KEY DATA: Confidence: +1.7 points; Current Conditions: +5.3 points/ Home Prices: +0.4%; Year-over-Year: +4.7%
IN A NUTSHELL: “Despite the volatility in the markets, households are still confident, which means they should keep spending heavily.”
WHAT IT MEANS: When the University of Michigan’s mid-September reading on consumer sentiment was released, we saw a sharp decline. But that may have only been due to the shock of the wildly fluctuating stock markets. The final reading for the month was u from that initial level and that trend was reinforced as the Conference Board’s Consumer Confidence Index rose in September. People tend to spend money when they are comfortable about their current situation, especially their jobs, and they expect their incomes to grow. That is pretty much what the report indicated. The Present Situation Index jumped and the percentage of people saying they expect their incomes to rise in the next few months also was up solidly. There is some concern about the future, though. Whether that is due to the stock market declines or some issues finding jobs is not clear.
The data on the housing market remain solid. The S&P/Case Shiller national home price index rose moderately in July and over the year, it is up at a pace that is not excessive. That is not to say that there aren’t housing price surges occurring in some parts of the nation. Since July 2014, prices rose by double-digits in San Francisco and Denver and by 6% or more in Dallas, Portland, Las Vegas, Los Angeles Miami and Seattle. The national index is now only about 7% below the peak it reached in February 2007.
MARKETS AND FED POLICY IMPLICATIONS: We tend to watch the train wrecks, not the trains that merrily roll along and that seems to be the case right now when it comes to the economy. While some firms that have been battered by weak commodity prices are cutting back, the rest of the business sector is merrily rolling along, adding jobs, expanding output and making money. However, the losers seem to be setting the tone of the discussion. But you don’t get 3.9% GDP growth one quarter and have that followed up by something in the 2.5% range that is the current consensus for the third quarter if most firms are not doing well. And should we really worry about firms that might have had decent foreign sales but because of currency translation issues, their reported earnings are down? I don’t think that really matters, except for some quarterly numbers. Consumers are holding in there and that is driving domestically-oriented business activity. The economy is in good shape, no matter what is happening in Wall Street and I suspect the Fed members recognize that. Indeed, the Gang that Can’t Communicate Straight seems to getting its act together as another FOMC member, San Francisco Fed President Williams, has come out and indicated he thinks rates should rise this year. The ducks are getting in line, even if there are still some who are off on their own. While the markets expect a rate hike next year, most economists are now in the December camp, and that includes me.