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Last week was a busy time for economic updates, with a focus on the housing sector. The reports for this important sector of the economy largely pointed toward continued healthy levels of growth to end the year. This week will also be packed with updates, with the first look at fourth-quarter GDP growth and December’s personal spending and income reports serving as potential highlights.
Last Week’s News
On Wednesday, the National Association of Home Builders Housing Market Index for January was released. Home builder confidence fell from 86 in December to 83 in January, against expectations for no change during the month. Despite the decline to start the year, the index sits near the all-time high of 90 it hit in November, signaling continued high levels of home builder confidence. Home builders cited a lack of available lots to build on and rising lumber prices as headwinds toward higher confidence in January. With that being said, home builder confidence has rebounded notably since the index hit a pandemic-induced low of 30 in April, as evidenced by January’s strong result. High levels of home builder confidence typically support faster new home construction, so this report bodes well to start the new year.
Thursday saw the release of the December building permits and housing starts reports, which came in well above expectations. Permits rose by 4.5 percent during the month, against calls for a 1.7 percent decline. Starts increased by 5.8 percent, much higher than economist forecasts for a 0.8 percent increase. These strong results brought starts and permits to their fastest pace since 2006, highlighting the continued strength of the housing market. As was the case with home builder confidence, both permits and starts have increased notably since initial lockdowns were lifted last year. Given the low supply of homes for sale, the continued high levels of home builder confidence, and rising house prices, the pace of new home construction is expected to remain robust for the immediate future, despite rising construction costs.
Thursday also saw the release of the initial jobless claims report for the week ending January 16. Initial unemployment claims fell during the week, from a downwardly revised 926,000 to 900,000, against calls for an increase to 935,000. Continuing unemployment claims, which are reported with a one-week lag to initial claims, also fell by more than expected. They declined from 5.181 million to 5.054 million, against calls for an increase to 5.3 million. Despite these results, unemployment claims at these levels represent a concerningly high number of unemployed Americans on a historical basis. Claims near current levels are a signal that the labor market is continuing to feel the impact of increased state and local restrictions meant to combat the spread of the pandemic. Ultimately, we will need to see significant progress in getting folks back to work in order to achieve a full economic recovery. Accordingly, this report will continue to be widely followed.
We finished the week with Friday’s release of the December existing home sales report. Sales of existing homes beat expectations, rising by 0.7 percent during the month against forecasts for a 1.9 percent decline. Capping off the strongest year for existing home sales since 2006, this report is further evidence of the continued strength of the housing market. Record low mortgage rates and shifting home buyer preference for larger spaces led to a surge in home buyer demand throughout 2020. On a year-over-year basis, existing home sales grew by 22.2 percent in December. Although the rebound in housing demand during the year was a positive development, the supply of homes for sale is very low and prices continue to rise. Looking forward, significantly faster sales growth will be hard to come by. Nonetheless, if sales remain near current numbers, they would represent very strong home-buying activity and a healthy housing sector.
What to Look Forward To
On Tuesday, the Conference Board Consumer Confidence Index for January will be released. Economists expect to see this gauge of consumer sentiment rise modestly from 88.6 in December to 89.1 in January. Following the four-month low set by the index in December, this result would be a step in the right direction. Still, it would leave confidence well below the post-lockdown high of 101.4 recorded in October 2020. Historically, improving consumer confidence has supported faster consumer spending growth, so any improvement for the index would certainly be welcome. With that said, however, we’ll likely have to make significant progress in combatting the third wave of the pandemic before we see a large jump in consumer confidence. With mass vaccination efforts picking up steam, the public health situation looks set to improve over the upcoming months. This would likely bolster consumer confidence and spending.
Wednesday will see the preliminary release of the December durable goods orders report. Durable goods orders are expected to rise by 1 percent during the month, in line with November’s 1 percent increase. Unlike consumer spending, business spending held up well in the fourth quarter of 2020, despite rising coronavirus case counts and restrictions at the state and local levels. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to rise by 0.5 percent in December, up from a 0.4 percent increase in November. If estimates hold, this report will mark eight straight months with growth in both headline and core durable goods orders. These indicators are often viewed as a proxy for business investment, so continued growth would be a positive sign that business spending remained healthy in the fourth quarter of 2020.
Wednesday will also see the release of the FOMC rate decision from the Fed’s January meeting. The central bank lowered the federal funds rate to virtually zero in March of last year, and economists do not anticipate any changes to this rate until at least 2023. Given the anticipated environment of low interest rates, economists will be largely focused on the potential for changes to the Fed’s asset purchase programs over the next few FOMC meetings. No plans are in place to decrease the monthly purchases of Treasury and mortgage-backed bonds. But, given the impact that Fed buying has on the market, any mentions of future changes to asset purchase plans will be closely monitored. There may also be some discussion on how Fed members view the current and expected public health situation, especially now that vaccine rollout is underway.
On Thursday, the advance estimate of fourth-quarter GDP growth will be released. Economists expect to see the economy grow by an annualized rate of 4.4 percent during the quarter, down from the 33.4 percent annual growth rate in the third quarter. The surge in third-quarter growth was largely due to the weakness in the second quarter and a rebound in spending once initial lockdowns were lifted. The anticipated slowdown heading into the fourth quarter is due to a sharp decline in consumer spending growth, which was the major driver of third-quarter GDP growth. Personal consumption grew at an annualized rate of 41 percent in the third quarter, but economists expect to see this growth rate fall to an annualized 3.2 percent in the fourth quarter. Over the next few quarters, low to mid-single-digit economic growth is the most likely path forward, given the continued headwinds created by the pandemic. Nonetheless, we can hope that an improving public health picture will get us back to more normal economic conditions by the end of 2021.
Thursday will also see the release of the initial jobless claims report for the week ending January 23. Forecasts call for a drop in weekly initial unemployment claims, from 900,000 to 875,000. While this decline would be a positive development, the number of initial claims would remain high on a historical basis if estimates hold. The number of weekly initial claims has dropped notably since peaking at 6.87 million in March 2020, but initial claims have remained largely range bound since September. Given the high level of overall claims on a weekly basis, this lack of continued improvement is a concern. It signals that the labor market is still facing considerable stress due to the pandemic. With claims at historically high levels, this weekly report will continue to serve as an important barometer for the overall health of the labor market.
The third major data release on Thursday will be the release of the December new home sales report. The pace of new home sales is expected to rise by 1.3 percent during the month, following an 11 percent decline in November. New home sales are a smaller and often more volatile portion of the housing market compared with existing home sales. If estimates hold, this report would bring new home sales to their fourth-highest monthly level since 2008, highlighting the healthy rebound seen since initial lockdowns were lifted. As was the case with existing home sales, record low mortgage rates and shifting buyer preferences led to an encouraging resurgence in new home sales last year. Looking forward, low supply and rising prices are expected to serve as a headwind for significantly faster growth for this segment. Still, if the pace of new home sales remains near current levels, it would signal a noted increase compared with recent years.
On Friday, December’s personal income and personal spending reports are set to be released. Forecasts call for a 0.2 percent increase for personal income, while spending is set to fall by 0.5 percent. Personal spending has been hard-hit by the third wave of infections, as well as the increased state and local restrictions associated with the pandemic. A decline in personal spending in December would mark the first two months with consecutive spending declines since the initial lockdowns in March and April 2020. With that said, the anticipated decline in December is much more modest than the 12.7 percent decline in spending we saw in April. This fact indicates that consumers are dealing with the third wave with much more resiliency than they did with the first wave. Personal income has been very volatile on a month-to-month basis, due in large part to shifting levels of federal income support and stimulus. The anticipated rise in income in December is encouraging, as it would be the first increase since September 2020. Looking forward, the additional stimulus passed at the end of 2020 should support faster income and spending growth. Nonetheless, we’ll have to wait to see the results as they feed through in January’s data.
We’ll finish the week with Friday’s release of the second and final reading of the University of Michigan consumer sentiment survey for January. The initial estimate for this index showed confidence falling by more than expected, from 80.7 in December to 79.2 in January. Calls were for a slightly more modest decline to 79.5. Economists do not expect to see any intramonth change for the index for January. If estimates hold, this report would be slightly disappointing, given the boost to spending growth that rising confidence typically provides. With that said, the index is expected to remain well above the initial lockdown-induced low of 71.8 it hit in April. This result would be another sign that consumers are showing more resiliency in dealing with the pandemic compared with last year. Given the relationship between improving consumer confidence and faster spending growth, this release will continue to be widely monitored.
That’s it for this week—thanks for reading and stay safe!
