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.


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.


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%.


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.


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.


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%.