Monday Update: Housing Keeps Slowing, Income and Spending Solid

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Dec 3, 2018 12:21:42 PM

and tagged In the News

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Monday updateLast week was a busy one on the economic front, giving us a wide range of views on where the economy is going. This week will also be busy, with several key reports.

Last week’s news

On Tuesday, the Conference Board Consumer Confidence Index did slightly worse than expected. It pulled back from an almost two-decade high of 137.9 to a still very high 135.7. The decline largely came from lower future expectations, which may be a warning sign going forward. Even with the pullback, though, confidence remains close to the highest levels in the past 20 years and continues to be supportive of continued growth.

On Wednesday, the second estimate of third-quarter gross domestic product growth stayed the same as the previous estimate, at 3.5 percent. This result confirms the initial indication of continued healthy growth, but it also suggests that growth at the level of the first quarter may not be sustainable.

Also on Wednesday, the new home sales report significantly disappointed. It dropped from 553,000 to 544,000—against an expected increase to 575,000—on top of a disappointing result last month. The housing market slowdown continues, in line with last week’s data, and it may be getting worse. If so, this would be a warning sign for the economy going forward.

By contrast, on Thursday, the personal income and spending report did better than expected. Personal income was up by 0.5 percent in October. This result was better than the 0.4-percent gain expected and up from 0.2 percent in September, on faster job and wage growth. Personal spending also beat expectations, rising by 0.6 percent in October. Here, the outperformance was offset by a downward revision to September’s growth, to 0.2 percent. Overall, this remains a healthy level of spending growth and is well supported by the income growth.

Finally, on Friday, the minutes from the November meeting of the Federal Open Market Committee were released. Markets got the confirmation they were looking for that a rate hike is on the way in December. But this confirmation was offset by later comments by Chair Powell that seemed to signal slower rate increases next year.

What to look forward to

The data flow started Monday, when the Institute for Supply Management (ISM) Manufacturing index surprised to the upside. It rose from 57.7 to 59.3, above the expected 57.5. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this metric remains quite strong. The increase came despite slowing global growth and the recent appreciation in the dollar, which has been increasing the costs of U.S. products to foreign buyers. Uncertainty over trade policy remains a headwind as well. Despite these concerns, the increase suggests that the damage has not yet been significant, and manufacturing will remain positive for the economy as a whole.

On Wednesday, the ISM Nonmanufacturing index is expected to pull back a bit further, from 60.3 to 59.5, after a surprise increase in September to a 21-year high. This is a diffusion index, too, where values above 50 indicate expansion and below 50 indicate contraction. The pullback is expected to come from slowing growth in services. With some surveys indicating more of a slowdown in this sector, there is likely some downside risk here. But even with a larger pullback than the decline expected, this would remain very positive for the overall economy.

On Thursday, the international trade report is expected to show that the U.S. trade deficit widened further in November, from $54 billion to $54.9 billion. We already know from the advance report that the trade deficit in goods widened because export growth has dropped back—even as imports have remained steady. Consequently, there may be some additional downside risk to this report. Overall, if the numbers come in as expected, trade will likely be a drag on fourth-quarter growth.

The University of Michigan consumer confidence survey, to be released on Friday, is expected to show confidence pulling back further from 97.5 for November to 97 for December. This would remain a high level, historically. It suggests that consumers are not yet worried about the effects of a trade war, given the continued strong labor market and decline in gas prices. These factors should continue to support consumer spending and economic growth.

Finally, Friday’s employment report is expected to show that job growth continued to be strong in November, with a gain of 205,000, after an October surge of 250,000. The unemployment rate is expected to stay at a very low 3.7 percent. In addition, wage growth is expected to tick up a bit, from 0.2 percent in October to 0.3 percent for November. Wage growth on an annual basis is also expected to rise, from 3.1 percent to 3.2 percent, on base effects. There is some downside risk here, depending on the impact of the California fires. But if the numbers come in as expected, this would be another healthy report and signal continued economic growth. It would also likely support another rate hike from the Fed in December.

Thanks for reading and have a great week!

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