On Tuesday, the National Association of Home Builders Housing Market Index for January was released. Home builder confidence dropped modestly to start the year, as the index fell from 84 in December to 83 in January against calls for no change. This is a diffusion index, where values above 50 indicate expansion, so this result signals continued construction growth despite the decline. Home builder confidence has remained in solid expansionary territory following the expiration of initial lockdowns in 2020. Since then, high levels of home buyer demand and a lack of homes for sale has supported faster construction growth. Home builder confidence sits well above pre-pandemic levels, signaling more construction growth in the months ahead. The continued strength of home builder confidence is impressive, given the headwinds caused by rising material and labor costs for homebuilders. Today’s report indicates a healthy housing sector to start the new year.
Wednesday saw the release of the December building permit and housing starts reports. Both measures of new home construction increased by more than expected. Permits rose by 1.4 percent, against calls for a 1.7 percent decline. Starts jumped by 9.1 percent, against forecasts for a 0.8 percent drop. This report marks two months in a row in which the pace of construction has beat the estimates. Although these reports can be quite volatile month-to-month, construction grew by 15.6 percent on a year-over-year basis throughout 2021. This trend highlights the tailwinds from high home buyer demand and a lack of existing homes for sale. Given the still-high levels of home builder confidence in January, construction is expected to stay strong in the months ahead. This would represent healthy development for the supply-constrained housing market.
We finished the week with Thursday’s release of the December existing homes sale report. Sales of existing homes fell by 4.6 percent, against calls for a more modest 0.6 percent decline. November’s existing homes sales were revised up, however, which helped offset the decline to finish out the year. Despite December’s drop in existing home sales, home sales showed impressive strength throughout 2021. The 6.12 million existing home sales during the year was the most recorded in a year since 2005. The drop in sales in December likely reflected ongoing supply constraints, as well as modestly higher mortgage rates. Looking forward, supply constraints, rising prices, and rising mortgage rates may serve as a headwind for notable sales growth. Still, sales near current levels would signal a strong housing market in 2022.
Tuesday will see the release of the Conference Board Consumer Confidence Index for January. This measure of consumer confidence is expected to decline slightly to start the new year. Economists anticipate the index will fall from 115.8 in December to 112 in January. If estimates hold, this report would echo the decline in the advance estimate of the University of Michigan consumer sentiment survey for January. The anticipated result is due to continued consumer concerns about inflation, as well as the rise in case growth related to the Omicron wave. December’s consumer inflation reports showed another uptick in consumer prices at year-end, which capped off a year with rapidly rising prices. Looking forward, it’s possible case growth and inflationary pressure will begin to recede, which could support improvements for consumer confidence and spending. For the time being, however, this monthly report will continue to be widely monitored.
On Wednesday, the FOMC rate decision from the central bank’s January meeting will be released. Economists do not expect to see any changes to interest rates. Still, investors will be closely following the Fed’s press release, as well as Fed Chairman Jerome Powell’s post-meeting press conference, for hints on the path of future policy. In December, the Fed announced it would be decreasing its secondary-market asset purchases at a faster rate than originally anticipated. This signaled the central bank is working to normalize monetary policy sooner rather than later. Given the continued inflationary pressure at year-end, as well as the improvements throughout 2021 to the labor market, the Fed is expected to spend much of 2022 combatting inflation. The central bank aims to promote stable prices while unwinding the fiscal support put in place at the start of the pandemic. These plans are a good sign, as they indicate the Fed’s positive outlook on the economy. Nonetheless, as changes to monetary policy always have the potential to rattle markets, they should be closely monitored.
Thursday will see the release of the preliminary estimate of December’s durable goods orders report. Durable goods orders are expected to drop by 0.5 percent, following a 2.6 percent increase in November. The anticipated decline in headline orders is due in large part to a slowdown in volatile aircraft orders to end 2021. Core durable goods orders, which strip out the impact of transportation orders, are expected to increase by 0.4 percent in December. Core durable goods orders are often used as a proxy for business investment, so it’s notable that this report could mark 10 consecutive months with growth for this indicator. Business spending was supportive throughout 2021, as business owners scrambled to invest in equipment and labor to meet high levels of consumer demand.
Thursday will also see the release of the advanced estimate of fourth-quarter GDP growth. The economy is expected to show growth at an annualized rate of 5.8 percent during the quarter. That result would be up from the annualized growth rate of 2.3 percent in the third quarter of 2021. So, if estimates hold, they would demonstrate an impressive rebound for economic growth to finish out the year. The anticipated growth is partially due to expectations for faster personal consumption. Economists expect consumption to increase by 3 percent on an annualized basis in the fourth quarter, up from the 2 percent annualized growth in the third quarter. Looking forward, the pace of overall economic growth is expected to moderate in 2022. Still, if the fourth-quarter estimates prove accurate, the economy would enter the new year on solid footing and with strong momentum.
We’ll finish the week with Friday’s release of the December personal income and personal spending reports. Mixed results are expected. Personal income is set to increase by 0.5 percent, while spending is set to drop by 0.5 percent. If estimates hold, this report would break a nine-month streak of personal spending growth. It would echo a decline recorded in the previously released retail sales report for December. According to the retail sales report, consumer spending on goods and services fell during the month. This decline was a slightly disappointing finish to 2021, but it was understandable given consumer concerns about the Omicron wave and inflation. Personal income has been quite volatile throughout the pandemic, as shifting federal support payments led to large swings in monthly income. Looking forward, the expiration of the advance monthly child tax credit payments at the end of 2021 is likely to weigh on personal income growth in January. Nonetheless, a tight labor market could support income improvements throughout 2022.
That’s it for this week—thanks for reading!