Category Archives: Home Prices

January Supply Managers’ Non-Manufacturing Survey, November Durable Goods Orders and Home Prices

INDICATOR: January Supply Managers’ Non-Manufacturing Survey, November Durable Goods Orders and Home Prices

KEY DATA: ISM (Non-Manufacturing): -3.1 points/Employment: -0.7 point/Orders: -0.7%; Capital Spending: 0%/Home Prices (monthly): +0.1%; Over-the-Year: +5.5%

IN A NUTSHELL:   “The economy hardly ended the year with a bang, but only because the recent pace was not sustainable.”

WHAT IT MEANS:  It would be great if we could get a string of five percent growth rates, but the likelihood that the third quarter pace will be duplicated anytime soon is not great.  What would be good is if the economy eases only modestly and that looks to be the case.  The Institute for Supply Management’s December index of non-manufacturing activity fell solidly, but there is no reason to worry.  Yes, just about every component posted decent declines, but the levels also matter and they are still pointing to decent growth.  That is, the services sector is coming down from extremely high levels to more sustainable and solid levels.  Indeed, hiring continues to be strong and dropped the least of all components.  The one change that does cause a little concern is the sudden shrinkage in order books.  The thinning was modest, though.

As second indication that the summer’s breakneck pace is cooling was the drop in durable goods orders in November.  Interestingly, while these data are usually really volatile, there was no sector, except defense aircraft, that posted either a large change.  As for business spending, executives continue to be cautious, as capital goods orders were flat after having dropped the previous two months.  I guess a strong economy is not enough to get firms to invest in the future.

Housing prices look like they have finally stabilized.  The year-over-year increase had been slowing for quite some time but we the latest data are indicating the drop is largely over.  CoreLogic’s November index showed a rise in both the monthly change and the yearly increase.  Every state and 96 of the top 100 metro areas posted increases since November 2013.

MARKETS AND FED POLICY IMPLICATIONS: The quarterly GDP growth rates always bounce around even when conditions are great.  The summer’s 5% pace was way above expectations but we really are not sure what trend growth will look like.  I think we can expand at or above 3.5% this year.  Consensus is around 3%.  As long as energy prices don’t spike, consumers will have lots more income to spend and the likely gains in wages will only add to purchasing power.  Ultimately, businesses will recognize that the U.S. economy has turned the economy and investment will rise with that epiphany.  Think about it.  The Conference Board’s CEO Confidence Index declined in the third quarter even as the economy was soaring.  So who knows what drives thinking in the corner office?  Maybe executives are more worried about the rest of the world, which is clearly a concern.  But the U.S. is hardly a problem.  Regardless, we get the December employment numbers this Friday and that is what will likely drive investor and Fed thinking.  Don’t expect another job gain number anywhere near 300,000, but it should be decent and the unemployment rate could decline even if the participation rate rises.

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!

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. 

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.