The Weekly Economic & Real Estate Forecast – 7/17/17 to 7/21/17

What I Saw Last Week

Consumer Credit rose by $18.4B in May (I had forecast $12.7B) after increasing by an upwardly revised $12.9B (from $8.1B) in April.

Credit

The growth in May was driven by a double-dose expansion in non-revolving credit, which was up $11.1B from April to $2.824T, and revolving credit, which increased by $7.3B to $1.019T.

Consumer credit increased at a seasonally adjusted annual rate of 5.75% in May, with revolving credit increasing at an annual rate of 8.75% and non-revolving credit increasing at an annual rate of 4.75%.

Provided consumers weren’t making greater use of revolving credit lines to cover basic needs due to a shortfall in income, this report can ostensibly be looked upon as a good sign for the economy since the expansion of credit is an integral contributor to economic growth. It is hard to say, though, because there isn’t enough detail in the report and it tends to be subject to large revisions, which is why the market rarely shows much reaction to it.

U.S. Retail Sales declined 0.2% (I had forecast +0.1%) on the back of an upwardly revised 0.1% decline (from -0.3%) for May while core sales, excluding autos, fell 0.2% after an unrevised 0.3% decline for May.

Retail Sales

A 1.3% drop in gasoline station sales was the main drag on total retail sales along with a 0.6% decline in sales at food services and drinking places and a 0.4% decline in sales at food and beverage stores.

Building material, garden equipment and supplies dealers (+0.5%), general merchandise stores (+0.4%), and non-store retailers (+0.4%) were among the pockets of retail sales strength in June.

Core retail sales is the component that factors into the PCE goods component of the GDP report, so the takeaway from the retail sales data is that it points to weak spending on consumer goods in June and will be a negative input for Q2 GDP models.

Inflation, as measured by the Consumer Price Index, was unchanged in June, as I had forecast, while core CPI, which excludes food and energy, rose by 0.1%.

CPI

These monthly readings left CPI up 1.6% year-over-year, versus up 1.9% in May, and core CPI up 1.7% year-over-year, which was unchanged from the 12-month period ending in May.

The takeaway from this report is that the trend of disinflation for the Consumer Price Index, which began in March, remained intact and will force the Fed to take more time to determine if it ultimately flows through and undercuts the stable trend in core CPI.

Consumer Sentiment in early July came in at 93.1 – I had forecast it to have remained at 95.1.

Sentiment

The Current Economic Conditions Index climbed from 112.5 in June to 113.2 in July, matching the March 2017 peak for this index.

The Index of Consumer Expectations fell from 83.9 in June to 80.2 in July, which is ten points below its January 2017 peak.

It was noted in the report that the data does not suggest an impending recession, as much steeper declines in expectations typically precede an economic contraction.  The report also stipulated that the overall data indicates an annual gain of 2.4% in personal consumption in 2017.

The takeaway from the report is that it is fitting a pattern seen around past cyclical peaks, whereby the assessment of current conditions hits new peaks at the same time expectations start to post significant declines.

What to Watch for This Week

The NAHB Housing Market Index was measured at 67 in June and the July number is likely to stay at the prior month’s level.

U.S. Building Permits were running at an annual rate of 1.168M units in May.  The June figure should show a modest bump to 1.196M.

U.S. Housing Starts were measured at an annual rate of 1.092M in May and the June figure will be higher.  Look for 1.160M units.

The Weekly Economic & Real Estate Forecast – 7/10/17 to 7/14/17

What I Saw Last Week

US Construction Spending was basically flat in May (I had forecast a 0.3% increase) following an upwardly revised 0.7% decline (from -1.4%) in April.

Con Spend

Non-residential spending was up 0.3% month-over-month, so the drag in May was residential spending, which declined 0.5%.

Total private construction spending was down 0.6%, with declines in both residential spending (-0.6%) and non-residential spending (-0.7%). Despite the decline, private construction spending was up 6.2% year-over-year.

Total public construction spending jumped 2.1%, paced by a 1.9% increase in non-residential spending (which accounted for 98% of public construction spending). Non-residential spending made up the difference and increased 9.2% month-over-month. On a year-over-year basis, public construction spending was down 0.6%.

The takeaway from the report is that, with private residential spending down in May, housing market growth will continue to be pinched by limited supply.

U.S. Non-Farm Payrolls rose by 222,000 in June – well above my call for an increase of 173,000.

Payrolls

Over the past three months, job gains have averaged 194,000 per month as May payrolls were revised up to 152,000 from 138,000 and the April number was also revised higher to 207,000 from 174,000.

With payroll gains exceeded 200,000 in June, and upward revisions to payroll numbers for April and May, it would be natural to expect to see average hourly earnings increasing; however, this was not the case and failed to corroborate the Fed’s expectation that a tight labor market will ultimately produce stronger wage inflation.

June average hourly earnings increased 0.2% after increasing a downwardly revised 0.1% (from 0.2%) in May. Over the last 12 months, average hourly earnings have risen by just 2.5%, versus 2.4% for the 12-month period ending in May.

The takeaway from the report is that the weak year-over-year growth in average hourly earnings is likely to give the Fed some cause for pause when considering the timing of its next rate hike.

The June Unemployment Rate ticked back up to 4.4% – I had expected it to have remained at 4.3%.

U RAte

Notably, the U-6 unemployment rate, which accounts for both unemployed and underemployed workers, increased to 8.6% from 8.4% in May.

The takeaway here is that the increase in the unemployment rate was a function of more people (372,000) entering the labor force in search of work.

What to Watch for This Week

Consumer Credit rose by $8.1B in April and the May number should be higher with total credit increasing by $12.7B.

U.S. Retail Sales were a disappointment in May when they contracted by 0.3% as consumers remained guarded with their discretionary spending.  The June number should be modestly better and I anticipate a modest 0.1% increase.

Inflation, as measured by the Consumer Price Index, has been essentially benign and I expect this to continue as wage growth is clearly not apparent.  As such, it is likely that CPI will have remained static in June.

Consumer Sentiment ended June at an index level of 95.1.  The early July number is unlikely to have moved at all.

The Weekly Economic & Real Estate Forecast – 7/03/17 to 7/07/17

What I Saw Last Week

The Case Shiller Index data for April was released with few surprises with the 20-City index rising by 5.7% year over year – matching consensus forecasts.

Seattle, Portland, and Dallas reported the highest year-over-year gains among the 20 cities. In April, Seattle led the way with a 12.9% year-over-year price increase, followed by Portland with 9.3%, and Dallas with an 8.4% increase. Seven cities reported greater price increases in the year ending April 2017 versus the year ending March 2017.

CS

Before seasonal adjustment, the 10-City Composite posted a 0.8% increase and the 20-City Composite reported a 0.9% increase in April. After seasonal adjustment, the 10-City Composite posted a 0.2% month-over-month increase. The 20-City Composite posted a 0.3% month-over-month increase. Eighteen of 20 cities reported increases in April before seasonal adjustment; after seasonal adjustment, 13 cities saw prices rise.

As home prices continue rising faster than inflation, two questions are being asked: why? And, could this be a bubble?

Since demand is exceeding supply and financing is available, there is nothing right now to keep prices from going up. The increase in real, or inflation-adjusted, home prices in the last three years shows that demand is rising. At the same time, the supply of homes for sale has barely kept pace with demand and the inventory of new or existing homes for sale shrunk down to only a four- month supply. Adding to price pressures, mortgage rates remain close to 4% and affordability is not a significant issue.

The question is not if home prices can climb without any limit; they can’t. Rather, will home price gains gently slow or will they crash and take the economy down with them? For the moment, conditions appear favorable for avoiding a crash. Housing starts are trending higher and rising prices may encourage some homeowners to sell. Moreover, mortgage default rates are low and household debt levels are manageable. Total mortgage debt outstanding is $14.4 trillion, about $400 billion below the record set in 2008. Any increase in mortgage interest rates would dampen demand; however, household finances would be able to weather a price drop should it come to it – which I doubt, at least in the foreseeable future.

Consumer Confidence in June rose to 118.9 from a downwardly revised 117.6 (from 117.9). I had forecast a drop to 116.7.

Confidence

Interestingly, the Present Situation Index rose from 140.6 to 146.3, which is close to a 16-year high while the Expectations Index dipped from 102.3 to 100.6.

The Conference Board’s report notes that consumers see the economy continuing to expand in the months ahead, yet they don’t foresee the pace of growth accelerating.

The key takeaway from the report is that consumer expectations for the short-term have been reined in some, but are still upbeat overall.

The NAR Pending Home Sales Index decreased for the third month in a row, and annually for the second year in a row. The PHSI, a forward-looking indicator based on signed contracts reported by the National Association of Realtors, dropped to 108.5 in May, down 0.8% from a downwardly revised 109.4 in April, and down 1.7% from the level seen a year ago. I had forecast an increase of 0.5%.

Pending Index

The PHSI remained flat in the Midwest, and decreased in the Northeast, South and West by 0.8%, 1.2% and 1.3% respectively. Year-over-year, the PHSI increased 3.1% in the Northeast, but fell 1.4% in the South, 2.8% in the Midwest and 4.5% in the West.

May existing sales increased 1.1%, despite two monthly declines in the PHSI. However, NAR reported a 7.2% year-over-year decline in sales of homes priced under $100,000 and only a 2.0% year-over-year sales increase in homes priced between $100,000 and $250,000. Meanwhile, sales jumped 26.0% for homes priced between $750,000 and one million dollars, while sales for homes at a million dollars and up increased 29.1%. The low inventory of homes for sale continues to dampen sales in the first two categories, but the sharp dichotomy suggests a more troubling picture regarding affordability.

The third and final estimate for US GDP in Q1 was upwardly revised from 1.2% to 1.4% – I had forecast it to have remained at 1.2%.

GDP

The rise in growth was a function of improved real final sales (which exclude the change in inventories) being revised up to 2.6% from 2.2% and personal consumption expenditures growth which was revised to 1.1% from 0.6%.

Additionally, export growth was revised up to 7.0% from 5.8%.

The key takeaway is that first quarter GDP growth was better than expected, but as the report from the BEA itself says, “…the general picture of economic growth remains the same,” which is to say it remains below potential.

I would also add that the economy saw little change amid a switchover from the Obama administration to the Trump White House – the U.S. grew 2.1% at the end of 2016. The U.S. has been growing close to 2% annually during most of the current eight-year-old recovery and is showing little sign that it’s about to rapidly speed up – or slow down!

Income & Spending in May were a bit of a mixed bag with incomes up 0.4% (I had forecast 0.3%) and spending exactly matching my forecast for a rise of 0.1%.

The personal savings rate as a percentage of disposable income rose from 5.1% to 5.5%, which is the highest rate since September 2016.

Income

Disposable personal income (income remaining after deducting personal income taxes) grew by 0.6% after accounting for inflation. It is noticeable that this is the largest monthly growth over the past two years. Disposable personal income ended up with a 2.2 % annual increase.

The takeaway is that inflation moved away from the Fed’s longer-run inflation target of 2.0%, not toward it as the Fed is anticipating. That will help solidify the market’s belief that the Fed doesn’t have enough data-based scope to raise the fed funds rate until perhaps its December meeting at the earliest.

The final take on Consumer Sentiment in June was revised from the preliminary reading of 94.5 to 95.1 – I had forecast a more modest rise to 94.7.

The Current Economic Conditions Index moved up to 112.5 from 109.6 in the preliminary reading. The final reading for this index for May was 111.7.

The Index of Consumer Expectations was revised down to 83.9 from 84.7 in the preliminary reading. The final reading for this index for May was 87.7.

Sentiment

The report notes that the data provide no indication of an imminent downturn nor does it offer any indication of a resurgent boom in spending.

The takeaway from the report is that consumer confidence has dipped to its lowest level since the election, yet it still remains at favorable levels as the average level of 96.8 for the first half of the year was the best half-year average since the second half of 2000.

What to Watch for This Week

U. S. Construction Spending dropped by 1.4% in April and the May number should indicate a bit of a turnaround with total spending up by 0.3%.

U.S. Non-Farm Payrolls rose by 138,000 in May and the June figure is likely to come in at around 173,000.

The June Unemployment Rate is likely to remain at 4.3%.

The Weekly Economic & Real Estate Forecast – 6/26/17 to 6/30/17

U.S. Existing Home Sales in May were at a seasonally adjusted annual rate of 5.62M units – I had forecast 5.52M – up 1.1% from a downwardly revised 5.56M (from 5.57M) in April and up 2.7% from a year ago.

Existing sales

Total housing inventory for sale rose 2.1% in May to 1.96M but that is still 8.4% lower than a year ago, marking the 24th consecutive year-over-year decline.

The median existing-home price for all housing types increased 5.8% to $252,800, which was the 63rd straight month of year-over-year gains and the highest median sales price on record. The median price for existing single-family homes rose 6.0% to $254,600.

Based on the May sales pace, the inventory of unsold homes is at a 4.2-month supply versus 4.7 months a year ago. A 6.0-month supply is typically associated with a more balanced market.

Existing home sales were up in every major region in May except the Midwest (-5.9%). Sales were up 6.8% in the Northeast, up 2.2% in the South, and up 3.4% in the West.

The median number of days a home was on the market fell to 27 days, down from 29 days in April and down from 32 days a year ago. That is the shortest timeframe since tracking for that metric began in May 2011.

The takeaway from the report remains the same: existing home sales are being impeded by a lack of affordable supply, particularly in the lower- and mid-market price ranges.

The FHFA Housing Price Index rose by 0.7% on April – I had forecast a more modest increase of 0.4% – and the previous month’s reported 0.6% increase was revised upward to reflect a 0.7% increase in home prices.

Existing sales

Over the year, the HPI shows that home sales prices have risen 6.8%. Broken down by U.S. Census Division, the Mountain region (Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona, New Mexico) experienced the biggest annual jump in home prices, with a rise of 8.9% over April 2016. At No. 2 for largest 12-month price increases was the South Atlantic region, which experienced an 8% uptick over the year. This division includes Delaware, Maryland, the District of Columbia, Virginia, West Virginia, North Carolina, South Carolina, Georgia, and Florida.

Prices have steadily risen year-over-year in most Census divisions with the exception of the Pacific region, which includes Hawaii, Alaska, Washington, Oregon, and California. Home prices in this area rose 8.9% from 2015 to 2016 but just 7.5% from 2016 to 2017.

The takeaway here is that the compound annual growth rate since 1991 has been 3.5%; however, since January 2012, it has nearly doubled to an annual rate of 6.2%.

U.S. New Home Sales in May ran at a seasonally adjusted annual rate of 610,000 which was above my forecast for 599,000 units, up 2.9% from an upwardly revised 593,000 (from 569,000) in April and up 8.9% from the same period a year ago.

New sales

The median price of a new home sold surged 16.8% year-over-year to a record high of $345,800 and the average sales price rose by an equally impressive 16.1% to $406,400.

New homes priced at $399,999 or less accounted for 66% of the homes sold in May versus 70% in April, underscoring supply constraints at the lower end of the market.

The sales gains in May were not broad based. The Northeast and the Midwest saw single-family sales decline 10.8% and 25.8%, respectively, while the South and the West — the two largest regions for new home sales — saw single-family sales increase 6.2% and 13.3%, respectively.

The takeaway from the report is that affordability constraints driven by rising median prices are going to continue to serve as a headwind for first-time buyers who are facing added supply constraints in the existing home market.

What to Watch for This Week

Consumer Confidence in May slipped to 117.9 but remains close to a 10-year high. Expect to see the June figure drop a little further to 116.7 as consumers’ view of the short-term economic outlook downshifts a little more.

The NAR Pending Home Sales Index dropped by 1.3% in April and the June figure should be an improvement with pending sales rising by 0.5%.

The third and final estimate for US GDP in Q1 is likely to show no change from the previously reported growth rate of 1.2%.

Income & Spending both rose by 0.4% in April and the May number should show incomes up by 0.3% and spending up by just 0.1%.

The final take on Consumer Sentiment in June will show a slight increase from the previously reported figure of 94.5. Expect to see it come in at 94.7.

 

The Weekly Economic & Real Estate Forecast – 6/19/17 to 6/23/17

What I Saw Last Week

The Federal Reserve released its Q1-2017 Financial Accounts of the U.S. report and there were some really interesting data points that relate to housing.  The report showed the value of residential real estate in the country totaling $34.5 trillion in Q1 – up by almost 1.6 trillion from a year ago and 3.7% above its pre-recession peak.

Ddebt & Equity

Of equal, if not greater, interest to me is that homeowner equity in the quarter rose by $1.3 trillion to now stand at $13.7 trillion.

U.S. Retail Sales dropped 0.3% in May (I had forecast an increase of 0.1%) and retail sales, excluding autos, dropping by 0.3% (I had forecast an increase of 0.2%).

Retail Sales

Core retail sales – which exclude auto sales, gasoline station, building materials, and food services sales – were basically flat versus April.  A drop in electronics and appliance store (-2.8%), gasoline station (-2.4%), and motor vehicle (-0.2%) sales were key drags on overall sales, yet there wasn’t much strength seen in general.

Non-store retailers (+0.8%) were the notable exception in terms of sales strength. Clothing and clothing accessories stores sales rose by 0.3%.

The takeaway from this report is that consumers clearly remain guarded with their discretionary spending activity, which is likely the result of seeing little, if any, wage growth.

Inflation, as measured by the Consumer Price Index, declined 0.1% in May (I had forecast no change) while the core rate, which excludes food and energy, was up 0.1% (I had forecast a rise of 0.2%).

CPI

For the 12 months ending May, total CPI on an unadjusted basis was up 1.9%, versus 2.2% for the 12-months ending April, while core CPI was up 1.7% versus 1.9% for the 12-months ending April.

Total CPI was driven lower in May by a 2.7% decline in the energy index, which was led by a 6.4% decline in the gasoline index. The food index was up 0.2%. The increase in core CPI was paced by a 0.2% jump in the shelter index, but notably, declines were registered for many other indexes, including apparel (-0.8%) and medical care services (-0.1%).

The takeaway from this report is that it shows a softening trend in consumer inflation which should, presumably, be some cause for concern among Fed members.

As anticipated, the Federal Reserve raised its benchmark interest rate by 0.25% to a range of 1.0% – 1.25%. This was somewhat more interesting given the data shown above which shows inflation still running well below target.

The central bank now believes inflation will fall well short of its 2% target this year. The post-meeting statement said inflation “has declined recently” even as household spending has “picked up in recent months,” the latter an upgrade from the May statement that said spending had “rose only modestly.” The statement also noted that inflation in the next 12 months “is expected to remain somewhat below 2% in the near term” but to stabilize.  The likelihood of one more rate increase this year just dropped.

The NAHB Housing Market Index weakened slightly in June as it dropped two points to 67 from a downwardly revised May reading of 69.  I had expected to see it drop just one point.

HMI

All three HMI components posted losses in June but still remain at healthy levels. The components gauging current sales conditions fell two points to 73 while the index charting sales expectations in the next six months dropped two points to 76. Meanwhile, the component measuring buyer traffic also moved down two points to 49.

Builder confidence levels have remained consistently sound this year, reflecting the ongoing gradual recovery of the housing market. However, even as the housing market strengthens and more buyers enter the market, builders continue to express their frustration over an ongoing shortage of skilled labor and buildable lots that is impeding stronger growth in the single-family market.

U.S. Building Permits defied my expectations and dropped 4.9% to an annual rate of 1.168M units.  I had forecast an increase to 1.250M.

Permits

Permits for single-family units declined 1.9% as compared to April to an annual rate of 779,000 – the third straight month of declining permit activity suggesting single-family homebuilding may remain weak in the coming months.

The takeaway from the report relates to the continued decline in single-family permits, which means further supply shortages and affordability constraints are likely to persist in the new home market.

U.S. Housing Starts rose at an annualized rate of 1.092M in May – well below my forecast for an increase to 1.227M units. The number was down 5.5% from the revised April rate of 1.156M. On a year-over-year basis, housing starts were down 2.4%.

Starts

The overall decline in starts was paced by a 9.8% drop in multifamily units. Single-family starts declined 3.9% after ticking up 0.4% in April.  Single-family starts jumped 12.5% in the Northeast, rose 9.5% in the Midwest, declined 8.9% in the South, and fell 4.9% in the West.

The total number of units under construction at the end of the period declined 0.7% to 1.067M. I would note that 57% of homes under construction in May were multifamily (612,000) with the multifamily count almost 6% higher than a year ago (although in recent months this total has flattened). There were 455,000 single-family units under construction, a gain of 6% from this time in 2016 which is slightly lower than the April total (457,000) – a post-recession high.

The preliminary reading of the University of Michigan Consumer Sentiment Index for June declined to 94.5 from May’s final reading of 97.1 – I had forecast a drop to 97.0.

The Current Economic Conditions Index fell to 109.6 from 111.7 in May and the Index of Consumer Expectations slipped to 84.7 from 87.7 in May.

Sentiment

Interestingly, only a handful of respondents identified the James Comey congressional testimony as a factor in their outlook, meaning specific political concerns did not play a significant role in the modest dimming of the outlook. However, there is growing evidence that continued political bickering has taken a toll on sentiment across the political spectrum. Declines were observed across all political parties with self-identified independents reporting an 11.5-point decline in sentiment while Republicans (-9.2) and Democrats (-6.8) reported smaller declines.

What to Watch for This Week

U.S. Existing Home Sales in April were running at an annual rate of 5.57M units.  I think that we will see a small pullback when the May figures are released on Wednesday.  Look for a figure of around 5.52M units.

The FHFA Housing Price Index gauges the value of US housing and I am looking for a monthly increase of 0.4% after the 0.6% increase seen in March.

U.S. New Home Sales were running at an annual rate of 569,000 units in April and I am hopeful that the May figure will be an improvement.  Look for sales to be running at an annual rate of 599,000 units.

The Weekly Economic & Real Estate Forecast – 6/12/17 to 6/16/17

What I Saw Last Week

On Wednesday, the Federal Reserve released data regarding Consumer Credit in April and the number was a disappointment.  Total credit expanded by $8.1B – I had forecast a more robust increase of $15.0B.

Credit

The growth in April was driven predominately by non-revolving credit, which was up $6.6B from March to $2.81T.  Revolving credit increased by $1.5B to $1.011T.

Credit2

Consumer credit increased at a seasonally adjusted annual rate of 2.5% in April, with revolving credit increasing at an annual rate of 1.75% and non-revolving credit increasing at an annual rate of 3%.

This is the slowest growth in consumer credit since 2011, nearly 6 years ago. With 70% of US economic growth derived from consumer consumption, this declining trendline is worrisome for future growth.  Total household net debt reached a new record, surpassing 2008 which was driven by the exceptional growth in student debt and auto loans, the latter being key in consumer credit use.

What to Watch for This Week

U.S. Retail Sales rose by 0.4% in April and I expect to see the May number come in lower with total sales up by 0.1% and core sales up by 0.2%. 

Inflation, as measured by the Consumer Price Index, is likely to remain unchanged in May, but the core rate should have risen by 0.2%.

U.S. Building Permits should rise from the annual rate of 1.229M seen in April. My call is for an increase to an annual rate of 1.250M.

U.S. Housing Starts rose at an annualized rate of 1.172M in April and I expect the May figure to come in at 1.227M units. 

Consumer Sentiment in early June will likely drop just a little from the final May figure of 97.1. I am looking at 97.0.

The Weekly Economic & Real Estate Forecast – 6/05/17 to 6/09/17

What I Saw Last Week

The Case-Shiller Index data for March saw the 20-City index up by 5.9% year-over-year matching the annual gain seen in February and representing the fastest rate of growth since July of 2014.

CS

Among the 20 cities surveyed for this report, Seattle, Portland, and Dallas just reported their highest year-over-year gains while the smallest gain of 4.1% was seen in New York.

I continue to believe that households are staying in their homes longer rather than selling and trading up.  Additionally, I would contend that if mortgage rates start to rise further, this may lead households to further delay moving which will continue to put pressure on housing as inventories will remain at depleted levels and price growth will continue at above average levels.

While it is true that prices cannot rise indefinitely, there is really no way to tell when prices and mortgage rates will force a slowdown in housing.

Personal Income & Spending in April exactly matched my forecast for both to rise by 0.4%. The personal savings rate as a percentage of disposable income held steady at 5.3%.

Income

An increase in wages and private salaries (+0.7%) drove the uptick in personal income in April.

Real disposable personal income was up 0.2% for the month and up 1.9% year-over-year versus up 2.0% in March. Real PCE (Personal Consumption Expenditures), the core component of the GDP report, was up 0.2% in April. Spending on goods was up 0.7% while spending on services was flat on a chained basis.

The takeaway from the report is the year-over-year changes for the PCE Price Index (1.7% versus 1.9% in March) and the core-PCE Price Index (1.5% versus 1.6% in March) decelerated from the prior month. That is unlikely to alter the prevailing view that the Fed will raise the target range for the fed funds rate at its June meeting, although it will stir some belief that another rate hike this year may not happen.

Consumer Confidence in May slipped to 117.9 – I had forecast a smaller decline to 119.5 – from a downwardly revised 119.4 (from 120.3) in April.

The Expectations Index dropped from 105.4 in April to 102.6 in May while the Present Situation Index rose slightly from 140.3 in April to 140.7 in May.

Confidence

Despite the dip in May, the consumer confidence reading remains close to a 10-year high.

Of interest to me is the Conference Board report on the share of respondents planning to buy a home within six months. It indicated that 5.8% of respondents were planning to buy a home in May, compared with 6.4% in April. Despite monthly volatility, the trend in the share of respondents planning to buy a home within six months has been climbing signifying further trust in the housing market.

The takeaway from the report is that a downshift in consumers’ view of the short-term economic outlook triggered the lower overall reading for April.

The NAR Pending Home Sales Index decreased 1.3% in April for a second consecutive monthly decline and fell 3.3% below its level a year ago. The Pending Home Sales Index (PHSI), a forward-looking indicator based on signed contracts, decreased to 109.8 in April, down from a revised 111.3 in March.  I had forecast an increase of 0.8%.

Pending Index

The PHSI was lower in the Northeast, South, and Midwest by 1.7%, 2.7%, and 4.7% respectively, while jumping 5.8% in the West. Year-over-year, the PHSI fell in all regions, ranging from 0.6% in the Northeast to 6.1% in the Midwest.

Looking ahead, April existing home sales fell 2.3% and the drop in PHSI suggests that this index will contract further in May. The NAR cites, as dual headwinds, spring inventory levels that are down 9.0% from a year ago, and price increases that continue to exceed wage increases. However; I would note that builder sentiment continues on an upward trend, and new home sales have risen in 2017.

The takeaway here is that, as the economy continues to add jobs, rising demand among first-time buyers will support new and existing sales in 2017.

U.S. Construction Spending in April was very disappointing as total spending dropped by 1.4% (I had forecast an increase of 0.5%) month-over-month. The mitigating factor, however, came in the understanding that March construction spending was upwardly revised to show a 1.1% increase versus an originally reported decline of 0.2%.

Con Spend

Total private construction spending declined 0.7% in April, with private residential spending down 0.7% and private non-residential spending down 0.6%. A 1.9% decline in manufacturing spending and a 1.4% decline in power spending led the downturn in non-residential spending. Despite the April decline, private construction spending was up 10.4% year-over-year.

Residential spending in aggregate was down 0.9% in April while non-residential spending was down 1.7%. On a year-over-year basis, total construction spending was up 6.7%.

The Non-Farm Payroll report for May produced a headline disappointment with non-farm payrolls coming in lower than expected and far lower than the job gains reported in the ADP Employment Change Report last Thursday.

Payrolls

May non-farm payrolls rose by 138,000 (I had forecast a more robust 185,000). Over the past three months, job gains have averaged 121,000 per month – enough to cover population growth but not much more. April payrolls were revised lower to 174,000 from 211,000 and the March numbers were also revised down to 50,000 from 79,000.

The takeaway from the employment report is that wage inflation continues to be dormant despite increased hiring activity. That understanding will temper concerns about the Fed having to walk an aggressive rate-hike path.

The U.S. Unemployment Rate in May dropped from 4.4% to 4.3% – I had forecast no change.

U RAte

Persons unemployed for 27 weeks or more accounted for 24% of the unemployed versus 22.6% in April and the U-6 unemployment rate, which accounts for both unemployed and underemployed workers, decreased to 8.4% from 8.6% in April.

The drop in the unemployment rate can be attributed to a drop in the labor force participation rate which fell to 62.7% from 62.9%.

What to Watch for This Week

Very skinny week for data this week with just one notable announcement. On Wednesday, data regarding Consumer Credit in April is released and I anticipate that it will show an expansion of $15.0B.

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