Midweek Round-Up
This is getting monotonous: leave the news for a few days – as I did over the weekend until yesterday – and nothing much changes. We live in an era of economic nuance rather than change. Except for the Euro, of course, but that’s for tomorrow. Today let’s catch up on the data so far this week.
First up we heard Monday that sales of new homes edged up to an annual pace of 307,000 in October. That’s better than September’s 303,000, but not much. And it was a lot worse than the widely quoted forecast of 320,000. The median prices of these sales dropped by a further $1,000 to $212,300, and the unsold inventory also dropped to about 6.3 months worth of supply. Evidently the real estate market is still mired in its slump despite record low mortgage rates and continued weakness in prices.
As if to reinforce this picture on Tuesday we read that the Case-Shiller index of home prices slipped again. The latest data we have is for September and records an 0.6% drop in prices, bringing the overall decline to 3.6% over the last twelve months. There isn’t much to add to this other than to point to the very thin dataset – there just aren’t that many sales in each area nowadays to provide a robust sampling of activity. So these numbers are to be taken with a large dose of salt. Still, given all the other evidence, it is clear that our real estate woes linger on.
In brighter news the Conference Board reported that its measure of consumer confidence jumped strongly in November, rising more than 15 points to reach 56. This was the largest monthly increase since 2003 and lifted the index from the miserable 40+ range recorded in the revised October figures. So consumers appear to be headed into the holiday spending season on something of an upbeat mood. But let’s not get carried away – in a good year this index typically reaches the 90+ range, so we are a very long way from a healthy consumer attitude. Interesting details within the guts of the survey include the fact that the number of consumers planning to buy a home sometime in the next six months ticked up slightly – to 4.7% of consumers; and the expected rate of inflation dropped from 5.8% to 5.5%. This latter point is interesting because actual inflation, as measured by the official statistics is much lower than that and also trending down. Clearly consumers are facing a different price experience than that reflected in the government data. Or, perhaps more likely, they are unduly influenced by one or two items that have been more volatile, whilst overlooking other items that have declined in price.
They may, of course, also be reflecting the decline in real earnings caused by the combination of flat wages and slight inflation. Either way, it would be reasonable to expect consumers faced by a 5.5% inflation rate to accelerate some purchases, especially if they perceive that wages will lag nominal prices. This expectation may be one reason that retail sales have edged up a bit lately despite those flat wages.
Next came the even better news in the ADP payroll data: private sector payrolls jumped 206,000 in November, the largest one month gain in almost a year and twice the rate of growth we have seen over the past few months. This is clearly a much better performance in the employment market and suggests that the total payroll outlook – including government employment – may also have improved. It is very difficult to get a good read on the overall job market at present because the government side of the ledger is experiencing a significant shift. The large scale reduction in workers at the state and local level seems to be over: employment there is now fairly constant. But we about to see a much more aggressive shedding of federal jobs as defense payrolls are trimmed as the Iraqi and Afghanistan military ventures are unwound. Because of this it looks as if the unemployment rate will stay unchanged, so all that good news in the ADP data may amount to little improvement after all.
Lastly, and back to real estate, there was a jump in pending home sales in October. These are sales where a contract has been signed, but the transaction has not yet closed. They were up 10.4%, a very strong performance. The main strength coming in the Midwest where they rose 24.1%, and the Northeast where they rose 17.7%. In contrast the West saw a 0.3% decline. Overall pending sales are up 9.2% over this time last year, so those low mortgage rates and weak prices are inducing some consumers to enter the market. Whether this pace can be sustained is more a function of future incomes, employment prospects, and inflation.
And that remains an enigma.
So the news this week – so far – has been the same kind of mixed bag we have experienced for months now. There is no sign of a weakening trend, but the ongoing improvement is sketchy at best. Toss in our perpetual election cycle during which it will be next to impossible to get a policy shift and the prospect for the next few months stays the same: a long slow sideways crawl fraught with risk and downside possibilities.
No change in the outlook. No change in policy. No change in much at all. At least not based on this week’s numbers.
