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Home and Car Sales Clearly Reflect Confidence in Economy

Image: Home and Car Sales Clearly Reflect Confidence in Economy

By    |   Tuesday, 24 May 2016 12:17 PM

  • INDICATOR: April New Home Sales and May Philadelphia Fed Non-Manufacturing Survey
  • KEY DATA:  Home Sales: +16.6%; Prices: +9.7%/ Phila. Fed: -8.9 points; Orders: +9.2 points
  • IN A NUTSHELL:  “Households went out an bought lots of homes and vehicles in April and if that isn’t a clear sign of confidence, I don’t know what is. ”
WHAT IT MEANS:  Just when you thought it was safe to say that the Fed would not raise rates again for a while, along comes the economy, which is showing clear sings that it is bouncing back sharply from the winter malaise.  New home sales soared in April to their highest level in over eight years.  The gains were in three of the four regions, with only the Midwest posting a decline.  The Northeast, where sales had fallen so low that rather than reporting the number of homes sold they had started simply listing the names of people who bought houses (just joking), saw demand up by over 50%.  Both the South and West increased by over 15%, so their gains were not too shabby either.  But the real eye-opener was the median price number: It spiked and hit the highest level on record, as households started buying more expensive homes again.  In April, 56% of the houses purchased cost over $300,000.  In 2015, only about 49% of the houses cost that much.  That is good news for builders, who just may start putting more shovels in the ground.
The Philadelphia Federal Reserve Bank’s May survey of non-manufacturing firms showed some very odd results.  While respondents said the region’s economy slowed, their own activity picked up, led by a surge in new orders and sales.  Huh?  Conditions are worsening even as demand is rising and hiring is accelerating?  And, optimism about both the local economy and their own businesses faded.  A special question was asked concerning wage costs and price inflation.  Respondents expect wages to rise by about 2.5% over the next year, which is below the 3% that manufacturers forecasted, but still solid.  On the inflation front, both service and manufacturing employers expect consumer prices to rise by about 2.5%, which is above the Fed’s target.  In other words, most businesspeople in the MidAtlantic region expect inflation to pick up over the next year to levels that would lead to more Fed rate hikes.

MARKETS AND FED POLICY IMPLICATIONS:  The FOMC April minutes said that a rate hike in June was a possibility if the economy continued to show signs of rebounding.  Well, housing is one sector that still has lots of room to run and I am no Exaggerator when I say that it can win.  (Sorry about that.)  A strong housing market, where starts and sales are rising solidly, significantly affects other parts of the economy.  Existing home sales rose, though modestly in April, while new home demand jumped.  While the May numbers will likely be softer, there is a clear upward trend in sales and prices that should trigger a new round of construction.  We started the second quarter with some really good numbers for housing, vehicle sales and retail sales, pointing to renewed strength in the consumer sector.  But those increases have to be sustained. Before the June14-15 FOMC, we get the May jobs numbers, vehicle sales and retail sales, so the Committee should have enough information to make a decent guess at second quarter GDP.  I have growth above 3% and the numbers are coming in strong enough that most forecasters will likely be revising upward their expectations.  A number at or above 3%, with wages rising even modestly in May after the surge in April, should be enough to get he Fed to raise rates either in June or July.  As for investors, if they keep in mind that slow growth means weak earnings - and earnings have been soft - then they should be happy with stronger growth and higher rates.  But we shall see.  

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm. To read more of his blogs, CLICK HERE NOW.

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Households went out an bought lots of homes and vehicles in April and if that isn’t a clear sign of confidence, I don’t know what is.
home sales, vehicles, economy, confidence
Tuesday, 24 May 2016 12:17 PM
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