Category Archives: Consumer Sentiment

Consumer Sentiment, Economic Indicators, Home Prices

December Consumer Confidence and August Home Prices

KEY DATA: Confidence: 92.6 (up 1.6 points)/National Home Prices (Year-over-Year): 4.6%

IN A NUTSHELL:   “The consumer is smiling and there is every reason to think the era of good feeling will continue next year.”

WHAT IT MEANS:  If 2015 is to be the year of that the consumer makes a comeback, it will have to start with people actually feeling good about things – and they do.  The Conference Board’s Consumer Index rose in December led by a surge in the current conditions measure.  People viewed the labor market more positively with jobs becoming more plentiful.  The perceptions of business conditions also improved.  As a consequence, the Present Conditions Index hit its highest level since February 2008, which was at the start of the Great Recession but well before the banks collapsed.  The only concern in the report was that the outlook for the future faded a touch.  It is hard to understand how the present economy is clearly improving but optimism is not when there have been few factors that have raised concerns about the future.  I guess record stock prices and soaring job gains are problems.  Or maybe it was the election results.  Or more than likely, it was just one month’s numbers.

As for housing, price gains continue to slow.  The latest S&P/Case-Shiller report showed that the deceleration in year-over-year price increases continued in October.  While the monthly change was negative, on a seasonally adjusted basis, the national index continued to post a solid rise.  That holds out hope that we are reaching a bottom on the price appreciation decline.  Nevertheless, it is not looking like we are in for a sharp rise in prices anytime soon.  Looking across the country, none of the twenty metro areas identified posted a double-digit rise from October 2013.  Similarly, none posted a decline over the month, when you look at the seasonally adjusted numbers, so that is something positive to work with.

MARKETS AND FED POLICY IMPLICATIONS: The year is coming to an end and the good news is that people are feeling positive about economic conditions.  All signs point to strong growth in 2015 and while optimism is great, households still need the wherewithal, i.e., income, to follow through on those thoughts.  That is the big unknown entering 2015 and how wage and salary gains play out will determine the strength of the economy.  I believe that job gains will be robust and by spring, labor shortages and with them, higher wage increases, will follow.  That is my wish for the New Year, but as the saying goes, “if wishes were horses, beggars would ride.”  In other words, we shall see.  On that note, let me say:

Have a Happy and Healthy New Year!

Consumer Sentiment, Economic Indicators, Gross Domestic Product

Revised Third Quarter GDP and November Consumer Confidence

KEY DATA: GDP: 3.9% (up from 3.5%); Year-over-Year: 2.4%; Corporate Profits: +2.1%/Consumer Confidence: down 5.4 points

IN A NUTSHELL:   “The economy really is growing solidly, which makes the decline in confidence very strange.”

WHAT IT MEANS:  Is the economy accelerating?  It sure looks that way.  The upward revision to the summer economic performance was a surprise, but it was not caused by anything that could be considered strange.  Both consumer and business spending was a bit better, but the changes were not large.  Similarly, government spending was cut, but also by a modest amount.  The trade deficit turned out to be wider than initially thought but businesses stocked up for the holiday shopping season at a greater pace, offsetting the negative impact of trade on growth.  All-in-all, the changes came in all the right places.  Inflation remained in check, which was expected, but there was a downgrade to personal income growth.  That is not good news for employees.  Corporate profits rose at a modest rate as well. 

Meanwhile, in the face of declining gasoline prices, improving economic activity, strong job gains and a lower unemployment rate, consumers suddenly turned sullen.  The Conference Board’s Consumer Confidence Index dropped sharply in November after having risen solidly in October.  There was an especially large decline in expectations as the labor market outlook seemed to dim.  These results were quite a surprise and given all the positive economic news, are hard to explain. 

Meanwhile, the slowdown in home price appreciation continued in September. The S&P/Case-Shiller national index fell slightly and the year-over-year gain came down again. It is hardly a surprise that the huge increases we had been seeing have disappeared but it is disturbing that we are not seeing some continued monthly gains.

MARKETS AND FED POLICY IMPLICATIONS: If the consumer confidence numbers had come in as expected, I would be talking about the economy being off to the races.  But the sharp decline does raise some questions, though I am not sure what they are.  Basically, there is every reason but one to believe that people should be feeling better about things.  That reason is wages, or lack thereof.  Nothing else should be standing in the way of this economy really picking up steam.  But businesses have done a great job of keeping worker demands for higher wages at bay and until the pendulum swings back to employees, firms will continue limiting pay increases to their workforces.  The Fed members are likely to take these reports in stride, as they really do not change anything.  But investors have to start wondering what shoppers are really thinking.  I believe this will be a really solid holiday season, but we need happy consumers for that to happen. 

Consumer Sentiment, Economic Indicators, New Home Sales, Pending Home Sales

October New Home Sales, Pending Home Sales and November Consumer Confidence

KEY DATA: New Homes: +0.7%/Pending Sales: -1.1%/Consumer Comfort: up 2.2 points

IN A NUTSHELL:   “The housing market is marking time but improving consumer confidence may be coming at just the right time.”

WHAT IT MEANS:  The housing market has been adding to growth since the winter wipeout but the impact has slowed.  That trend may be continuing.  New home sales did increase a touch in October, but only because the September pace was revised downward.  Builder confidence has been rising so the small gain, though better than some thought, was a surprise to me.  The level of purchases has been in a tight pattern for the past three months and it is still below 500,000 a month, annualized.  Strong sales would be around one million, so the sector has a long way to go.  Demand was strong in the Northeast and Midwest but off in the South and West.  Prices, however, did surge.  The high end of the market looks like it may be coming back.

Pending home sales, which are signed contracts for existing homes, dropped in October.  There were declines in all regions except the Northeast, which posted a modest rise.  This does not bode well for existing home sales, which are likely to rise minimally, if at all,

On a positive note, The Thompson Reuters/University of Michigan consumer sentiment index rose in November.  That was in sharp contrast to the large decline posted by the Conference Board’s confidence index.  There was a small fall off from the mid-month reading, but sentiment hit a level not seen in more than seven years.  Both current conditions and expectations were up.  This report is also supported by an increase in the Bloomberg Consumer Comfort Index to its highest level since December 2007. 

MARKETS AND FED POLICY IMPLICATIONS: Housing is just not improving very much at all.  But while it is critical that this market get going, for the holiday shopping season, the consumer numbers are what really matter.  I had mentioned in my commentary on the Conference Board’s confidence number that the decline made little sense.  That two other reports point to improving confidence is more in line with logic.  But logic and household perceptions don’t necessarily go hand-in-hand so we have to be a little uncertain about what people are thinking.  If confidence is rising, which I tend to think it is, then we could be in for a very good fourth quarter spending number.  That is what we really need.  So on that note, let me say to everyone:

Have a Happy Thanksgiving!

Consumer Sentiment, Durable Goods Orders, Economic Indicators, Home Prices

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. 

Case-Shiller Home Prices, Consumer Sentiment, Economic Indicators

September Conference Board Consumer Confidence and July Case-Shiller Housing Prices

KEY DATA: Confidence: -7.4 points/Housing Prices (National): +0.5%; Year-over-Year: +5.6%

IN A NUTSHELL:   “Whether the sharp decline in consumer confidence is the result of rising international concerns or a slowing economy makes a big difference, so it is premature to start worrying.”

WHAT IT MEANS:  With the September jobs report on the horizon, we are looking for signs that the economy could be either stronger or weaker than expected.  Today’s reports were not particularly great, though they may not be as worrisome as the headlines imply.  First, there was a huge drop in the Conference Board’s Consumer Confidence Index.  That was a shocker as the August reading was the highest in nearly seven years.  The details were not particularly pretty either, as current conditions were down, though at only half the pace that future expectations dropped.  It is that difference that raises real questions about what is going on.  A cratering in confidence usually is caused by an event but there has been no major negative economic crisis.  Indeed, with gasoline costs falling, the logic would have been for consumers to feel better.  However, the emergence of ISIS/ISIL and the need to get militarily involved again in the Middle East was a very negative political event and that could be behind the drop.  If that was the driving force, the impact on spending should be limited as political issues usually don’t change consumption patterns significantly for any extended period.

As for housing, the S&P/Case-Shiller national index of home values rose but the pace of gains is slowing.  The year-over-year rise was the smallest in a couple of years.  Also, the 20-City Index of large metropolitan areas declined over the month.  Only three areas, Las Vegas, Miami and San Francisco, rose by double-digits since July 2013.  The deceleration is not bad as the last thing we want is for bubbles to start forming again. Prices need to continue rising moderately so homeowners’ equity can increase and the normal churn in the market can return.

Two other reports released today point to modest September growth.  The Paychex-IHL Small Business Jobs Index showed slowing small business hiring while the ISM-Chicago manufacturing index moderated.  So far, the September numbers have not been anything stellar.

MARKETS AND FED POLICY IMPLICATIONS: I will wait on the confidence issue as the Middle East worries may be dominating.  But any slowdown in spending would not be helpful as we need job growth to be strong and the unemployment rate to continue falling.  Of course, we will know more on Friday, but until then, we can only speculate, which is the most fun.  As for investors, the confidence drop has to hurt and given the unrest in Hong Kong, it is hard to see how any rational investor could feel great today.  Note, I said rational.  Remember, markets may be efficient by they don’t have to be rational.

Consumer Sentiment, Durable Goods Orders, Economic Indicators, Home Prices

August Consumer Confidence, July Durable Goods Orders and June Home Prices

KEY DATA: Confidence: +2.1 points: Current Conditions: +6.7 points; Expectations: -1 point/ Orders: +22.6%; Excluding Aircraft: +1.6%/ Home Prices (Monthly): 1%; Year-over-Year: 8.1%

IN A NUTSHELL:  “Consumers are getting some real smiles on their faces and that should help propel spending, but only if wage increases improve.”

WHAT IT MEANS: There were a number of key reports released today and maybe the most interesting one was the Conference Board’s Consumer Confidence numbers.  Overall confidence rose solidly again in August, the fourth consecutive increase.  The level hasn’t been this high since October 2007.  The eye-opening component was the Present Situation index, which surged.  There was a sharp rise in the percentage of respondents who thought that jobs were plentiful and a modest decline in those who felt it was difficult to find a position.  Strangely, fewer believe job openings will rise in the near future.  Rationality may not be at work here.  The other key finding is that people are not overly optimistic about their incomes increasing going forward.  That, even more than their general view of the world, could keep households from spending briskly.

Orders for big-ticket items skyrocketed in July, but when civilian aircraft orders rise 318%, you know that the headline is largely meaningless.  Excluding private and defense aircraft, orders did jump and that was due to strength in the vehicle sector, which was up over 10%.  Otherwise, the numbers were largely off, with only communications posting a nice gain.  Business capital spending eased, but quite modestly compared to the jump posted in June.  Backlogs are building nicely and that should mean expanding production going forward.

Home prices continue to rise, but the rate of increase is decelerating.  The S&P/Case Shiller 20-city index was up decently in June and has moved back to fall, but the gain over the year was down in all twenty cities.  The price index is back to where it was in fall 2004.

MARKETS AND FED POLICY IMPLICATIONS: Consumers are feeling a lot better about economic conditions, but they are not exuberant about their income possibilities.  That is holding back spending and until the labor market tightens further, wage increases will remain limited.  That is why the debate over the slack in the workforce is so important.  In addition, home price gains are slowing.  While that may help affordability, it hurts the churn in the market as fewer homeowners will see their equity levels rise to where they can once again sell their homes.  That said, the jump in orders does point to continued decent overall economic growth but until we get the consumer going, strong growth will remain a wish not a reality.  Investors should understand that, even as they bid up prices.  But these reports only add to the divisions that exist at the Fed.  It’s still the labor market and we don’t get the August employment report until the Friday after Labor Day.

Consumer Sentiment, Economic Indicators, Producer Price Index

May Producer Price Index and Mid-June Consumer Sentiment

KEY DATA: PPI: -0.2%; Goods: -0.2%; Excluding Food and Energy: 0%; Services: -0.2%/Michigan Sentiment: 81.2 (down 0.7 point)

IN A NUTSHELL: “Producer inflation pressures took a holiday in May, but it is unclear if that is just a temporary lull or a movement back to a trend of modest wholesale cost increases.”

WHAT IT MEANS: Inflation pressures, what inflation pressures?  After two months of sharp increases in wholesale prices, there were growing concerns that we might be in for some acceleration in inflation.  Those fears were eased, at least to some extent, with the May decline in the Producer Price Index.   The retrenchment was in both goods and services.  Food costs, which had been skyrocketing, reversed field and fell.  The huge volatility in this segment is not unusual but it does create some caution in determining future trends.  On the energy side, the reduction we saw is likely to turnaround as the craziness in Iraq is roiling the oil markets.  While food and energy prices have been changing wildly, consumer costs remain tame.  There was one place where rising prices have to be watched closely.  Transportation services costs are jumping and to the extent they represent rising economic activity – and the growing need to move goods and people – the increase in this component could be signaling that improving conditions could trigger some grab for higher prices.  Looking into the future, there does not appear to be any major pressures building that would be a cause for alarm.

In a separate report, the Thompson Reuters/University of Michigan mid-June reading of consumer sentiment dipped again.  It is interesting to note that in the May report, people felt reasonably good about the economy.  However, they are becoming more and more depressed about their incomes as they don’t expect to see any gains this year.  There is a real disconnect in the business community.   They are doing everything possible to keep wages from rising but then they complain that consumers are not buying.  It is hard to buy more goods when your income is stagnating.  I have said this many times and now we see that the hard cap on wage gains is affecting confidence.

MARKETS AND FED POLICY IMPLICATIONS: Inflation is not likely to be a major issue for the Fed for quite some time.  While wholesale costs are rising at a moderate pace, firms are not passing much of that through and consumer inflation is below the Fed’s desired level.  It will take a lot stronger growth for an extended period for inflation to become a problem.  That allows Fed Chair Yellen to have free reign to keep rates low.  Confidence, wages and consumer spending will remain in its death trap until firms are forced to start bidding for workers.  At that point, spending will pick up and improving confidence will boost it.  But don’t expect anything spectacular until the unemployment rate gets below 6%.   At that point, labor shortages should be widespread enough that wages will start rising fast enough to trigger not only better growth but also words of warning from the Fed about rate hikes.  That time may not arrive until later this year.  Investors will likely be more concerned with Iraq than May wholesale prices. I am not sure how much sense that really makes, as it is not clear there will be any major dislocation of oil supplies.  It is an excuse, though, to take prices up.