INDICATOR: July Consumer Confidence and May Home Prices

KEY DATA: Confidence: down 8.9 points/ S&P Home Prices (National): 0%; Year-over-Year: +4.4%

IN A NUTSHELL: “Consumers seem to be more uncertain than expected but whether that translates into continued restrained spending is unclear.”

WHAT IT MEANS: Jobs and income are growing but households don’t seem to be merry.

The Conference Board’s reading of consumer confidence dropped precipitously in July. The present conditions index cratered while expectations eased more moderately.

Importantly, perceptions about the labor market deteriorated, with fewer respondents expecting more jobs in the future while a growing number expect positions to be harder to find.

On the housing front, prices continue to filter upward but the gains are nothing spectacular. The seasonally adjusted S&P/Case-Shiller National Home Price Index was essentially flat in May.

The increase over the year was a touch faster than in April, but the gain has been between 4.2% and 4.4% this entire year.

In other words, home prices are not accelerating sharply. Looking across the nation, half the twenty metro areas followed reported price declines, using seasonally adjusted numbers.

Only Las Vegas and Miami, the basket cases after the housing bubble burst, showed a monthly increase of 0.5% or more. The national index has risen back to its highest point since February 2008. It is still down 7.5% from its February 2007 peak.

One factor that will drive home prices is the homeownership rate. The percentage of households living in owned units declined again in the second quarter but this time it was not driven by Millennials.

Indeed, the homeownership rate rose for those under 35 years old but fell for every other age grouping, hopefully reversing a long-term decline. That may be good news for the housing market over the next few years. Millennials are becoming the key demographic and we need them to start buying homes if housing is to be a major driver of growth.

MARKETS AND FED POLICY IMPLICATIONS: The large decline in household perceptions about the labor market — and the resulting collapse in confidence — is puzzling, to say the least. Payroll gains have been solid and job openings are high.

Households may be reacting to equity market volatility or political issues, such as the Iran nuclear treaty. If that is the case, the fall in confidence might not translate into slower consumer spending. What drives spending in the short run is incomes, not equity price changes or non-economic issues such as politics. Basically, the confidence decline is probably just transitory. There wasn’t any major change in anything that occurred over the past month to cause that fall. As for housing, price increases in the 4% to 5% range are sustainable, especially if income gains accelerate, as expected.

The Fed is beginning its two-day meeting today and that should put a hold on market activity. If the FOMC signals that a rate hike is near, watch for investors to finally start pricing in higher rates.

If we do get a rate increase in September, I expect a second one in December. The only reason we may not get one in October is that Chair Yellen wants to show that the pattern of rate changes at every meeting set by her predecessors is history.