KEY DATA: ECI (Over-Year): +2.8%; Wages: +2.9%/ Confidence: +5 points/ Pending Sales: +3.8%/ Home Prices (Over-Year): +4%
IN A NUTSHELL: “Confidence is strong, labor costs are relatively restrained and the housing market is stabilizing, so what is the Fed worried about?”
WHAT IT MEANS: Is the economic lull now null? I think that is a fair thing to say. First quarter growth was okay, even given the softness in consumer and business spending. With job gains also decent and labor market tight, there is every reason to expect that worker compensation costs would accelerate. We are even seeing firms announce future increases in wages to maybe even as much as $20 per hour in the future. But happy days for workers is not here yet. The Employment Cost Index, which includes both wages and benefits, rose at a moderate pace in the first quarter and the gain over the year actually decelerated. That was true for both wages and benefits and for most industries and occupations. There were some exceptions in those industries that are suffering from extreme labor problems, such as transportation, warehousing and hospitality, but there were not many others. Basically, there may be labor shortages, but firms are not trying to attract workers by raising compensation significantly.
The lack of sharp increases in wages is not depressing households. The Conference Board’s Consumer Confidence Index rose solidly in April and the details were even better. Jobs were more plentiful, the current economy was better and the outlook for growth and income improved. The index is below its peak, but it is still at a high level, indicating the slowdown in spending we saw early in the year should dissipate.
As for the housing market, things there may be improving – at least a little. Pending home sales jumped in April. Demand in the West surged, was up solidly in the South and Midwest but eased in the Northeast. Still, the index is off from the levels posted in the first half of 2018, so we may not see a huge rebound in sales.
One aspect of the housing market that doesn’t appear to be changing is the slowdown in price gains. The Case Shiller index posted a moderate increase from February 2018, but the year-over-year rise continued to decelerate. We are even starting to see some weakness in San Francisco – yikes. In the past year, the increase in the Bay Area was the second slowest of the twenty large areas in the index. Only San Diego posted a smaller gain. The sharp rise in prices in so many areas has priced people out of the market and coupled with the lack of inventory, helped create the softening in sales. Thus, an easing back in housing price gains can only be good for the market.
MARKETS AND FED POLICY IMPLICATIONS: Friday we get the April jobs report and it should be good, though maybe not great. Regardless, with growth decent, the labor market tight and housing at least stabilizing, the Fed members, who are starting their two day meeting today, should have little to complain about. Yet there is a concern. Inflation is actually decelerating and is back below the target. As long as that is the case, the Fed can hide behind the lack of inflation to support their do nothing policy. I suspect that will be the argument when the statement is released early tomorrow afternoon and Chair Powell holds his press conference afterward. As for the markets, earnings are driving decisions and they have tended to be good, with the usual random misses. The economic data are not arguing investors should be greatly worried.