The stock market had yet another good week as bonds faltered and emerging markets remained on a yo-yo. The S&P 500 Index was up 1.3%, the 10-year Treasury bond touched 3%, and emerging markets seesawed, but the overall Emerging Market Index ended up rising 1.6% after a brief scare on Thursday.
The housing market data looked better this week, though I still believe the industry will continue plateauing until credit for housing becomes easier to obtain. Mercifully, home price growth has begun to slow somewhat, just in the nick of time to prevent home prices from moving back to a range that would make them unaffordable.
Great consumption news this week was tempered by the fact that a good part of the gain was auto-related. Even worse, income data continued in its short-term funk, providing little fuel for further consumption gains. Durable goods orders saw a nice tick upward, as business attitudes toward spending on long-lasting goods seemed to pick up markedly with the resolution of the government shutdown and now the new two-year budget deal. This should spell more good news for manufacturers in the months ahead. However, I continue to caution that a lot of manufacturing data seems to be driven by the auto industry, which seems to have driven up production just a little more than justified by the current data set.
The evidence this week suggests a stronger economy, but not a sharply stronger one. I am still not buying the escape velocity, rapid acceleration, 3%-plus growth rate arguments for 2014. Both autos and housing are likely to contribute less to GDP growth in 2014 than in 2013. Furthermore, inventories are not likely to be as big a contributor to growth as they were in 2013. Still, inflation-adjusted GDP growth at the high end of my 2.0%-2.5% range is entirely possible, and the likelihood of a big slump seems remote.
I am trying to temper the animal spirits that seem to be driven by the short-term economic numbers that look better, at least for now. I hope to be the voice of optimism in early 2014 and into the spring, when the data might suggest a temporary weakening (higher heating costs, new home lending limits, difficult comparisons, and other issues related to cold weather). Reduced unemployment benefit periods, which begin starting after Saturday, and food stamp reductions in place since November (unless reversed by Congress) are likely to keep a lid on things, too.
Data out of China this week suggested more 7.5% or so growth without any strong indicators of an accelerating pace that could aid world growth rates more than they already are.
Consumption Report Contains Both Good News and Bad News
November consumption growth trends look to be accelerating based on both a year-over-year and month-over-month basis. Month-to-month inflation-adjusted consumption growth was up 0.5% in November, a nice follow-up to the 0.4% growth rate for October. One would have to go all the way back to February 2012 to find a better month-to-month improvement than in November. The November consumption data is an awful lot better than the zero growth rate experienced in April and the 0.1% growth rate experienced in July.
Even the slower-to-move, averaged, year-over-year consumption data turned in its best performance since mid-2012. Given that the consumption category makes up about 70% of the GDP calculation, these numbers are really good news for the fourth quarter's overall economic growth. Even with almost no month-to-month consumption growth in December, the full fourth-quarter consumption growth rate could be up as much as 3.5%, considerably better than the third quarter's 1.9% growth rate.
So What's Not to Like About the Great November Consumption Report?
As good as the headline numbers were, the data was exceptionally lopsided--durable goods and higher utility growth (due to colder-than-normal weather) drove almost all of the growth. Broad swatches of consumption categories showed little or no growth. Durable goods grew 2.2% in November, and non-durable goods didn't grow at all. Services finally looked a little better with 0.4% growth, but as mentioned above, strong utility sales were probably behind most of that expansion. Unfortunately, utility growth doesn't do much to help employment gains. Autos were largely behind the large jump in the monthly consumption numbers and accounted for half of that gain. It will be exceptionally difficult for autos to match that large gain in December. In fact, auto sales are likely to be down in December compared with November, at least on a seasonally adjusted basis.
Income Data Didn't Keep Up With Spending
Although consumption grew nicely in November, income barely outpaced inflation at 0.1% growth in November and was even down during the month of October. Spending and income growth have been a little out of sync lately, with incomes sometimes spurting ahead and consumption sitting still. Several months later, spending finally surges ahead just in time for incomes to begin to slow. Then the slowing income growth can cause consumption slumps.
I am always a little wary of using month-to-month data, but the monthly data does show that while consumption growth can be out of whack for a month or two, gravity seems to kick in, pulling the consumption and income data back together again. Unfortunately the numbers seem to indicate that income data could pull down the consumption report after providing several months of tailwind earlier this fall.
New Homes Sales Held Up Well After an October Spike
On the surface, a decline in new homes sales from 474,000 seasonally adjusted, annualized sales in October to 464,000 units in November might appear to be a disappointment. However, a closer look at the numbers shows that November was relatively strong. Recall that sales slumped in all months of the September quarter before showing a large spike in October. I thought this would end up being just a one-time bounce. Instead, the sales rate for November was nearly as high as the October rate and was the second-highest rate of 2013, behind only the October figure. Year over year, averaged data also shows renewed growth after the summer slump.
The average price also held some better news, showing an improving trend. Although a lot of investors focus on the unit volumes, actual transaction values are what drive economic activity. Inventories are also looking less robust and have now dropped from 182,000 homes in September to 167,000 homes currently. That suggests any further increases in sales will likely have to be met with some type of new construction and more new housing starts. Starts had a bump in November, but the home sales number suggests an even better single-family starts number for December (if weather factors don't impede that growth).
I have never been a huge fan of the new home sales report, because it thoroughly mixes sales of homes sitting finished in a development with homes just on the drawing board and those halfway finished. Still combined with the starts report, the summer housing slump could be nearing its end. However, I am not expecting any kind of housing boom or a huge ramp-up. The summer months had a perfect storm of bad news: higher mortgage rates hurt affordability, rapidly rising rates favored quicker-to-close existing home sales, and the uncertainty surrounding the government slowdown all weighed on those summer figures, which slumped badly compared to the spring months.
Some of those factors are now behind us, and we have witnessed a meaningful bounce in new home sales, at least partially at the expense of existing home sales. It is a little less clear whether starts and new home sales are establishing a new higher base, or whether this is a temporary bounce that will disappear in January and February. New higher FHA fees have been tabled for now, though lower lending limits still appear to be in the cards for 2014, which will be a new impediment to growth for the housing industry next year. Better employment and income growth will probably be the key to determining how much the housing market can improve in 2014.
Even if most things break right for the housing industry, I am not expecting housing to be any bigger a contributor to GDP growth than it was in 2013. Things still look more like a plateau than a new boom.
Moderating Lending Standards Is the Missing Piece to Start a Housing Boom
To start a new boom, looser credit standards and a new appraisal regime will be needed to kick things into high gear. Sadly, credit standards could get tighter in 2014 than in 2013 with the implementation of various Dodd-Frank legislative mandates. Recall that it was looser credit standards that set the auto market on fire. The auto market is now approaching its pre-recovery high due to easier lending. With no such loosening on the immediate horizon for housing, even population growth and household formation rates cannot drive single-family housing activity much higher.
I am not necessarily advocating looser standards (though things seem at least a little overdone); instead, I am just pointing out what is holding things back and at least one example of looser standards (in auto loans) sharply boosting activity.
Home Price Growth Continues in Plateau Mode
FHFA home price data also has slowed from its torrid pace this spring, when home prices increased almost a percentage point for several months running. Seasonally adjusted October prices were up a more normal 0.5% (or over 6% annualized), which would be very consistent with the 5% price growth rate I am anticipating in 2014.
Year-over-year single-point prices were up 8.2% (or 8.3% using a three-month average). By region, the data seem to be converging a bit--most regions are up about 5% year over year, with the Pacific and Mountain regions remaining outliers with 17.5% and 12.7% price increases, respectively. Still, this is a smaller gap than in previous months. Overall prices are about 8.8% below the previous peak in April 2007.
Improved Durable Goods Order Report Shows Renewed Business Confidence
Overall durable goods orders jumped a sharp 3.5% in November, breaking a string of crummy reports and exceeding consensus forecasts for 2% growth. Although transportation goods were a big part of that headline, even excluding them, durable goods orders were up 1.6%.
This report has been dismal for most of the year and seemed at odds with strong manufacturing reports from the purchasing managers. It is good to finally see some improvement in the durable goods report. Even the orders for non-defense capital goods excluding aircraft--a good indicator of business confidence--also improved on a month-to-month basis. The year-over-year data is a little less robust but still looks a lot better than last spring.
There certainly doesn't seem to be either a big boom or a bust in the manufacturing data. The very short-term month-to-month data is looking better, perhaps as more businesses seek to take advantage of tax breaks by the year-end deadline. Or it could be due to the use-it-or-lose-it budget mentality that often motivates managers to spend money at year-end, especially when they may have been holding back during the government shutdown.
Durable goods shipments (not orders) also grew nicely in November, growing 1.8% from October. Combined with good shipment results in October, this could indicate that business investment, a weak category in the third quarter, could look a little better in the fourth-quarter GDP calculation.
Pending Home Sales, ISM Manufacturing Data, and Motor Vehicle Sales on the Docket for Next Week
The data flow for 2014 starts out with a whimper, as many first-week-of-the-month data points are being pushed into the second week, most notably the employment report, which won't be released until Jan. 10.
Of the reports that are due, Friday's auto sector report is the most critical. Auto sales are a great marker for consumer confidence, and recent data has been very strong--perhaps too strong. November auto sales hit 16.4 million units in November, helped along by the Thanksgiving calendar and a very early start to holiday activity and promotions. This probably means that December sales are likely to be down from November, perhaps to around the 16 million car level on a seasonally adjusted annual rate basis. The December estimates I watch have been trending up for the past few weeks as slow sales early in the month are now accelerating sharply at the end of the month, helped along by ever-improving incentives. Original expectations for the month were for sales of just 15.7 million units. Anything around the level of 16 million cars would be great. However, I will also be checking the discounts and incentives offered quite closely. Inventories have grown a bit high, and more incentives have been added to help bring down those high inventory levels.
Given the strong spurt in the ISM purchasing managers' data from November, and some softening in auto production plans, the consensus is expecting the ISM manufacturing index to drop from 57.3 to 56.9. The ISM data has been strong for several months, but auto activity sometimes has an outsized effect on the data. However, it is not entirely clear that all the auto manufacturers are cutting back production, with Ford (F) accounting for a good part of the cutbacks that I am hearing about. Still I would not expect a big change in the ISM data in either direction.
Pending home sales (which are a great predictor of existing home sales) have been falling like a rock since May, with the index moving down from 110 to 101. The rate of decline slowed to less than 1% in October, and I am hopeful that the index can trim that decline even further in December. However, with competition from new home sales continuing to expand, it may be difficult to get the pending index all the way back to zero this month. An index reading above 104 would cause me to re-evaluate my forecast of basically flat existing home sales in 2014.
