The Weekly Economic & Real Estate Forecast – 11/12/18 to 11/16/18

What I Saw Last Week

Consumer Credit rose by $11.0 billion in September – below my forecast for an increase of $14.5 billion – after increasing by an upwardly revised $22.8 billion (from $20.1 billion) in August.

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The jump in consumer credit was driven entirely by non-revolving credit, which increased by $11.2 billion to $2.909 trillion as revolving credit decreased by $0.3 billion to $1.041 trillion.

The takeaway from the report is that it reflects a deceleration in credit expansion that could contribute to concerns about the U.S. economy hitting/nearing peak growth.

Consumer Sentiment in early November edged down to 98.3 from the final October number of 98.6.  I had forecast a drop to 98.0.

The Current Economic Conditions Index edged up to 113.2 from 113.1 while the Index of Consumer Expectations slipped to 88.7 from 89.3.

Con Sent

The takeaway from the report is that stock market sell-off in October had no real impact on consumer sentiment, which was rooted more in favorable views about income expectations and job growth that are key drivers of consumer spending.

What to Watch for This Week

Inflation – as measured by the Consumer Price Index – rose by 0.1% in September with the core rate up by 0.1%.  The October number is likely to show the total rate rising by 0.3% and the core rate up by 0.2%.

U.S. Retail Sales in September rose by 0.1% with core sales (ex-auto) dropping by 0.1%.  I am looking for the October figures to show total sales rising by 0.6% and core sales up by 0.5%.

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The Weekly Economic & Real Estate Forecast – 11/05/18 to 11/09/18

What I Saw Last Week

Income & Spending data for September both exactly matched my forecast for incomes rising by 0.2% and spending was up by 0.4%.

I&S

The jump in personal income was led by a 0.2% increase in wages and salaries and a 0.9% jump in rental income. Those increases were offset somewhat by a 0.8% decline in proprietors’ income.  Meanwhile, real disposable personal income (accounting for inflation) was up 0.1% after increasing 0.2% in August. Real spending (PCE) was up 0.3% after increasing 0.4% in August.

The key takeaway from the report is the recognition that PCE price inflation decelerated to 2.0% year-over-year from 2.2% in August. Core PCE price inflation held steady at 2.0%. The inflation readings are on par with the Federal Reserve’s longer run target, yet they haven’t moved to such a degree that they are going to alter the Federal Reserve’s current policy stance, which involves an expectation for further gradual rate hikes.

Case Shiller Index numbers for August showed the 20-City Index up by 5.5% year-over-year – I had forecast 5.1%.

CS

Following reports that home sales are flat to down, price gains are beginning to moderate. Rising prices may be pricing some potential home buyers out of the market, especially when combined with mortgage rates approaching 5% for 30-year fixed rate loans.

The market is beginning to balance more between supply and demand, following one of the strongest seller’s markets in decades. There is little concern, however, that prices will actually fall, only that the gains will fall back to more normal, historical levels of 3% to 4% annually.

Even as the gains shrink, some local markets continue to show price strength. Las Vegas, San Francisco and Seattle saw the biggest annual gains among the 20-city index.

In August, Las Vegas home prices jumped 13.9% year-over-year, followed by San Francisco with a 10.6% increase and Seattle with a 9.6% gain. Four of the 20 cities reported greater price increases in the year ending August 2018 versus the year ending July 2018.

As you will see from the table above, I have started to look at the change in momentum in price gains.  This looks as the rate of increase over the past 12-months and compares that with the previous 12-month period.  As can be seen, 12 of the 20 cities in the Index are seeing gains slow and Seattle is leading the way with a drop of 3.6%.  I expect that we will see more cities start to slow as we move toward a more balanced market.

Consumer Confidence in October came in at 137.9. I had forecast 140.1.

The Present Situation Index increased from 169.4 to 172.8 while the Expectations Index rose from 112.5 to 114.6.

The takeaway from the report is that strong employment growth continues to underpin favorable consumer attitudes about present-day conditions and the outlook.

U.S. Construction Spending in September remained unchanged – I had forecast total spending up by 0.3% – following an upwardly revised 0.8% increase (from +0.1%) in August.

Total private construction rose 0.3% month-over-month, led by a 0.6% increase in residential spending and a 0.1% increase in non-residential spending. New single-family construction spending fell 0.8%.

Total public construction spending declined 0.9% month-over-month, with almost all of that decline stemming from a 0.8% decline in nonresidential spending. A 1.1% decline in highway and street spending was a key drag.

On a year-over-year basis, private construction spending was up 6.1% while public construction spending was up 11.0%.

The takeaway from the report is the recognition that there was no growth in public construction spending in September.

U.S. Non-Farm Payrolls grew at an impressive rate in October, the labor force participation rate rose, and most importantly, average hourly earnings growth trended higher to 3.1% year-over-year, its strongest pace since April 2009.

October nonfarm payrolls increased by 250,000 (I had forecast a much lower rate of 142,000 because of Hurricane Michael, but that was clearly a non-issue). Over the past three months, job gains have averaged 218,000 per month.

September nonfarm payrolls were revised down to 118,000 from 134,000 while August payrolls were revised up to 286,000 from 270,000.

October average hourly earnings were up 0.2% after increasing an unrevised 0.3% in September. Over the last 12 months, average hourly earnings have risen 3.1%, versus 2.8% for the 12 months ending in September.

The U.S. Unemployment Rate in October met my forecast for it to remain unchanged at 3.7%.

Persons unemployed for 27 weeks or more accounted for 22.5% of the unemployed versus 22.9% in September. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 7.4% versus 7.5% in September.

The takeaway from the October employment report is that it is consistent with labor market trends that will keep the Federal Reserve on a tightening path.

What to Watch for This Week

Consumer Credit rose by $20.1 billion in August and the September number should show an increase of $14.5 billion.

Consumer Sentiment in early November should come in at 98.0 from the final October figure of 98.6.

The Weekly Economic & Real Estate Forecast – 10/29/18 to 11/02/18

What I Saw Last Week

U.S. New Home Sales in September dropped 5.5% to a seasonally adjusted annual rate of 553,000 – I had forecast an increase to 630,000.

NHS

That was the weakest pace since December 2016 and it followed on the heels of a sharp downward revision for August to 585,000 (from 629,000).

The median sales price of $320,000 was down 3.5% from the year-ago period. The average sales price of $377,200 was down 0.6% from the year-ago period

There was a 7.1 months’ supply of new homes based on the September sales pace. That is the highest supply level since March 2011.

The key takeaway from the report is that it underscores how demand is being impacted by rising mortgage rates. Median and average home prices were both down year-over-year, yet that didn’t seem to provide much of a lift for new home sales.

The NAR Pending Home Sales Index for September rose 0.5% – I had forecast a drop of 0.2%.

PHS

According to the Index, activity broke through in the Midwest and West, where, from August to September, the Index tracked up 1.2% and 4.5%, respectively. Compared to September 2017, however, the Index was lower, down 1.1% in the Midwest and 7.4% in the West.

Meanwhile, in the Northeast, the Index trickled down 0.4% from the month prior, and 2.7% below its level in September 2017. In the South, the Index tumbled 1.4% from the month prior, but was 3.3% above last year’s reading.

The takeaway from this report is that buyers are out there on the sidelines, waiting to jump in once more inventory becomes available and the price is right. When compared to 2000, when the housing market was considered very healthy, home sales figures were roughly equivalent, and the affordability conditions were much lower compared to now. So even though affordability has been falling recently, the demand for housing should remain steady.

The first take on U.S. growth in the third quarter of 2019 showed GDP rising by 3.5% – marginally above my forecast for 3.3%.

GDP

The key takeaway from the report is that real final sales of domestic product (which subtracts the change in private inventories) was up just 1.4% — the weakest growth rate since the fourth quarter of 2016. Additionally, with the largest group of U.S. tariffs hitting in September, we may well see slower growth in the 4th quarter.

The final Consumer Sentiment figure for October was 98.6, down slightly from the preliminary figure of 99.0 – I had forecast no change.

CSI

The Current Economic Conditions Index slipped to 113.1 from the preliminary reading of 114.4 while the Index of Consumer Expectations edged higher to 89.3 from the preliminary reading of 89.1.

The takeaway from the report is that consumer sentiment has not been unduly affected by the stock market sell-off or the jump in interest rates. The outlook for consumers is still rooted in feelings about job security.

What to Watch for This Week

Income & Spending data for September should indicate incomes rising by 0.4% and spending up by 0.5%.

Case Shiller Index numbers for August are likely to show the 20-City Index up by 5.9% year-over-year matching the July figure.

Consumer Confidence in October should be down from the September level of 138.4.  Look for it to come in at 135.8 as concerns over dropping stock prices factor in to the Index.

U.S. Construction Spending rose by 0.2% in August on the back of rising public construction spending. I expect to see the September data show total spending up by another 0.2%.

U.S. Non-Farm Payrolls in October should have risen by 190,000 following the September increase of 134,000.

The national Unemployment Rate in October should remain at 3.7%.

 

The Weekly Economic & Real Estate Forecast – 10/22/18 to 10/26/18

What I Saw Last Week

U.S. Retail Sales were, again, a disappointment with total sales rising by just 1% and core sales (ex-auto) dropping by 0.1%.  I was looking for total sales to have risen by 0.6% and core sales up by 0.4%.

Retail sales

The weak spots for retail sales in September were food services and drinking places (-1.8%), gasoline stations (-0.8%), department stores (-0.8%), health and personal care stores (-0.3%), and grocery stores (-0.1%). There were some areas of strength, notably, non-store retailers – that includes e-commerce – rose 1.1%, furniture and home furnishing stores were also 1.1% higher, electronics and appliance store sales rose 0.9%, and sales at motor vehicle and parts dealers rose by 0.8%.

The takeaway from the report is that core retail sales, which factor into GDP growth models, have not seen significant growth and this may factor negatively for Q-3 real GDP growth prospects.

Builder confidence in the market for newly-built single-family homes rose one point to 68 in October according to the NAHB Housing Market Index. I was expecting to see no change from the September level.

HMI

Notably, builder confidence levels have held in the high 60’s since June of this year as they continue to see solid housing demand, fueled by a growing economy and a nearly 50-year low for unemployment. Additionally, lumber prices have declined for three straight months from the elevated levels seen earlier this summer and that has also helped to reduce some cost pressures.  That said, builders will need to manage supply-side costs to keep home prices affordable and that is a significant task.

September Housing Starts dropped by 5.3% month-over-month to a seasonally adjusted annual rate of 1.201 million units. I had expected a smaller drop to 1.221 million.

Starts

Single family starts dropped by a more modest 0.9% to 871,000 but there was a significant contraction in multifamily starts that dropped by 15.2% to 330,000.

Total starts were up 29.0% in the Northeast (single-unit down 6.7%); down 14.0% in the Midwest (single-unit up 10.2%); down 13.7% in the South (single-unit down 6.8%); and up 6.6% in the West (single-unit up 7.0%).

The number of units under construction at the end of the period stood at a seasonally adjusted annual rate of 1.129 million. That left the third quarter average at 1.124 million, up less than 0.1% from the second quarter average, so it won’t account for much in terms of a positive input into Q-3 GDP growth forecasts.

U.S. Building Permits were down 0.6% to a seasonally adjusted annual rate of 1.241 million – I had anticipated a slight rise to 1.273 million – although the drop was solely due to a 9.3% decline in permits for buildings with five units or more; single-family permits were up 2.9% to 851,000.

Permits

The takeaway from the September Housing Starts and Building Permits report is that the supply of new homes isn’t picking up fast enough to meet the demand for new homes at more affordable price points. Accordingly, overall home sales activity will continue to be curtailed by affordability constraints.

U.S. Existing Home Sales in September came in at an annual rate of 5.15 million units – I had anticipated a smaller drop to 5.3 million.  This represents the lowest number of sales (on an annualized basis) since November of 2015. Total sales were 4.1% lower than the same period a year ago.

EHS

Existing home sales across regions showed the Northeast down by 2.9%; the Midwest unchanged; the South down by 5.4%; and the West 3.6% lower.

The inventory of homes for sale at the end of September decreased from 1.91 million to 1.88 million. The inventory was up 1.1% from a year ago. Unsold inventory stood at 4.4 months of supply versus 4.3 months in August. This is below the 6.0-month supply typically associated with a more balanced market.

The takeaway from the report is that home sales activity was pressured by the limited supply of lower-priced homes and the affordability constraints presented by higher mortgage rates.

What to Watch for This Week

U.S. New Home Sales rose 3.5% to a seasonally adjusted annual rate of 629,000 in August and I anticipate that the September figure will show a slight increase to 630,000.

The NAR Pending Home Sales Index for September should show a drop of 0.2% as overall sales velocities continue to slow.

The first take on U.S. growth in the third quarter of 2019 should show GDP rising by 3.3% – down from the Q-2 growth rate of 4.2%.

I anticipate that the final Consumer Sentiment figure for October will remain at the early month level of 99.0.

The Weekly Economic & Real Estate Forecast – 10/15/18 to 10/19/18

What I Saw Last Week

Inflation, as measured by the Consumer Price Index, rose by 0.1% with the core rate also up by 0.1% (I had forecast both to have risen by 0.2%).

CPI

The monthly increases left total CPI up by 2.3% year-over-year, versus 2.7% in August, and the core rate up by 2.2%, unchanged from August.

The takeaway from the report is that it helped temper concerns about rising inflation for the time being yet, with total CPI and core CPI both running above the Fed’s long-run inflation target of 2.0%, it still leaves little reason to think the Fed is going to back away from a rate hike in December.

The preliminary Consumer Sentiment number for early October came in at 99.0 from the final September figure of 100.8 – I had forecast a more modest drop to 100.0.

CS

Of note is that there was hardly any overlap in the time interviews for the survey were conducted and the recent sell-off in the stock market, suggesting that the impact of the sharp stock market pullback could register more noticeably in the final reading for October.

The takeaway from the report is that it revealed some budding concerns about inflation crimping real income expectations, which is something to be watched closely considering spending is driven more by income growth than consumer confidence.

What to Watch for This Week

U.S. Retail Sales in August were generally a disappointment with total sales rising by just 1% but core sales rose by 0.3%.  I expect to see significant improvement in the September number that should show total sales rising by 0.6% and core sales (ex-autos) up by 0.4%.

The NAHB Housing Market Index has been steady at 67 for the past two months and I am looking for the October number to stay at the September level.

August Housing Starts rose by 9.2% month over month to a seasonally adjusted annual rate of 1.282 million units. I expect to see that figure pull back to 1.221 million.

U.S. Building Permits dropped 5.7% in August to a seasonally adjusted annual rate of 1.229 million units.  Look for the September number to rise to 1.273 million.

U.S. Existing Home Sales in August were unchanged at a seasonally adjusted annual rate of 5.34 million units. I believe that the September number will show a modest pull back to an annual rate of 5.30 million units.

The Weekly Economic & Real Estate Forecast – 10/08/18 to 10/12/18

Total U. S. Construction Spending rose by 0.1% in August – below my forecast an increase of 0.4% – following a downwardly revised 0.2% (from 0.1%) in July.

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Total private construction spending declined 0.5% due to a 0.7% decline in residential construction and a 0.2% decline in non-residential construction.  On a year-over-year basis, total construction spending is up 5.3% with private construction spending up 4.4% and public construction spending up 14.0%.

The takeaway from the report is that public construction spending has continued driving the overall growth rate while private construction spending growth has moderated – likely due to cost constraints.

Non-Farm Payroll growth in September was much weaker than expected.  That will be attributed by some sources to the effects of Hurricane Florence, but the overriding point is that upward revisions to August non-farm and private sector payrolls more than compensated for the headline misses for September.

payrolls

September non-farm payrolls rose by 134,000 (I had forecast 184,000). Over the past three months, job gains have averaged a pretty impressive 190,000 per month. Revisions were substantial with August payrolls revised up to 270,000 from 201,000 and July payrolls revised up to 165,000 from 147,000.

The U.S. Unemployment Rate dropped to 3.7% from 3.9 – I had forecast a drop to 3.8%.

Urate

Persons unemployed for 27 weeks or more accounted for 22.9% of the unemployed versus 21.5% in August and the U-6 unemployment rate – which accounts for unemployed and underemployed workers – was 7.5%, versus 7.4% in August.

The takeaway from the employment/unemployment reports is that the labor market is solid and still simmering with the prospect of pent-up wage pressures being unleashed at any point as employers encounter difficulty in finding qualified workers.

Consumer Credit rose by $20.1 billion in August – well above my forecast for an increase of $14.8 billion.

Non-revolving credit increased by $15.2 billion to $2.894 trillion while revolving credit rose by $4.8 billion to $1.042 trillion.

Consumer credit increased at a seasonally adjusted annual rate of 6.25% in August, with revolving credit increasing at an annual rate of 5.5% and non-revolving credit increasing at an annual rate of 6.5%.

The takeaway from the report is that it reflects a pickup in credit demand that should be construed as an offshoot of a strengthening economy led by a solid labor market.

What to Watch for This Week

Inflation in September, as measured by the Consumer Price Index, is likely to have risen by 0.2%.

Consumer Sentiment has been on a tear with the September number at its highest level since 2004. Look for the preliminary October level to drop slightly to 100.0 from 100.8.

The Weekly Economic & Real Estate Forecast – 10/01/18 to 10/05/18

What I Saw Last Week

Case Shiller Index data for July showed the 20-City Index up by 5.9% year-over-year – down from an annual growth rate of 6.4% in June.

CS

Home prices are still rising, but the pace of the gains continues to slow, as potential homebuyers hit an affordability wall and sellers cave to a new reality.

It is clear that rising homes prices are beginning to catch up with the market.  Sales of existing single-family homes have dropped each month for the last six months and are now at the same level as seen in July of 2016. Notably, housing affordability has worsened substantially since the start of the year.

Las Vegas, Seattle and San Francisco continue to see the biggest annual gains in home prices, with increases of 13.7% , 12.1% and 10.8% respectively. Five of the 20 cities saw home price gains accelerate annually compared with June.

While it is clear that demand for housing is still strong, a continued shortage of for-sale listings has overheated prices throughout much of the past year, and buyers are now starting to step back.  This has led home sellers to reassess values with more than one-quarter of sellers in early September reducing their list prices. Homes are sitting on the market longer, and sales continue to slow, especially in some of the previously hottest markets in Southern California.

The takeaway from this report is that price growth is likely to taper for the balance of the year as many markets hit an affordability ceiling.

Consumer Confidence rose to 138.4 in September from an upwardly revised 134.7 (from 133.4) in August. The September reading is the highest since September 2000.

CC

The Present Situation Index increased from 172.8 to 173.1 while the Expectations Index surged from 109.3 to 115.3.

The takeaway from the report is that the high level of consumer confidence, fueled by an uptick in expectations, creates a good backdrop for healthy consumer spending activity that is the driver of GDP growth. Notably, we are getting closer to the all-time index high of 144.7 which was seen in May of 2000.

U.S. New Home Sales in August rose 3.5% to a seasonally adjusted annual rate of 629,000 units from a downwardly revised 608,000 (from 627,000) in July.

NHS1

New home sales in the South dropped 1.7% month-over-month to 350,000 units and that is noteworthy because the South is the largest market for new home sales in the U.S.  On the other end of the spectrum, sales in the Northeast surged 47.8% to 34,000, rose 2.7% in the Midwest to 77,000, and jumped 9.1% in the West to 168,000 units.

The takeaway from the report is that it reflects the affordability constraints that are increasing on the back of high prices and rising mortgage rates. To wit, the median sales price was up 1.9% year-over-year to $320,200 and the supply of new homes for sale stood at a 6.1-months’ supply at the August sales pace versus 6.0 months a year ago.

The third and final estimate for U.S. GDP in the second quarter was unchanged from the second read, coming in at 4.2%.

GDP

The takeaway from the report is that it showed no change in personal spending growth (3.8%) from the second estimate. I still expect to see a marked slowdown when the third quarter numbers are released as the specter of tariffs pulled growth forward. 

The NAR Pending Home Sales Index in August fell 1.8%month-over-month and are down by 2.3% year-over year.

PHS

The August figure represents the fourth month of declines in the past five months, and the slowest sales pace since January of this year.

With both home prices and mortgage rates continuing to rise, fewer consumers signed contracts to buy existing homes in August. Sales have been hampered all year by a very lean supply of affordable listings. Inventories did rise slightly in August, but there is still precious little supply at the entry level – which is where most of the demand is.

The greatest decline occurred in the West region where prices have shot up significantly, which clearly indicates that affordability is hindering buyers and those affordability issues come from lack of inventory, particularly in moderate price points.

Pending home sales dropped 5.9% in the West month-over-month and were down a striking 11.3% when compared to August 2017. Prices in the West, however, are still higher than a year ago, but the gains are shrinking. Prices usually lag sales.

Sales fell 1.3% in the Northeast monthly and were down 1.6% annually. In the Midwest, sales fell 0.5% monthly and 1.1% annually. In the South, sales were down 0.7% monthly but were 1.3% higher than a year ago.

The takeaway here is that a record high number of Americans believe now is a good time to sell and I expect to see substantially more inventory start to come to market as potential sellers are considering that now is a good time to list and bring more properties to the market. This, in turn, will further slow home price growth.

Income & Spending in August both rose with incomes and spending both rising by 0.3%.

I&S

The growth in income was led by a 0.8% increase in rental income, a 0.5% increase in wages and salaries, and a 0.4% increase in personal current transfer receipts.

The takeaway from the report is that the year-over-year increase in the PCE (Personal Consumption Expenditures) Price Index (+2.2% vs. +2.3% prior) and the core PCE Price Index (+2.0% vs. +2.0% prior) will keep the Federal Reserve on its tightening path.

The early Consumer Sentiment number for September hit 100.8 – the second highest level since 2004.

CSI

The Index of Consumer Expectations rose to 91.1 from 87.1 in August, hitting its highest level since July 2004 while the Current Economic Conditions Index increased to 116.1 from 110.3.

The takeaway from the report is that the pickup in sentiment was widespread across all major socioeconomic groups, which is a good underpinning for solid consumer spending activity.

What to Watch for This Week

U.S. Construction Spending rose by 0.1% in August and I am looking for some improvement in the September data with an increase of 0.4%.

Non-Farm Payrolls were up by 201,000 in August and the September figure should drop a little to a still respectable 184,000.  With this growth, the Unemployment Rate should drop to 3.8% from the current level of 3.9%.

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