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.