INDICATOR: December Existing Home Sales and National Economic Activity and November Home Prices
KEY DATA: Home Sales (Month): +3.6%; Annual: 0%/ Prices (Dec.-Dec.): +7.8%; Annual: +4.8%/ NAI: -0.76 point/ FHFA Prices (Month): +0.2%; Over-Year: +4.9%
IN A NUTSHELL: “The previous weak link, housing, is coming back but the current laggard, manufacturing, is slowing further.”
WHAT IT MEANS: Today’s economic reports were an economist’s dream: There was some good news, some bad news and some mediocre news. Okay we don’t have three arms, but you get the picture. First, the good news. The National Association of Realtors reported that existing home demand jumped in December to its highest level in nearly two years. Strong sales of multifamily units led the way. Single-family purchases were up decently. Solid gains were reported in three of the four regions, with only the Midwest posting a decline. How long the strong increases can be sustained is open to question. Inventories are largely nonexistent. At current selling rates, there is only three months of supply, well below what there should be. If you cannot find a house to buy, you cannot buy a house and we are now at that point when it comes to sales. Indeed, the flat annual sales pace is likely more the result of the lack of inventory than demand and unless the willingness to list homes changes, there is little reason to think sales will soar this year. For sellers, though, the low inventory is a good thing: Price gains are coming back and they could accelerate this year.
Speaking of prices, the Federal Housing Finance Agency’s home price index rose moderately in November, though the year-over-year gain decelerated a touch. It looks, though, as if the decline may be stabilizing.
As for the overall economy, conditions appear to be deteriorating further. The Chicago Fed’s National Activity Index cratered in December. The index has been signaling below trend growth for the last year. With production faltering and hiring slowing, there is little likelihood that the economy will surge anytime soon. Yes, the administration is claiming we will get 3% growth this year and it would be even higher without the Fed standing in the way, but that is not likely given the labor shortages and softening wage growth. Indeed, ADP reported that wage growth decelerated by a half percentage point this the beginning of the year. That hardly bodes well for continued strong consumer spending.
MARKETS AND FED POLICY IMPLICATIONS: Well, we are getting lots of economic forecasts for this year by the administration and if you believe the president and his minions, everything is wonderful and if it isn’t, it’s someone else’s fault. Hmmm, you think we are in an election year? And that reminds us that it would be foolish to believe everything, no make that anything, that comes out of the mouths of politicians and their spokespeople. So look for one side to say the economy is magnificent and the other to say it is falling apart. If we were really going to expand by a robust 3% or more pace, why is the administration talking about a middle-class tax cut? Didn’t we already have a massive one? And when it comes to the “phase one” trade agreement, it might provide a short-term boost in farm exports during the spring and/or summer, but that is about it. On the other hand, there aren’t any factors that would lead to a major softening in growth. The reality is that we are still basically growing at trend and that is in the 2% range. My advice is that when you hear a politician start talking about the economy, run away as fast as you can. Stick with your favorite economist’s commentaries.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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