Monday Update: Confidence Improves as Consumer Fundamentals Pause

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 27, 2016 5:22:56 PM

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monday updateLast week’s data was generally positive, with the housing market doing well and business investment improving. Consumer income and spending growth paused, however, suggesting that we need to keep an eye on the situation of the average American consumer.

Still, the news was better than the previous week—and, as of this morning, consumer confidence had registered another strong gain.

A look at last week’s data

Housing performs well. Last week offered more insight into the housing industry, this time from the consumer demand side.

  • Existing home sales increased in November for the third month in a row, up by 0.7 percent to 5.61 million, the highest level since early 2007. This rise came against an expected decline to 5.52 million. Sales were up by 15.4 percent on a year-to-year basis, the fastest growth since mid-2013, suggesting that momentum continues to strengthen.
  • New home sales also surprised to the upside, with Friday’s release showing an increase to 592,000, the biggest in four months. A 5.2-percent jump from 563,000 the previous month, November's results beat expectations for an increase to 575,000. Longer-term trends also strengthened, with the 12-month average hitting its highest level since August 2008.

Business confidence looks solid. The durable goods orders report showed that headline orders declined as expected in November, from a gain of 4.6 percent to a decrease of 4.6 percent, on a big drop-off in aircraft orders. Core orders posted a reasonably strong gain of 0.5 percent, down from a very strong 0.8 percent but beating expectations for 0.2-percent gain. Core business orders also fared better than expected, up 0.9 percent, and longer-term trends continue to improve.

Overall, though these numbers were not very strong, they do represent ongoing improvement and suggest that business investment will likely continue to strengthen.

Income and spending somewhat disappointing. Finally, we got a last look at the consumer with the personal income and spending report for November. Here, the results were somewhat disappointing. Personal income growth was particularly weak, coming in flat after an increase of 0.6 percent the previous month, well below expectations of a 0.3-percent gain. Personal spending growth also slowed to 0.2 percent, the lowest level in three months and below expectations for an increase to 0.4 percent.

Looking ahead

Today, the Conference Board’s consumer confidence survey once again surprised to the upside, coming in at 113.7, up from 107.1 and beating expectations of 109. This is its highest level since 2001, suggesting that, despite weak personal income and expense growth, consumers are increasingly optimistic.  

There are no other significant data releases this week, thank goodness, so we can all relax a bit. After the New Year, however, the data deluge resumes. Next week’s reports will show us how business sentiment is evolving, what the Federal Reserve has been thinking, and (most important) how the job market is doing.

  • On Tuesday, January 3, the ISM Manufacturing Index is expected to show further strength, increasing from 53.2 to 53.5, confirming the sector’s recovery.
  • On Wednesday, January 4, minutes from the Federal Open Market Committee will be released. I’ll be keeping an eye out for comments on the Trump administration’s likely fiscal stimulus and what that might mean for the economy and monetary policy.
  • On Thursday, January 5, the ISM Non-Manufacturing Index is expected to drop back slightly, from 57.2 to a still strong 56.5, suggesting steady growth.
  • On Friday, January 6, the international trade report should show that the trade deficit has remained stable.
  • Also on January 6, the jobs report is expected to show continued employment growth of around 175,000, consistent with the previous month’s 178,000. Wage growth is expected to bounce back, from a decline of 0.1 percent to a gain of 0.3 percent. Business surveys continue strong and temporary hiring is also positive, both of which are good indicators.

Have a great week!

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