measured by the Consumer Price Index, is at the Fed’s target. However, the Fed’s preferred measure, the Personal Consumption Expenditure deflator, remains just below target. With energy prices falling, at least temporarily, inflation should not accelerate sharply. Also, February retail sales were soft, indicating that consumer confidence may be up but spending isn’t. Growth this quarter could be disappointing.

At least two more rate hikes this year are expected. If we get a huge fiscal stimulus package, especially one directed at consumers, the increase could total one percentage point.

(The next FOMC meeting is May 2-3, 2017.)

February Producer Prices and Small Business Confidence

KEY DATA: PPI: +0.3%; Excluding Food and Energy: +0.3%/ NFIB: -0.6 point

IN A NUTSHELL: “The rise in price pressures continues and it is very likely the Fed will make a move tomorrow.”

WHAT IT MEANS: The Fed’s rate setting committee, the FOMC, is in day one of its two-day meeting and while you can never be certain what the members will do, it looks like a rate hike is coming when the statement is released tomorrow afternoon. Today’s data only reinforce that view. First, wholesale prices rose moderately in February, led by another jump in energy costs. Over the year, producer prices are have now risen by over 2% and are up by nearly that pace even excluding the volatile food and energy components, as the gains were spread across most areas. Food and services expenses posted solid increases, adding to the cost pressures. Looking down the road, sharp rises in intermediate goods costs are pointing to further increases in consumer finished goods prices and that doesn’t bode well for inflation.

Small business owners have been ecstatic about the election and their confidence has soared. But that could change. The National Federation of Independent Business’ small business index fell slightly in February. Though the index remains at a high level, the NFIB president issued this warning: “The sustainability of this surge and whether it will lead to actual economic growth depends on Washington’s ability to deliver on the agenda that small business voted for in November. If the health care and tax policy discussions continue without action, optimism will fade.” Given the chaos over the AHCA, which should be called Republicancare, and the lack of any proposal on tax reform, don’t be surprised if small business owners become a little more cautious about the future.

MARKETS AND FED POLICY IMPLICATIONS: With a rate hike potentially only 24 hours away, it is time to start recognizing that rates are really going up this year and probably faster and greater than thought. Fed Chair Yellen will have a press conference tomorrow after the meeting and might provide a small amount of guidance as to future actions. In addition, there will even be another round of the infamous and largely useless dot plots that provide “insights” into the members’ thinking. I suspect there will be a shift to as many as four increases. Coming into the year, I had forecasted three increases but a total of one percentage point. It looks like that 100 basis point forecast may occur, but through a quarter point increase every other meeting. Regardless, the markets didn’t have a full point hike factored in coming into the year and many still have the “when I see it, I will believe it” attitude when it comes to Fed actions. That is actually a rational approach given the hesitancy to raise rates we have seen from this Fed Chair. But my view is that once she gets going, and assuming the Republicans actually pass a tax and spending plan, Chair Yellen will push ahead steadily.

February Private Sector Jobs and Help Wanted OnLine

KEY DATA: ADP: +298,000; Construction: 66,000/ HWOL: -360,2000

IN A NUTSHELL: “If job gains are really heating up this much, the Fed might find itself behind the curve and having to catch up.”

WHAT IT MEANS: A strong employment number on Friday could cement a Fed rate hike next Wednesday and it looks like that could happen. ADP’s estimate of February private sector job gains was off the charts, or at least well above anyone’s expectations. The rise was led by a surge in construction jobs that was the second largest since the report was first released fifteen years ago. The only time there was a greater increase was at the peak of the home construction boom and we know that is not happening right now. The incredibly warm February weather across much of the nation may have played a major role in this outsized estimate. There was also a huge rise in manufacturing payrolls. That doesn’t seem to be weather driven, but the gain was the third highest in this measure’s history. Why the sudden surge in hiring, especially given the shortage of workers, is unclear.   It raises questions about whether this is the start of a greater hiring trend or just a seasonal adjustment anomaly. Regardless, it is really nice to see.

Another reason that I am cautious about the ADP report was the large decline in the number of online ads, as reported by the Conference Board. The level was the lowest in almost five years and every major state reported a drop. There are a number of divergent reasons for the nearly steady decline that has been going on for fifteen months. First, labor demand may simply be slowing, as the economy hasn’t grown particularly robustly. The second is that firms are recognizing that in this labor shortage environment, they cannot fill a lot of the openings so they are cutting back on their advertising. Actually, a combination of the two could be occurring. That would argue for slow job gains. Alternatively, firms may actually be finding workers all those workers they are saying they cannot find and filling the openings. That would argue for strong job increases. We may not know for a few months which explanation reflects reality.

The Labor Department released revised productivity data for the final quarter of 2016 and it was depressing. Productivity increased in 2016 by the slowest pace since 2011. It is hard to grow rapidly, especially with businesses having so much trouble finding “qualified” workers, if firms cannot get a lot more out of current workers. Indeed, if we do get a surge in payrolls this quarter, as the other data imply, productivity will likely start of the year on a down note.

MARKETS AND FED POLICY IMPLICATIONS: Friday we will get the February payroll and unemployment government data and they should be good. Every once in a while, ADP and the Labor Department differ significantly in their estimates of private job gains, so it is unclear how big a number we will get. But if the employment increase exceeds 200,000 and wages rise solidly, as expected, a Fed rate hike should be assumed. I never say “done deal” when it comes to the Fed, but a strong report would get us pretty close to one. And it would reinforce the warning that I have been making that rates could rise faster and go higher than the markets currently anticipate.

I am headed out on my annual father/son Phillies spring training trip, so I will not be around for what may be a fun morning on Friday. Buckle up, everyone. The only roller coaster I will be riding will be in Islands of Adventure.

January Trade Deficit and Housing Prices

KEY DATA: Deficit: $4.2 billion wider; Imports: +2.3%; Exports: +0.6%/ Home Prices (Over-Year): +6.9%

IN A NUTSHELL: “The strengthening economy is sucking in foreign products and that could depress first quarter growth.”

WHAT IT MEANS: The stock markets may be hitting new record highs and consumer confidence soaring, but don’t look for a huge increase in economic growth. Yes, first quarter growth should be better than the tepid pace posted at the end of last year, but if the trade deficit keeps widening, it will not be anything great. Indeed, the January deficit was the largest in almost five years, led by a surge in demand for foreign products. We bought a lot more oil, cell phones, vehicles and capital goods. On the export side, farmers did well as did the vehicle sector, and we did sell a lot of energy to the rest of the world. But a slowdown in aircraft related shipments depressed the export total. That could change quickly, so don’t assume the deficit will keep rising.

It’s always nice when economic theory actually works and that is the case with the housing sector. The limited supply of homes on the market is driving up prices sharply. CoreLogic’s Home Price Index jumped in January and over-the-year. Improving wage gains, confidence and credit scores are allowing more families to enter the market and they are bidding high for the limited inventory. We are in another leg up of price gains. With the Fed likely embarking on what could turn out to be a fairly consistent pattern of rate hikes, we could see prices rise even faster if buyers try to beat the rising mortgage rates. Of the ten major metro areas CoreLogic charts, four were rated as “overvalued”. The rest were considered to be fairly valued.

Two other reports were released today. The Paychex/IHS Small Business Jobs Index rose for the third consecutive month and the gains were across the nation and across almost every sector. The IBD/TIPP Economic Optimism index fell for the first time since the election and the expectations index posted its second consecutive decline. Still, both indices remain well above where they were before the election.

MARKETS AND FED POLICY IMPLICATIONS: Employment Friday is this week, so most data will take a back seat to that report. I don’t expect the jobs gain number to be great, but good enough that the FOMC members will have little reason to faint at the prospect of raising rates. Regardless of the number of positions added or the unemployment rate, a sharp rise in wages would do the job and that is a distinct possibility. The economy is not booming, but that may actually be working to the Fed’s advantage. Fed Chair Yellen has said the members estimate that we are at an unemployment rate consistent with full employment. A strongly growing economy would tax the tight labor market, making it difficult for firms to continue expanding rapidly without bidding up wages to attract the workers they need. Inflation would rise and that could lead to the Fed to increasing rates more often than expected. A rate hike at next week’s FOMC meeting is likely, especially since the markets expect one. But that opens up the possibility of an increase each quarter. And a major fiscal stimulus package would only add to the belief that people are underestimating how much rates could rise this year.  

February Non-Manufacturing Activity

KEY DATA: ISM (Non-Manufacturing): +1.1 points; Activity: +3.3 points; Orders: +2.6 points

IN A NUTSHELL: “With all components of the economy on the rise, the question for the Fed is this: What are you waiting for?”

WHAT IT MEANS: We’re hitting on just about all cylinders. Wednesday, the Institute for Supply Management reported that manufacturing activity accelerated in February and today it was announced that the rest of the economy picked up steam as well. Business activity improved, led by rising demand for not only for domestic firms but for those involved in both importing and exporting. The improving world economic situation is helping drive additional sales to other countries. It’s funny how economics works that way. Employment growth was a little faster and is likely to increase more as backlogs are building. About the only negative in the report was a large increase in the percentage that think inventories are too high. Stocks are building and demand will have to remain strong or firms will look to ease up on additional production.

Yesterday, a report was released that should have really opened eyes at the Fed. The weekly unemployment claims number came in at 223,000, the lowest since April 1973. Let me put that in perspective. The labor force back then was 89 million compared to about 160 million today. Adjusting for the size of the labor force, the number of claims would have to currently be 400,000 in order for the two to be comparable. Simply put, this labor market is really tight.

MARKETS AND FED POLICY IMPLICATIONS: Due to calendar oddities and when the labor market data are collected, the employment report was delayed a week. That is actually too bad. There will only be four days between when we get the numbers and when the FOMC starts its two-day meeting. The Fed will not be able to react to the report. It is clear the economy is moving forward and may be picking up steam. Consumer confidence is very high, spending is decent, just about all sectors, including energy, are growing and the Fed’s dual mandate has essentially being met. There is every reason for the FOMC to announce its first rate hike of the year on March 15th. But what happens if the jobs report is weak? The January job gains were outsized and these data can be pretty volatile, especially in winter months. The Fed should look past one report and probably will, but this has been a group of decision makers who panicked at any sign of economic trouble in the past. That said, the messages being sent by Fed members have all been similar: A rate hike is coming and a half-decent employment report, which is the consensus right now, should be enough. Going into this year, few were predicting a March increase. I had the following meeting, in May. But the general belief was that it wouldn’t happen until June. A March increase creates the possibility that we could have more than the Fed’s implied three rate hikes, especially if the Republicans stop acting like disorganized Democrats and start actually passing something that has to do with the economy – or at least proposing something. As I keep saying, highly stimulative fiscal policy, especially in a labor shortage economy, is likely to cause the Fed to be more aggressive than most people think. Investors seem totally clueless or unconcerned by that possibility.  

January Income and Spending and February Manufacturing Activity

KEY DATA: Consumption: +0.2%; Income: +0.3%; Prices: +0.4%/ ISM (Manufacturing): +1.7 points; Orders: +4.7 points

IN A NUTSHELL: “It’s nice that manufacturing is accelerating, but it is worrisome that rising prices are wiping out household income gains.”

WHAT IT MEANS: If the consumer is going to lead the way, and household spending kept the economy afloat last year, then incomes better start growing faster because inflation is on the rise. Consumer spending was solid in January as households bought lots of soft-goods but not a lot of durables or services. Indeed, the only category reporting an increase was nondurables and that was due to increasing prices. Actually, the big story in this report was not the jump in spending but the sharp rise in consumer costs. The acceleration in inflation totally wiped out the rise in consumption and that raises questions about the ability of households to keep holding up the economy. Yes, incomes did increase nicely but spending power declined. We need wages and salaries, which rose moderately, to show bigger gains going forward. For the Fed, its preferred measure of inflation is now just a small tick away from its target. The Personal Consumption Expenditure deflator was up 1.9% over the year.

Manufacturers are going to watch the situation with the consumer carefully. The sector has been recovery very nicely and the Institute for Supply Management’s reported that activity accelerated again in February. This was the sixth consecutive month the headline index rose. Demand was strong, production increased and orders swelled. Hiring is still solid but not quite as strong as it had been.

Separately, the U.S. Census Department reported that construction activity fell in January as a large drop in public sector overcame a moderate rise in the private sector.

MARKETS AND FED POLICY IMPLICATIONS: The Fed is meeting in two weeks and we now have everything in position for a rate hike. The Beige Book summary of economic activity indicated that the labor shortages are getting worse and causing wages in some areas to rise faster. The members will be discussing that when they start the meeting on March 14th. Adding to the Fed’s concerns is that inflation is now at its target on likely to go through it in the next month or two. So, its two mandates, full employment and stable (i.e., target) inflation are being met. While last night’s presidential address didn’t provide any usable details about policy, it is clear the President is intent on pushing his agenda of tax cuts and spending increases. To whatever extent that happens, growth should accelerate by year’s end. So, the Fed has no reason to stand pat. Yes, rising prices are curtailing consumer spending power, but the labor market tightness offset some of that. More importantly, the Fed knows it has a long way to go before it hits a neutral or long-term rate and it needs to get going on that process before inflation becomes an issue. Will we get a rate hike in two weeks? The members are trying to get the word out that it is now a real possibility. I had been expecting the move at the following meeting in May, but now I think it is a toss up. Regardless, rates are going up and if the expansionary fiscal policy does get passed, look for them to rise faster than the market currently expects. I a sticking with my 100 basis points – one percentage point – increase this year.

January New Home Sales and February Consumer Confidence

KEY DATA: Sales: +3.7%; Over-Year: +5.5%; Prices: +7.5% / Confidence: -2.2 points

IN A NUTSHELL: “Consumers are confident and are buying homes, but builders are not getting their share of that demand.”

WHAT IT MEANS: The economy is solid, consumer confidence is high and growth in the United States and around the world is improving. That is a mess every new president should hope for. Today’s data only add to the belief that while conditions are not booming along, they are accelerating. New home sales rose moderately in January. Still, the level of demand remains less than most builders would like to see. Whereas existing home sales were the highest in a decade, newly built units are still selling at depressed rates. Indeed, sales need to increase between 15% and 20% for the market to be called solid. Looking across the nation, solid gains were seen in all areas except the West. As for prices, they are rose rapidly, though the gains have had their ups and downs. Inventory is also improving, though it is hardly what one would call excessive. There is not a whole lot of speculative building going on.

Consumer confidence has skyrocketed since the election so it was not a great surprise that the University of Michigan’s Consumer Sentiment index eased in February. Household views on current conditions improved but they were more cautious about the future. That also should shock no one. Not surprisingly, Republicans are borderline irrationally euphoric about the future while Democrats are borderline irrationally depressed. That makes clear how the political divide is affecting people’s views on the future economy and possibly spending patterns.

MARKETS AND FED POLICY IMPLICATIONS: The more data we get, the more it is clear that the economy is moving forward solidly. No, we are not going to get 3% growth on an extended basis soon, but we should move back to the 2.25% to 2.50% range that we had seen until the collapse of energy prices shut down the energy sector. It is interesting, though, to see the divide between the new home and existing home sectors. In both places, inventory is low and prices are rising, but the sales pace of newly constructed properties is disappointing. Apparently, the real deals are in existing homes and people are moving in that direction. For construction to rise faster, we need demand to increase, but builders will not put the shovel into the ground unless they have a clear indication the product will move. That is not an easy cycle to break, but it will keep us from revisiting the housing bubble days. We could use a few more homes on the market to spur traffic and ultimately sales. On the consumer front, reality needs to set in. The future is neither a rosy as Republicans think or dark as Democrats believe. But the longer it takes for the replacement of the ACA and for tax cuts and spending increases to be passed, the more concerned households, especially Republicans, will become about the future. This shows how politics could affect economic activity in this highly divided nation. When or if the uncertainty over fiscal policy takes hold in the equity markets is a wholly different question, but for now, optimism reigns.

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