On a shortened week with the Christmas holiday, last week’s data releases gave a mixed look at the consumer and business sectors, with notably different results.
Last week’s releases
Consumers continued to do reasonably well. Personal income was up 0.3 percent, beating expectations of a 0.2-percent gain. The details were even better, with wages and salaries up 0.5 percent, although about one-third of that was due to a one-time bonus to union auto workers. Consumer spending also increased 0.3 percent, as expected. In the long term, over the past year, disposable personal income is up 3.7 percent, while spending is up 2.8 percent, suggesting that consumers’ actual economic status continues to improve, even as they remain cautious in their spending. As I have noted before, however, in many respects this is a good thing—slow, sustainable spending growth is preferable to faster, debt-fueled growth. Savings rates remain at high levels, putting this level of growth firmly in the sustainable category.
Home sales were a mixed bag. Existing home sales were expected to decline slightly, due at least in part to a lack of inventory. In fact, they dropped substantially, by 10.5 percent to 4.76 million, as opposed to an expected decline of 0.2 percent. One potential reason for this unexpected decline was a new federal rule on closings, which delayed closing for several days. Although this reasoning is possible, it remains to be proven, and this decline is therefore worrying.
That being said, the underlying demand for housing still looks solid, according to both housing prices, which reached a new high, and pending home sales. Overall, it is quite possible the disappointing results may well be due to a shortage of inventory and the new rules. But even with that, a downward revision in the previous month suggests housing demand may be starting to slow.
New home sales, on the other hand, were more mixed. Although the gain of 4.3 percent to 490,000 was above expectations of a 2.0-percent gain, a downward revision to the October number means that the results were still below expectations on an absolute basis, again potentially signaling a slowdown. On a longer-term basis, sales are still above the six-month average and up 9.1 percent over the previous year. But trend growth may be slowing, although not as much as for existing homes.
Also mixed were the durable goods orders, an indicator of business confidence. They were flat in November, which was better than the expected decline of 0.6 percent—but only because aircraft orders declined by less than expected, and motor vehicle orders ticked up unexpectedly. Excluding transportation, orders fell by 0.1 percent.
The details were more worrying. Shipments of nondefense capital goods were down by 0.5 percent, and the previous month was revised down from a decline of 0.5 percent to a drop of 1.0 percent. Absent a small recovery in December, equipment investment looks to have actually declined in the fourth quarter, which is discouraging.
Overall, last week’s results are in line with our previous conclusion that the consumer-related domestic economy continues to grow but is being held back by a slower business sector and weakness in demand from the rest of the world. Signs of a slowdown are certainly there, but with consumer earning power and spending continuing to increase, the foundation of the economy remains solid, for the moment.
The week ahead
This week will also be a short one due to the New Year’s holiday, with not much data. The Conference Board’s Consumer Confidence survey will be released on Tuesday, which should give a direct read on the consumer. Mortgage application numbers and pending home sales, to be released on Wednesday, should give some context to whether the poor home sales numbers last week are the start of a bigger trend. This week, in other words, should give us some better context to evaluate just what last week meant.
I hope everyone is having a wonderful holiday season, and I wish you all the best for the rest of 2015. Happy New Year!