What I Saw Last Week

The Case Shiller Index for June showed annual price growth for the 20-City Index exactly meeting my forecast with an increase of 5.7%.


House price appreciation reflects both recovering demand and low inventory. National payroll employment continues to grow and a healthier labor market is supportive of stronger housing demand. However; on the supply side, inventory of existing homes declined and the July unsold inventory was low, at 4.2 months and when we combine economic growth with low inventories, it is natural to see prices appreciate at above average rates.

Seasonally adjusted, 9 of the 20 cities in the composite reported price increases in the year ending June 2017, down from 14 in May. Seattle, Portland, and Dallas reported the highest year-over-year gains among the 20 cities covered.

Both the number of homes for sale and the number of days a house is on the market
have declined for four to five years and, given current economic conditions and the tight housing market, an immediate reversal in home price trends appears unlikely.

Consumer Confidence in August rose to 122.9, up from a downwardly revised 120.0 (from 121.1) in July. I had forecast a drop to 120.3.


The bulk of the improvement in August was tied to the Present Situation Index, which rose from 145.4 to 151.2. The Expectations Index rose from 103.0 to 104.0.

Of note is that the percentage of respondents stating jobs are plentiful rose from 33.2% to 35.4%, while those claiming jobs are hard to get dropped from 18.7% to 17.3%.

The takeaway from the report is that consumer confidence remained high as the current labor market assessment overshadowed a lot of the political drama that has called into question the ability to implement a tax reform plan this year.

The second estimate for US GDP in the second quarter showed the economy expanding at 3.0% from the initial estimate of 2.6% – I had forecast a more modest increase to 2.7%.


The upward revision stemmed from upward revisions to personal consumption expenditures (from 2.8% to 3.3%) and gross private domestic investment (from 2.0% to 3.6%), which was led by non-residential fixed investment (from 5.2% to 6.9%). Government spending was revised down (from 0.7% to -0.3%).

Of note is that the overall GDP growth rate was the first with a 3-handle on it since the first quarter of 2015!

The second estimate for second quarter GDP will feed a good economic narrative and the takeaway from the report is that it was driven by a pickup in both consumer and business spending, which is typically a good mix for accelerating economic growth.

Income & Spending both rose in July with incomes up by 0.4% (I had forecast 0.3%) and spending up by 0.3% (I had forecast 0.4%).  The personal savings rate dipped from 3.6% to 3.5%.


PCE (Personal Consumption Expenditures) price inflation remains well below the Fed’s longer run target of 2.0%, yet it is the dip in the core inflation rate that stands out today because that can’t be blamed on volatile energy prices.

Real personal consumption expenditures increased 0.2%, which will be a positive input for Q-3 GDP forecasts, and rose 2.7% year-over-year versus 2.6% in June. Real disposable personal income increased 0.2% and is up 1.3% year-over-year versus 1.2% in June.

The takeaway from the report was that inflation pressures remained subdued, which suggests to me that expectations for another rate hike this year will also remain subdued.

The NAR Pending Home Sales Index decreased in July for the fourth time in five months, and now has decreased year-over-year in three of the past four months.

The Pending Home Sales Index, a forward-looking indicator based on signed contracts decreased 0.8% to 109.1 in July from a downwardly revised 110.0 in June, and fell 1.3% below a year ago. I had forecast a less substantial 0.5% drop.

Pending Index

The PHSI increased 0.6% in the West in July, but fell 0.3% in the Northeast, 0.7% in the Midwest and 1.7% in the South. Year-over-year, the PHSI increased 2.4% in the Northeast, but fell 0.2% in the South, 2.8% in the Midwest and 4.0% in the West.

The NAR reported that although buyer traffic remains higher than a year ago, house hunters face limited options. While the median sales price increased 38% over the past five years, incomes have increased only 12%, putting pressure on affordability, especially for prospective first-time buyers. Existing sales declined in July, and new home sales also faltered, although they remain up 9.2% for the year. However builder confidence jumped up in August, suggesting that new residential construction will continue its upward trend and address the tight inventory of homes for sale.

US Non-Farm Payrolls grew by a somewhat disappointing 156,000 in August (I had forecast a more robust 183,000).


Over the past three months, job gains have averaged 185,000 per month. July non-farm payrolls were revised down to 189,000 from 209,000 and the June number was also revised down to 210,000 from 231,000.

August private sector payrolls increased by 165,000 with July private sector payrolls revised down to 202,000 from 205,000 and June private sector payrolls revised up to 207,000 from 194,000.

The takeaway here is that, historically, August payroll numbers have been the most volatile due to seasonal distortions, often coming in weak at first reading only to be revised higher. For example, in 2011, the initial reading came in at zero, but later was revised up to 104,000. In 2016, the first report showed 151,000, while the final number moved up to 176,000.

The number, therefore, should not be taken as a sign of slowing growth.  At least not yet!

The Unemployment Rate in August rose to 4.4% (I had forecast it to have remained at 4.3%).

U RAte

Persons unemployed for 27 weeks or more accounted for 24.7% of the unemployed versus 25.9% in July. The U-6 unemployment rate, which accounts for both unemployed and underemployed workers, held steady at 8.6%.

The takeaway from the report is that wage inflation is still not picking up despite the low unemployment rate. That will keep the “Goldilocks” narrative in place, which has served as a perfectly-cooked bowl of porridge for a stock market that has feasted on a backdrop of modest growth and low inflation.

US. Construction Spending dropped by 0.6% in July (I had forecast a 0.5% increase).

Con Spend

The July decline was driven by a 1.4% decrease in total public construction spending and a 0.4% decrease in total private construction spending.

On the public side, non-residential spending dropped 1.4%, with almost every component category seeing a decline in spending. The lone exceptions were Power (+11.6%), Public Safety (+5.8%), and Highway and Street spending (+0.1%).

On the private side, residential spending increased 0.8% with new single-family spending increasing by a like amount to offset a 0.8% decline in non-residential spending, which was fueled by declines in all component categories.

Total residential construction spending increased 0.8% in July while total nonresidential spending fell 1.7%.

On a year-over-year basis, total construction spending is up just 1.8%, with public construction spending down 5.6% and private construction spending up 4.1%.

The takeaway from the report is that the decline in construction spending will act as a drag on Q-3 GDP forecasts.

The final August estimate for Consumer Sentiment came in at 96.8 (I had forecast a drop to 97.1) from an originally reported 97.6.


The Current Economic Conditions Index dipped to 110.9 from the preliminary reading of 111.0. The final reading for July was 113.4.  The Index of Consumer Expectations fell to 87.7 from the preliminary reading of 89.0. The final reading for July was 80.5.

The takeaway from the report is that consumer sentiment remains at high levels despite the (geo)political drama as consumers reportedly have maintained a favorable assessment of their own financial situations.

What to Watch for This Week

Total Consumer Credit rose by $12.4B in June and I expect to see the July number come in at around $11.9B.