What I Saw Last Week

The Case Shiller Index for March showed annualized home price growth for the 20-City Index of 6.8% (I had forecast 6.5%) and matching the previous month.


Seattle, Las Vegas, and San Francisco continue to report the highest year-over-year gains among the 20 cities. In March, Seattle led the way with a 13.0% year-over-year price increase, followed by Las Vegas with a 12.4% increase and San Francisco with an 11.3% increase. Twelve of the 20 cities reported greater price increases in the year ending March 2018 versus the year ending February 2018.

Looking across various national statistics on sales of new or existing homes, permits for new construction, and financing terms, two figures that stand out are rapidly rising home prices and low inventories of existing homes for sale. Months of supply, which combines inventory levels and sales, is currently at 3.8 months, lower than the levels of the 1990’s, before the housing boom and bust.

Until inventories increase faster than sales, or the economy slows significantly, home prices are likely to continue rising. Compared to the price gains of the last boom in the early 2000’s, things are calmer today. Gains in the National Index peaked at 14.5% in September 2005, more quickly than Seattle is rising now.

Consumer Confidence in May rose to 128.0 – I had forecast a drop to 127.5.


The Present Situation Index rose from 157.5 to 161.7 and the Expectation Index rose from 104.3 to 105.6.

The takeaway from this report is that consumers’ assessment of current conditions is at a 17-year high, which matches up neatly with the understanding that the unemployment rate is at a 17-year low.

The second estimate for US GDP in Q1 show the economy having expanded at a downwardly revised rate of 2.2% – I had forecast it to have remained at the previously reported 2.3% rate.


The downward adjustment was mainly due to Private Inventory Investment which was revised lower, such that the change in private inventories contributed only 0.13% to GDP growth in the second estimate versus 0.43% in the advance estimate. Additionally, and likely more importantly, Personal Consumption Expenditure growth was revised down to 1.0% from 1.1%.

The takeaway from the report is that it was a rerun of a bad episode of consumer spending in the first quarter. Therefore, it won’t have any market impact since the “new” news on Q1 GDP is old news!

Income & Spending both rose in April with incomes matching my forecast for an increase of 0.3% and spending outperforming by rising by 0.6% (I had forecast 0.3%).


Wages and salaries increased 0.4% in April, which was the main driver of the personal income increase.

The takeaway from the report is that real PCE was up 0.4%, leaving it well above the first quarter average growth rate of less than 0.1% and solidifying expectations for stronger GDP growth in the second quarter. Separately, the firming trend in the price indexes should contribute to an internal belief at the Federal Reserve that there is scope for three rate hikes in 2018.

The NAR Pending Home Sales Index for April fell by 1.3% even as I had forecast a 0.7% increase.


Pending sales were 2.1% lower when compared to April of 2017 and represents the fourth straight month of annual declines.

I would conjecture that the contraction in signed contracts was more a function of inventory constraints and not due to rising mortgage rates. Additionally, weakening affordability is going hand-in-hand with short supply, especially at the lower end of the market. As home prices continue to rise, potential buyers have less and less wiggle room in their wallets.

Regionally, pending home sales in the Northeast were unchanged for the month and 2.1% lower than a year ago.  In the Midwest, sales dropped 3.2% and were 5.1% lower than April 2017.  Pending sales in the South declined 1.0% in April but were 2.7% higher than last April and sales in the West dropped 0.4% and are down 4.6% from a year ago.

Non-Farm Payrolls in May substantially outperformed my forecast for an increase of 190,000, rising by 223,000.  April payrolls were revised down to 159,000 from 164,000 and the March numbers were revised up to 155,000 from 135,000. Over the past three months, job gains have averaged 179,000 per month.


May private sector payrolls increased by 218,000. April private sector payrolls were revised down to 162,000 from 168,000 and the March numbers were revised up to 153,000 from 135,000.

The employment report for May fits within the context of a strengthening economy and it also fits within the Federal Reserve’s context of seeing an improving economy that validates further gradual increases in the fed funds rate.  The takeaway from the May employment report is that it still had a Goldilocks hue to it, having been accented with strong job growth and only moderate wage inflation.

The national Unemployment Rate dropped from 3.9% to 3.8%. Persons unemployed for 27 weeks or more accounted for 19.4% of the unemployed versus 20% in April. The U-6 unemployment rate, which accounts for unemployed and underemployed workers, dropped to 7.6% versus 7.8% in April.  The labor force participation rate was 62.7% in May, versus 62.8% in April.


Of note is that the unemployment rate is so low it has only hit this level a few times in modern history. The last time was in the heat of the dot-com bubble in 2000. But before that you have to go back to the late 1960’s to find a time the unemployment rate was lower.

That said, to many Americans, the economy still feels pretty ho-hum as they are not getting that much more money in their paychecks. Wages in May were up 2.7% percent from a year ago, roughly in line with gains seen in recent months but also not outpacing inflation.

U.S. Construction Spending in April rose by 1.8% – I had forecast a more modest increase of 1.0%.


The April report featured a 2.8% increase in total private construction spending with total public construction spending was down 1.3%. Public construction spending was held down by a 1.4% decline in non-residential spending, which featured a 1% decline in highway and street spending.

Private construction spending growth was driven by a 4.5% increase in residential spending, which was led by multi-family building. Non-residential spending was up 0.8%, as a 2.4% increase in power spending was offset in part by a 2.8% decline in commercial spending.

On a year-over-year basis, total construction spending was up 7.6%, with public construction spending up 7.7% and private construction spending up 7.6%.

The takeaway from this report is that it showed a welcome pickup in construction spending growth, which will be a source of support for Q-2 GDP forecasts.

What to Watch for This Week

Just one major announcement this week.  Consumer Credit rose by $11.6B in March and I expect to see the April figure show further expansion of $13.9B.