KEY DATA: Confidence: +4 points/ New Home Sales: +14%; Case-Shiller Home Prices: +1.4%; Over-year: +19.8%; FHFA Home Prices: +1%; Over-Year: +18.5%
IN A NUTSHELL: “Consumer confidence is stabilizing and that shows in strong housing demand and continued soaring home prices.”
WHAT IT MEANS: Inflation may be hurting consumer spending power, but that doesn’t mean they are terribly distressed about it and have stopped buying, especially when it comes to big-ticket items. The Conference Board Reported that in October, consumer confidence started to stabilize after three months of declines. Yes, the index did rise solidly, but the details were decidedly mixed. Fewer respondents said business conditions were good, but a smaller percentage also indicated they thought conditions were bad. When it came to the labor market, there was a similar split: A declining share indicated jobs were plentiful and a lower proportion thought they were hard to get. You win some and you lose some and the net effect is that the details were not a ringing endorsement of improving confidence. That said, the expectations index did rise, though the details were similarly inconsistent.
New home sales soared in September, which should not have surprised anyone. Given the lack of supply of existing homes, families searching for a different place to live had to give the new housing market a chance. And they did, despite a nearly ten percent rise in prices over the year. While home construction may be somewhat constrained, the number of new homes for sale is at a fairly normal level. That is what supported the strongest sales pace since March and the availability of product should be able to support continued gains in new home purchases for a while.
Speaking of housing prices, two closely watched measures posted strong increases in August. The Case-Shiller index surged again, and the year-over-year rise is threatening twenty percent. The Federal Housing Finance Agency’s Index also jumped in August, but slightly less than Case-Shiller. Still, increases in prices of over eighteen percent are not something to be disappointed in, at least if you are selling your home.
IMPLICATIONS: Inflation is running hot not simply because of supply chain constraints. The lack of product is allowing firms to raise prices and continue planning to increase prices in the future because strong income growth is supporting solid demand. That is happening despite the ending of the government’s supplemental unemployment payments and the closing out of most of the business subsidies. The government did its job and now it is the private sector’s turn and so far, businesses are picking up the slack.Yes, growth is ebbing, but not for a lack of trying. If vehicle dealers don’t have inventory, sales cannot grow rapidly. If households don’t want to put their homes on the market, home sales will not surge. If inputs are tied up in ships sitting in harbors, manufacturing and construction activities cannot expand. The resulting “slower growth” doesn’t imply a weak economy. There is nothing soft about it, at least when it comes to demand. And isn’t that what it should be all about? Unfortunately, inflation is a growing concern. Firms have pricing power, and they seem to be enjoying using it. They would be fools not to. The worry is the new price-increase strategy will become embedded in the economy. If consumers think it will happen and businesses expect to be able to raise prices faster than they had pre-pandemic, the stage is set for higher trend inflation. The FOMC is meeting next week and look for a statement that tapering will begin, most likely in December. Don’t be surprised if the expectation is that it will be done before summer. And it would behoove the Fed members to make it clear they recognize the possibility that inflation could run hotter and longer than thought, but they are prepared to deal with it. That would put the markets on notice that the Fed could raise rates a lot sooner than expected just a few months ago.