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Housing suddenly pivoting sharply higher
Simply Economics - December 22, 2017
By Mark Pender, Senior Editor


Simply Economics will next be published on January 5, 2018. Happy Holidays from all of us at Econoday!



The new home market is ending the year in explosive fashion and becomes the first part of the economy to show the kind of acceleration that has been evident all year in confidence and of course in the stock market. The week's other results are also positive but, unlike housing data, are still showing some soft spots. Question marks aside, October and November are now in the books and the economy looks certain to end a favorable year in stride.


The economy

New home sales rose to a 733,000 annualized rate in November for a 17.5 percent monthly spike that is the largest in 25 years. This comes on top of plus 600,000 gains in October and September which were some of the best months of the expansion. Acceleration over the last three reports is the strongest since 2003. Existing homes, the other side of the housing market, didn't catch fire until now, that is in November when sales jumped 5.6 percent a 5.810 million annualized rate. This rate is also by far the strongest of the expansion with 5.700 million in March last year the next closest. Sales gains, both new and existing, have been balanced between regions with the Northeast showing the most sudden and broadest strength. The graph tracks new and existing home sales by their 3-month averages which helps smooth out volatility which is common for sales data especially for new homes. Still, the spike at the graph's top right edge speaks for itself. And to underscore the strength of these results, both easily beat Econoday's high forecasts. This striking spike raises the question whether tax changes for next year are at play. But the National Association of Realtors in their existing home sales report, citing client comments, said the tax bill did not influence November's buying decisions noting that the vast majority of homeowners under the new laws will qualify for mortgage interest and property tax deductions.


It's not just sales data that are accelerating. Housing starts and permits matched their unusual October strength with stronger-than-expected results for November as well. Single-family permits rose 1.8 percent to an 862,000 rate and a new expansion high while single-family starts jumped 5.3 percent to 930,000, also an expansion high. But what may limit immediate sales was a steep 4.6 percent decline in completions to 752,000 for the lowest showing since September last year. This is not what home builders want to hear though some relief is in sight as homes under construction, at 1.110 million in November, have been rising sharply the last four months. The graph tracks permits, which are going straight up, against completions which have been flat.


The prior week's highlight, that is November's standout 0.8 percent gain for retail sales, failed to predict what was only a moderately good month for the consumer. Total consumer spending did rise a strong 0.6 percent in November but income rose only 0.3 percent. The soft spot on the spending side was durable goods after the prior surge in vehicle sales fizzled in November. A positive on the income side was a respectable 0.4 percent gain in wages and salaries. The graph tracks the blue year-on-year line of income, at 3.8 percent and recovering back to the 4 percent line, and spending which, at 4.5 percent, has also been moving higher. Still these rates are far from overheating in what is a contrast with the great strength underway in housing.


Another headline of the consumer report, and this is an unwanted one, is a 3 tenths decline in the savings rate to under 3 percent at 2.9 percent and the lowest showing in exactly 10 years. The draw down suggests that consumers are sacrificing their savings to fund their shopping, hints of excess that are also suggested by the rise underway in credit card debt. Yet for 2017's holiday results, retailers probably wouldn't mind too much if savings dropped and debt rose, but how far this can be sustained, especially if the labor market were to cool, is a question for everyone. For the record, the current 2.9 percent savings rate comes out to a $426.2 billion annualized total.


Gains along with questions also come with November's durable goods report where a 1.3 percent jump, one skewed by a jump in aircraft orders, was no better than the lowest estimate. Orders for civilian aircraft, which have been solid this year, rose 31 percent and reflect Boeing's success at November's Dubai Air Show. But when excluding aircraft and other transportation equipment, orders slipped 0.1 percent in a drop offset however by a large upward revision to October's ex-transportation reading which now stands at a very strong 1.3 percent. Weakness in the latest month and an upward revision to the prior month is also the story for core capital goods orders (nondefense ex-aircraft) which also slipped 0.1 percent in November but with October now up an outsized 0.8 percent. Shipments of core capital goods, which will be part of the business spending component of fourth-quarter GDP, are only moderate, up 0.2 percent and 0.3 percent in November and October respectively. The graph tracks capital goods orders along with shipments and visibly underscores the latest weakness. And the results follow the prior week's soft 0.2 percent rise in manufacturing production and suggest that the factory sector won't be ending the year with the kind of momentum evident in housing.


Good news with hints of weakness also come from weekly jobless claims which moved higher but are nevertheless pointing to strength for the December employment report. Initial claims rose a sharp 20,000 to a higher-than-expected 245,000 in the December 16 week, a week that was also the sampling period for monthly employment. But a comparison with the November sampling period shows little change, only a 5,000 gain, while the comparison of the 4-week averages actually shows improvement, down 4,000 to 236,000. Hurricane-related claims from Puerto Rico are still inflating the total slightly but the three storms -- Harvey, Irma, Maria -- made for only a brief and comparatively moderate 60,000 to 70,000 increase. Separate data on the storms came in the week from the Bureau of Economic Analysis which said the third quarter current account benefited from $24.9 billion in related insurance payments, again a moderate result.


The passage of the tax bill will put the relationship between pre-tax profits and after-tax profits in special focus. The second estimate for third quarter pre-tax profits came in at a $2.214 trillion annualized rate with after-tax profits at $1.738 trillion. This puts total corporate taxes at $476 billion annualized or at a 21.5 percent rate. Under the new tax plan, which slashes the top rates, the gap between the light blue area of the graph and the dark area should narrow. We'll be keeping track!


Markets: Cutting taxes and selling bonds

Passage of the Republican tax cut has not been good for long-term Treasuries where demand is thinning. Lower taxes point to a quick decline for tax receipts and the need, at least initially, to issue more Treasuries to fund the government. The 10-year yield rose a sharp 14 basis points to 2.49 percent which will have an impact on mortgage rates many of which are tied directly to the 10-year Treasury. Should long yields continue to move higher, the housing rush may very well slow.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 15-Dec-17 22-Dec-17 Change Change
DJIA 19,762.60 24,651.74 24,754.06 25.3% 0.4%
S&P 500 2,238.83 2,675.81 2,683.34 19.9% 0.3%
Nasdaq Composite 5,383.12 6,936.58 6,959.96 29.3% 0.3%
Crude Oil, WTI ($/barrel) $53.71 $57.28 $58.36 8.7% 1.9%
Gold (COMEX) ($/ounce) $1,152.50 $1,259.10 $1,278.30 10.9% 1.5%
Fed Funds Target 0.50 to 0.75% 1.25 to 1.50% 1.25 to 1.50% 75 bp 0 bp
2-Year Treasury Yield 1.21% 1.84% 1.90% 69 bp 6 bp
10-Year Treasury Yield 2.45% 2.35% 2.49% 4 bp 14 bp
Dollar Index 102.26 93.93 93.32 -8.7% -0.6%


The bottom line

The week's other data included the third estimate for third-quarter GDP which came in at 3.2 percent following 3.3 percent in the second. Though December retail sales are still unfolding, the economy is steady and balanced and the fourth quarter looks to be on track for another 3 percent showing. Though the factory sector may be uneven, housing is closest to the consumer and the striking gains underway in this sector, which ultimately reflect the strength of the labor market, are definitely pointing to a very happy holiday.


Week of December 25 to December 29

The last week of the year will be a quiet one for the economic calendar offering last looks at December's factory activity with both the Richmond and Dallas reports on Tuesday. Housing data have been sweeping higher and strength is the call for Case-Shiller home price data and pending home sales, both out on Wednesday. Consumer confidence, which has been holding at 17-year highs, will post its final 2017 report on Wednesday while advance trade data on goods, an area that may not be positive for fourth-quarter GDP, will be Thursday's highlight. The last report on economic conditions to be released in the year will be the Chicago PMI which, like all the other anecdotal reports, has been reporting unusual strength.




Richmond Fed Manufacturing Index for December

Consensus Forecast: 23

Consensus Range: 20 to 31


Both new orders and backlog orders surged in November's Richmond Fed manufacturing report which like other regional reports has been running this year at the hottest levels on record. The index jumped in November to 30 with forecasters calling for only modest cooling in December to 23.



Dallas Fed General Activity Index for December

Consensus Forecast: 20.0

Consensus Range: 18.0 to 22.0 


Readings on costs and production cooled to more sustainable levels in the November manufacturing report from the Dallas Fed though new orders remained very strong in what points to continued strains on capacity. Econoday's consensus for the general activity index in December is 20.0 vs November's 19.4.




Case-Shiller, 20-City Adjusted Index for October

Consensus Forecast, Month-to-Month Change: 0.6%

Consensus Range: 0.6% to 0.7%


Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Month-to-Month Change: 0.5%

Consensus Range: 0.1% to 0.5%


Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Year-on-Year Change: 6.3%

Consensus Range: 6.1% to  6.4%


Home-price appreciation has been one of the high points of the 2017 economy, underlined by September's Case-Shiller report which came in at the high end of expectations showing gains for all 20 cities. Econoday's consensus for October is calling for a very strong 0.6 percent increase in the 20-city adjusted index. The consensus for the unadjusted monthly index is plus 0.5 percent with the consensus for the year-on-year rate at 6.3 percent.


Consumer Confidence Index for December

Consensus Forecast: 128.0

Consensus Range: 127.0 to 130.0


Consumer confidence, at 129.5, is coming off a 17-year high in November when assessments of employment, income expectations and the stock market were all once again unusually strong. The Econoday consensus is calling for 128.0 in December.


Pending Home Sales Index for November

Consensus Forecast, Month-to-Month Change: 0.6%

Consensus Range: -1.0% to 5.0%


Led by a hurricane bounce in the South, the pending home sales index jumped a much sharper-than-expected 3.5 percent in October to correctly predict strength in existing home sales for November. The Econoday consensus for November's pending sales index is a gain of 0.6 percent.




International Trade In Goods for  November

Consensus Forecast, Month-to-Month Change: -$67.6 billion

Consensus Range: -$69.5 to -$66.0 billion


The goods deficit in November is expected to narrow to a consensus $67.6 billion and only modestly below what was an unusually wide $68.1 billion in October ($68.3 billion initially reported). Looking back at October, exports fell 1.0 percent on declines in food products and capital goods while imports rose 1.5 percent on increases for industrial supplies and consumer goods. Also released with the report will be advance November data for both wholesale inventories and retail inventories which, like net exports, are also GDP inputs.


Initial Jobless Claims for December 23 week

Consensus Forecast: 240,000

Consensus Range: 235,000 to 240,000


Initial claims are expected to come in at 240,000 in the December 23 week vs 245,000 in the December 16 week. Claims have been very low and favorable and consistent with very strong demand for labor.




Chicago PMI for December

Consensus Forecast: 63.0

Consensus Range: 61.0 to 65.4


Growth has been steady and robust all year for the Chicago PMI which, at 63.9 in November, has been over 60 for the last three reports. Overheating is palpable in this report with a lack of available workers keeping down employment and limiting business expansion. For December, forecasters are calling for another 60-plus result at a consensus 63.0. This report tracks both the manufacturing and non-manufacturing sectors of the Chicago-area economy.


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