May 27, 2014
Last week: The Conference Board Leading Economic Index continues to point toward more solid footing for the U.S. economy. Investors remain skeptical. After the drop in bond yields last week, yields moved very little this week. Are consumers equally skeptical? This week’s consumer confidence report will show whether consumers remain in a “wait and see” mode. Of course, consumers pay more attention to changes in the labor market than the bond or stock market. Next week, the latest news on job growth may live up to consumer expectations and help convince them that it is time to finally implement some long delayed replacement purchasing.
The Conference Board Consumer Confidence Index, May
The data point to an improving economic environment. Are consumers buying it? Confidence, especially consumer expectations, was higher in April than at the start of this year. Did it move higher in May?
Personal Income and Outlays, April (Bureau of Economic Analysis)
Income growth has generally been in a range of about 0.2 to 0.3 percent. Spending was even slower through March but might have improved in April, as the severe winter weather lets up. The bigger issue is whether job growth and some rise in wages will be enough to move above that 0.2 to 0.3 percent range.
Question of the Week: Is the housing recovery running out of steam?
The housing recovery certainly ran into more than a simple speed bump. Consider that sales of existing homes peaked in July of 2013. But that’s not all. Sales peaked in different parts of the country nearly simultaneously. That’s not a typical pattern. Moreover, the drop in sales ran counter to all computer models. Clearly something happened to change the trend, and in an unusual manner. Perhaps the rise in mortgage rates, as well as the run up in home prices resulted in a pull back. Another factor may have been the slowing in sales of distressed homes – foreclosed homes put on the market. A third factor had to do with the number of sales to those buying a home to rent out or renovate and resell (so-called flip sales).
Mortgage rates have actually retreated a little from the peak last year. The supply of distressed homes has continued to dwindle, though the pace has slowed. On the other hand, with job gains averaging almost 200,000 per month over the past 12 months, and expected to continue, if not accelerate a little, demand for homes could well start moving up.
One more factor affects sales of homes: getting mortgage approval. This likely did not impact sales last year as lending conditions remained restrictive. Many lenders were still dealing with nonperforming loans. This problem has diminished to the point that some lenders have eased credit conditions. In sum, fewer diminished sales, fewer flip sales, more sales to the newly employed, mortgage rates not moving up (at least for now), and eased lending conditions should all combine to allow home sales to start moving higher. In turn, more demand would send more crews out to build more new homes. So, no, the housing recovery is not running out of steam. It did hit a speed bump. But that speed bump is now in the rear view mirror.
Source: The Conference Board
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