What I Saw Last Week

As I had anticipated, the NAR Pending Home Sales Index for January was a disappointment with a drop of 2.8% (I had forecast a contraction of 3%).


I was not surprised to see the decline which was a function of very low inventory levels, deteriorating affordability and rising interest rates.

Regionally, pending home sales in the Northeast rose 2.3% month to month and were 3.6% above a year ago. In the Midwest sales fell 5.0% for the month and were 3.8% lower than January 2016. Pending home sales in the South gained only barely, up 0.4% for the month and up 2% for the year. The biggest drop was in the West where sales plunged 9.8% for the month and were 0.4% lower compared with a year ago.

The second estimate for GDP in the fourth quarter of 2016 stayed true to the advance estimate, which was otherwise lackluster, showing real GDP increased at an annual rate of 1.9% in the fourth quarter.  I was looking for growth of 2.1%.


With the second estimate, personal consumption expenditures were shown to have increased 3.0%, versus 2.5% with the advance estimate. That upward revision, however, was offset by reduced estimates for state and local government spending, and nonresidential fixed investment.

The key takeaway from the report is that soft business spending continues to act as a drag on GDP growth.

Low inventory levels cross the country led the Case Shiller Index to continue higher in December with the 20-city index up by 5.8% year-over-year.  I had forecast a 5.3% increase.


Seattle, Portland and Denver once again topped the charts with the largest year-over-year gains. Seattle continued to lead the pack, rising at an annualized rate of 10.8%.

Of the nation’s 20 largest cities, seven reached their all-time highs in December: Seattle, Portland, Denver, Boston, Charlotte, North Carolina, San Francisco and Dallas.

Home prices continue to advance, with the national average rising faster than at any time in the last two-and-a-half years.

While rising home prices can trigger concerns about inflation, the speed at which they are growing is not alarming. Low inventory levels was the principal factor for the rise.

Consumer Confidence in February rose to 114.8 from 111.6 in January.  I had forecast a contraction to 111.5.


February marked the highest level for the index since July of 2001 when it hit 116.3.

The key takeaway from the report is that consumers are feeling better about current business and labor market conditions than they did in January; accordingly, they expect the economy to continue to expand in the months ahead.

Income & Spending data for January showed personal incomes up by 0.4% (matching my forecast) and spending up by 0.2% – modestly below my forecast for 0.3%.


The 0.4% increase in wages and salaries helped pace the pickup in income growth, along with a 0.8% increase in proprietors’ income and a 1.0% increase in rental income.

This report also exposes some of the disconnect between “soft” survey data, like the Consumer Confidence report, and the “hard” data. The former has been uplifting while the latter has suggested there is still plenty of heavy lifting left to do to reach the promised GDP growth land of 3-4%.

The sticking point with this report is twofold: (1) Real PCE declined 0.3%, led by a 0.3% decline in goods spending and a 0.2% decline in spending on services. That is going to be a negative input for Q1 GDP forecasts; and (2) The PCE Price Index was up 1.9% year-over-year, which leaves it tracking toward, and very close to, the Fed’s longer-run inflation target of 2.0%, which is to say it seems to satisfy the argument of any Fed official aiming to raise the policy rate at the March meeting (the core PCE Price Index was up 1.7% year-over-year, unchanged from December).

U.S. Construction Spending in January dropped by 1.0% – I had forecast an expansion of 0.6%.


Total private construction spending increased 0.2% in January, paced by a 0.5% increase in residential spending. Nonresidential spending was flat, pressured by a 0.5% decline in both commercial and office spending.

Total public construction spending declined 5.0%, driven by a 4.7% decline in nonresidential spending. The latter was paced by a 3.3% decline in highway and street spending, as well as spending declines in most categories.  The only areas where spending was up being power (+3.9%) and amusement and recreation (+1.1%).

On a year-over-year basis, total construction spending is up 3.1%. That is owed entirely to private construction spending, which is up 7.3% year-over-year. Total public construction spending is down 9.0% year-over-year.

What to Watch for This Week

Consumer Credit increased by $14.2 billion in December and I am hoping to see a further expansion of $17B when the January figures are released on Tuesday.

Non-Farm Payrolls rose by 227,000 in January and the February number will be much softer.  Look for the country to have added 188,000 new jobs.

With the growth in payroll employment, the Unemployment Rate should drop back down to 4.7% from the January figure of 4.8%.