What I Saw Last Week

Income & Spending data for September both exactly matched my forecast for incomes rising by 0.2% and spending was up by 0.4%.


The jump in personal income was led by a 0.2% increase in wages and salaries and a 0.9% jump in rental income. Those increases were offset somewhat by a 0.8% decline in proprietors’ income.  Meanwhile, real disposable personal income (accounting for inflation) was up 0.1% after increasing 0.2% in August. Real spending (PCE) was up 0.3% after increasing 0.4% in August.

The key takeaway from the report is the recognition that PCE price inflation decelerated to 2.0% year-over-year from 2.2% in August. Core PCE price inflation held steady at 2.0%. The inflation readings are on par with the Federal Reserve’s longer run target, yet they haven’t moved to such a degree that they are going to alter the Federal Reserve’s current policy stance, which involves an expectation for further gradual rate hikes.

Case Shiller Index numbers for August showed the 20-City Index up by 5.5% year-over-year – I had forecast 5.1%.


Following reports that home sales are flat to down, price gains are beginning to moderate. Rising prices may be pricing some potential home buyers out of the market, especially when combined with mortgage rates approaching 5% for 30-year fixed rate loans.

The market is beginning to balance more between supply and demand, following one of the strongest seller’s markets in decades. There is little concern, however, that prices will actually fall, only that the gains will fall back to more normal, historical levels of 3% to 4% annually.

Even as the gains shrink, some local markets continue to show price strength. Las Vegas, San Francisco and Seattle saw the biggest annual gains among the 20-city index.

In August, Las Vegas home prices jumped 13.9% year-over-year, followed by San Francisco with a 10.6% increase and Seattle with a 9.6% gain. Four of the 20 cities reported greater price increases in the year ending August 2018 versus the year ending July 2018.

As you will see from the table above, I have started to look at the change in momentum in price gains.  This looks as the rate of increase over the past 12-months and compares that with the previous 12-month period.  As can be seen, 12 of the 20 cities in the Index are seeing gains slow and Seattle is leading the way with a drop of 3.6%.  I expect that we will see more cities start to slow as we move toward a more balanced market.

Consumer Confidence in October came in at 137.9. I had forecast 140.1.

The Present Situation Index increased from 169.4 to 172.8 while the Expectations Index rose from 112.5 to 114.6.

The takeaway from the report is that strong employment growth continues to underpin favorable consumer attitudes about present-day conditions and the outlook.

U.S. Construction Spending in September remained unchanged – I had forecast total spending up by 0.3% – following an upwardly revised 0.8% increase (from +0.1%) in August.

Total private construction rose 0.3% month-over-month, led by a 0.6% increase in residential spending and a 0.1% increase in non-residential spending. New single-family construction spending fell 0.8%.

Total public construction spending declined 0.9% month-over-month, with almost all of that decline stemming from a 0.8% decline in nonresidential spending. A 1.1% decline in highway and street spending was a key drag.

On a year-over-year basis, private construction spending was up 6.1% while public construction spending was up 11.0%.

The takeaway from the report is the recognition that there was no growth in public construction spending in September.

U.S. Non-Farm Payrolls grew at an impressive rate in October, the labor force participation rate rose, and most importantly, average hourly earnings growth trended higher to 3.1% year-over-year, its strongest pace since April 2009.

October nonfarm payrolls increased by 250,000 (I had forecast a much lower rate of 142,000 because of Hurricane Michael, but that was clearly a non-issue). Over the past three months, job gains have averaged 218,000 per month.

September nonfarm payrolls were revised down to 118,000 from 134,000 while August payrolls were revised up to 286,000 from 270,000.

October average hourly earnings were up 0.2% after increasing an unrevised 0.3% in September. Over the last 12 months, average hourly earnings have risen 3.1%, versus 2.8% for the 12 months ending in September.

The U.S. Unemployment Rate in October met my forecast for it to remain unchanged at 3.7%.

Persons unemployed for 27 weeks or more accounted for 22.5% of the unemployed versus 22.9% in September. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 7.4% versus 7.5% in September.

The takeaway from the October employment report is that it is consistent with labor market trends that will keep the Federal Reserve on a tightening path.

What to Watch for This Week

Consumer Credit rose by $20.1 billion in August and the September number should show an increase of $14.5 billion.

Consumer Sentiment in early November should come in at 98.0 from the final October figure of 98.6.