What I Saw Last Week
Case Shiller Index data for June exactly met my forecast for an annual growth rate of 5%. The Seattle market rose by 7.4%, slightly above my forecast for a 7% increase.
There were no real surprises in the report. Price growth continues to moderate in most market but I am still somewhat cautious about Denver and Dallas where the index level is now well above it’s pre-bubble highs.
U.S. New Home Sales in July rose by 5.4% to an annual rate of 507,000 – this was just short of my forecast for 510,000.
After starting the year on a tear, new home sales have settled into a range of around 500,000 per month since March. That’s way up from the 437,000 homes sold in 2014, but I am not seeing an acceleration in demand trends that a recovering market would have expected by now.
The sales rate represents 5.2 months’ of supply at the current sales rate, down from a 5.3 months’ in June. Inventories are typically maintained at a 6 months’ supply during normal selling periods.
The median existing home price increased 2.0% y/y to $285,900.
Consumer Confidence increased to 101.5 in August from an upwardly revised 91.0 (from 90.9) in July. I was expecting to see a drop to 89.0.
The jump in confidence in August wiped away all of the discomfort from July and returned levels above where they were in June (99.8). In fact, this was the strongest confidence reading since January 2015. The gain in confidence was likely the result of improvements in labor market conditions – as shown by historically low initial claims filings – and lower gasoline prices. Uneven stock trends, which likely dampened the preliminary August reading from the University of Michigan Consumer Sentiment Index, did not seem to make much of an impact on these sentiment levels.
The Present Situation Index increased to 115.1 in August from 104.0 in July. The Expectations Index rose to 92.5 from 82.3.
U.S. Initial Unemployment Claims for the week ending August 22 declined by 6,000 to 271,000. I was expecting a figure of around 275,000.
The initial claims data remained in-line with the encouraging readings seen for some time now that has claims tightly bound between 250,000 and 300,000. This report will help solidify expectations that non-farm payrolls will again exceed 200,000 in the August employment report.
As expected, the second estimate for GDP in Q2 produced an upward revision. The surprise is that it was larger than expected. Specifically, Q2 GDP was revised up to an annual growth rate of 3.7% from the advance estimate of 2.3%. I was looking for an increase of 3.1%.
GDP showed some notable improvement after the weak first quarter. The upward revision to Q2 GDP will continue to stir the debate about when is the right time for the Federal Reserve to begin its rate normalization process.
The NAR Pending Home Sales Index for July rose by 0.5% – below my forecast for an increase of 1%.
Following the previous months decline in the Index I believe that it is reasonable to interpret the softness at the start of the quarter as payback after a strong performance at the beginning of 2015. I still expect the market to continue its recovery; however, listings at affordable price ranges remain scarce and this could put further pressure on the Index.
Income & Spending in the US in July rose by 0.4% and 0.3% respectively. I had anticipated that they would both rise by 0.4%.
Wages and salaries increased 0.5% in July after increasing 0.2% in June. That was slightly weaker than what was implied in the July employment report. That data showed aggregate earnings up 0.7% in July.
The personal saving rate increased for a second consecutive month, from 4.7% in June to 4.9% in July. Trends, however, look pretty stable since the harsh winter weather temporarily boosted savings levels in January and February.
Consumer Sentiment was revised down to 91.9 in the final July reading from a preliminary reading of 92.9. The index is down from 93.1 in June. I expected it to remain at its prior level.
The move in consumer sentiment was opposite of the trend in the Conference Board’s Consumer Confidence Index. That index spiked to 101.5, its highest level since January, from 91.0 in July. It is not unusual for the two sentiment indices to show differing trends. In this case, the Consumer Sentiment Index was likely impacted more by recent down trends in the equity market than the Consumer Confidence Index.
The drop in consumer sentiment is unlikely to have much of an impact on consumption trends. Consumption relies on income growth. As long as the labor market continues to strengthen, consumption growth should naturally follow.
Data on single family permit activity in the Puget Sound area continues to disappoint with year-to-date levels lower in King and Pierce counties when compared to the same period in 2014. Additionally, on a month over month basis, there was contraction across the board.
It remains very clear to me that the State needs to start to consider expansion of the Urban Growth Boundaries in the region. Current applications are not back at healthy levels which is putting upward pressure on finished home prices.
What to Watch for This Week
U.S. Construction Spending rose by 0.1% in June and I expect that we will see better numbers for July. I am forecasting an increase of 0.6%.
U.S. Initial Unemployment Claims are range bound I do not expect to see any tangible change from the current trend – look for 273,000.
Non-Farm Payrolls in August should have risen by 220,000 following the July growth of 215,000 new jobs.
The Unemployment Rate will drop to 5.2%.