What I Saw Last Week

Case Shiller Index data for June showed the 20-City Index up by 6.3% – marginally below my forecast for 6.4% year-over-year growth.


Sales of both new and existing homes have been roughly flat over the last six months amidst news stories of an increase in the number of homes for sale in some markets, and rising inventories have had a dampening effect on prices. Moreover, rising mortgage rates are also starting to suppress home price growth with the rate for 30-year fixed mortgages rising from around 4% at the start of the year to just over 4.6% now which directly affects housing affordability and, therefore, home prices.

That said, home price gains remain quite strong in the West – where supplies are leanest – but those gains are also showing signs of slowing. Las Vegas, Seattle and San Francisco continue to lead the pack in price rises with Las Vegas leading the way with a 13% year-over-year price increase, followed by Seattle which is up by 12.8%, and San Francisco saw a 10.7% increase.

Six of the 20 cities in the Index reported greater price increases in the year ending in June 2018 versus the same period in 2017.

The takeaway from this report is that I expect we will continue to see price growth taper through the rest of this year and into 2019.

Consumer Confidence in August climbed to 133.4 – I had forecast a drop 126.5 – from an upwardly revised 127.9 (from 127.4) in July.


The Present Situation Index increased from 166.1 to 172.2 while the Expectations Index rose from 102.4 to 107.6.

Interestingly, the percentage of consumers expecting an improvement in their short-term income prospects rose from 20.4% to 25.5%, while the proportion expecting a decrease declined from 9.4% to 7.0%.

The takeaway from the report is that surprisingly high confidence levels should support solid consumer spending in the near term, particularly since consumers have a better outlook for their short-term income prospects than I had expected.

The second estimate for GDP in the second quarter showed the economy expanding at 4.2% versus the advance estimate of 4.1% – I had forecast a drop to 4.0%.


The increase was driven by real final sales of domestic products, which rose by 5.3% versus the 5.1% initial estimate; gross private domestic investment increased 0.4% versus declining 0.5% in the advance estimate; and government spending which increased 2.3% versus 2.1% in the advance estimate.

The takeaway from the report is that it included a downward revision to personal spending growth (from 4.0% to 3.8%) that was offset by a higher estimate for non-residential investment growth, government spending, and a downward revision to imports (which are a subtraction in the calculation of GDP).

I still fully expect growth to slow in Q-3 as the second quarter was substantially boosted by export activity ahead of the implementation of Chinese tariffs.

The NAR Pending Home Sales Index for July fell 0.7% to 106.2 – I had forecast a drop to 106.3. The index is down 2.3% year-over-year and is the 7th straight month of annual declines.


It is evident that, in recent months, many of the most overheated real estate markets – especially those in the Western States – are starting to see modest declines in home sales and this also translates into slower price growth.

The reason sales are falling is relatively straightforward in that we saw multiple years of inadequate supply in markets with strong job growth which drove home prices to a point where an increasing number of prospective buyers are simply unable to afford to buy.

Regionally, pending home sales in the Northeast rose 1.0% for the month but were 2.3% lower compared with a year ago. In the Midwest, sales were up 0.3% monthly but 1.5% lower annually. In the South, sales declined 1.7% monthly and 0.9% annually while in the West, sales fell 0.9% monthly and 5.8% annually.

Sales are weakest in the West because that is where affordability is worst. Homebuilders are most active in both the South and West, but mostly not at the lower end of the market, where demand is strongest.

Some major markets in the West, including Denver and Seattle, which have been incredibly hot and competitive, are starting to see more supply come on the market. I believe that this will cool prices slightly and bring more would be buyers back into the market.

Income & Spending data for July showed incomes up by 0.3% (I had forecast 0.4%) and spending (PCE) matching my forecast for a 0.4% increase.


The growth in income in July was led by a 0.4% increase in wages and salaries, a 0.7% increase in rental income, and a 0.6% increase in personal dividend income. On a year-over-year basis, real PCE (Personal Consumption Expenditures) was up 2.8%, versus 2.7% in June, while real disposable personal income was up 2.9%, versus 3.0% in June. Notably, the 2.3% year-over-year increase in the PCE Price Index is the highest since March 2012.

The takeaway from the report is twofold; firstly, the spending increase puts Q-3 GDP on a solid growth track and secondly, the year-over-year increase in the PCE Price Index (+2.3% vs. +2.2% prior) and the core PCE Price Index (+2.0% vs. +1.9% prior) will keep the Federal Reserve on its tightening track in September.

The final Consumer Sentiment number for August showed a decline from 97.9 to 95.3 – I had forecast it to come in at 95.5 and is now at its lowest point since September of 2017. The Current Economic Conditions Index declined to 107.8 from 114.4 in the final July reading and the Index of Consumer Expectations held at 87.3.


A less favorable view of buying conditions due to prices was largely responsible for the pullback with the biggest decline recorded among households in the lower third of the income distribution curve.

Also of note was that vehicle buying conditions were viewed less favorably than at any time during the last four years while home buying conditions were viewed less favorably than at any time in the past ten years.

The takeaway from the report is that the overall decline was driven by concerns about the prices of large household durables.

What to Watch for This Week

U.S. Construction Spending dropped by 1.1% in July and I am looking for a turnaround with total spending up by 0.5%.

Non-Farm Payrolls rose by 157,000 in July and the August figure should show that the country added 187,000 new jobs in the month.

The U.S. Unemployment Rate should hold steady at 3.9%.