What I Saw Last Week
Year over year, theS&P/Case Shiller Home Price Index rose by 3% in September and matched my forecast while the Seattle area rose by 4.8% – well above my expectations. With a monthly increase of 0.3%, the Seattle index is down by 26.1% from the peak that was seen in July of 2007.
Consumer Confidence rose to 73.7 from an upwardly revised 73.1 which exceeded my estimate for an increase to 73.0. The increase in confidence follows recent improvements in the University of Michigan Consumer Sentiment Index. That index increased from 82.6 in October to 82.7 in November. The present situation index fell slightly from 56.7 in October to 56.6 in November as labor market conditions were mostly stable. The expectations index increased from 84.0 to 85.1.
It seems that consumers are either unaware or are discounting the potential negative effects of the upcoming fiscal cliff; otherwise, the expectations index would have declined in November. That may change, however, as increased media attention makes consumers aware of the potential economic realities that are set to begin in January. We expect consumer sentiment to fall in a similar vein as it did during the debt ceiling negotiation fiasco unless Congress is able to come together on a suitable compromise.
New Home Sales in October fell from a downwardly revised 369,000 to 368,000 – had expected the monthly figure to remain unchanged, but at the originally stated 389,000 figure. It was disappointing to see such a stark downward revision to the September data. That said, even though the new housing market may not be as solid as once thought, the trends in the sector continue to be favorable.
As expected, the second estimate for U.S. Gross Domestic Product was upwardly revised from 2.0% to 2.7%, just below my forecast for 2.8%. That was the strongest quarterly gain since increasing 4.1% in Q4 2011. While the improvement in GDP growth suggests a stronger-than-originally reported economy, the details paint a different story. The entire upward revision was the result of a gain in inventories. Real final sales, which exclude inventory changes, were revised down from 2.1% to 1.9%.
The pickup in inventories was likely due to lower demand causing more goods to be left on the shelf as opposed to a conscious effort by businesses to hold more inventories on the belief that demand will grow. Evidence of this comes from downward revisions to both consumption (from 2.0% to 1.4%) and non-residential investment in equipment and software (from no growth to -2.7%). If inventory gains were due to stronger future demand, then the revisions to consumption and investment would likely have been positive.
The housing sector remained a bright spot in the economy. Residential construction was revised down modestly from 14.4% to 14.2%, but that was still the best quarterly gain since the home buyer tax credit boosted sales and starts in Q2 2010.
US Pending Home Sales jumped by a massive 5.2% – well above my call for a 1% increase – and are now nearly at the same level as seen 6-years ago. Excluding a few months when the index spiked because of a home buyer tax credit, that is the highest level since March 2007.
A big reason for the rebound in housing is that the excess supply of homes that built up before the housing crisis has finally thinned out. The number of previously occupied homes available for sale has fallen to a 10-year low. The inventory of new homes is also near the lowest level since 1963.
Personal Incomes and Spending levels were mixed with incomes flat and spending falling by 0.2% – I had called for a 0.2% growth in income and a 0.1% increase in spending. According to the BEA, Hurricane Sandy reduced wages by roughly $18.0 annualized in October. Absent the effects of the hurricane, income would have risen 0.1%. That is still below the consensus, but is in-line with the aggregate wage data reported in the October Employment Situation Report.
What to Watch for This Week
Construction Spending should increase – no great surprise given the recent very bullish housing starts report. Look for an increase of 1.3%.
Initial Unemployment Claims will show further “post-Sandy” improvement. I am looking for the figure to drop from 393,000 to 382,000.
Non-Farm Payrolls data for November will not impress. Following the 171,000 new jobs created in October, I am looking for a figure closer to 90,000. With this, the Unemployment Rate should increase from 7.9% to 8.0%.
Consumer Sentiment was measured at 82.7 at the end of November; look for the early December figure to drop to 82.4.
Consumer Credit will continue to expand but at a more modest pace. Look for total growth of $9.9B following the September figure of $11.4B.
The Windermere Economist 