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Monday Update: Housing Better Than Expected, Other Indicators Disappoint

Written by Brad McMillan, CFA®, CFP® | Dec 24, 2018 3:27:33 PM

Last week was a busy one on the economic front, with several reports on housing, a look at durable goods demand, and the consumer income and spending report. This week is a short one, due to the Christmas holiday, but there are a couple of economic reports worth paying attention to.

Last week’s news

On Monday, the National Association of Home Builders survey showed another unexpected drop, to 56 for December. This result was worse than a small expected increase to 61 and down from 60 in November, which itself was a surprise drop from 68 in October. This suggests that the housing market may well continue to weaken.

The housing starts report, which was released on Tuesday, was more constructive. Housing starts rose from 1.228 million in October to 1.256 million for November, against an expectation for a flat result and after a small increase in the prior month. This suggests that actual activity remains relatively healthy despite the drop in sentiment.

On Wednesday, the existing home sales report also beat expectations. Sales rose from 5.22 million in October to 5.32 million in November, against an expected small decline. While housing in general has certainly slowed over the past year, that slowing trend may be moderating.

Also on Wednesday, the Federal Reserve Open Market Committee concluded its regular meeting with a press conference. As expected, the Fed raised its baseline rate by 25 basis points once more. But Chair Powell indicated that further increases were likely on track for 2019, significantly disappointing markets. Hoping for a more dovish stance, markets reacted negatively.

On Friday, the durable goods orders report was released. The headline index rebounded substantially from last month, although by less than expected. It went from a 4.3-percent decline in October to a gain of 0.8 percent in November, on an increase in aircraft orders. This headline index is notoriously volatile, as we can see. The core index, which excludes transportation and is a much better economic indicator, disappointed. Here, we saw a decline of 0.3 percent, although this was partially offset by an upward revision to October’s growth from 0.2 percent to 0.4 percent. This may be further evidence that business investment is slowing, which would be a headwind for 2019 growth.

Finally, also on Friday, the personal income and spending report showed that personal income continued to grow. It rose by 0.2 percent in November, down from 0.5-percent growth in October and below expectations of 0.3-percent growth, on slower job and labor demand growth. Personal spending growth also declined. It went from an upwardly revised 0.8 percent in October to 0.4 percent in November, on a decline in gasoline prices, which will offset rising retail sales. This remains a healthy level of spending growth, although it is becoming less well supported by income growth.

What to look forward to

On Wednesday, the Conference Board Consumer Confidence Index is expected to pull back further. It is likely to go from 135.7, which remains close to the almost two-decade high of a couple of months ago, to a still very high 133.6, on the recent stock market turbulence and rising political concerns. Even with the further pullback, confidence would remain close to the highest levels in the past 20 years and would be supportive of continued growth.

Also on Wednesday, the new home sales report is expected to improve, from 544,000 to 567,000, which would be in contrast to the weak home builder sentiment survey from last week. If the number comes in as expected, it will signal that while housing growth continues to slow, the downtrend may not be quite as bad as the recent data suggests.

Thanks for reading and have a great Christmas week!