A measure of consumer confidence retreated this month after hitting a 17-year high, while home prices have skyrocketed over the past year. However, expectations are the current quarter will show solid overall economic performance once more numbers start rolling in.
The Consumer Confidence Index from the private research group The Conference Board dropped to a reading of 122.1 in December, down from 128.6 in November. The Present Situation Index rose from 154.9 to 156.6, while the Expectations Index fell from 111 last month to 99.1 this month.
“The decline in confidence was fueled by a somewhat less optimistic outlook for business and job prospects in the coming months,” explained Lynn Franco, director of economic indicators at The Conference Board. “Consumers’ assessment of current conditions, however, improved moderately. Despite the decline in confidence, consumers’ expectations remain at historically strong levels, suggesting economic growth will continue well into 2018.”
Consumers’ appraisal of present-day conditions was slightly more positive in December. The percentage saying business conditions are “good” increased marginally from 35% to 35.2%, while those saying business conditions are “bad” decreased marginally, from 12.3% to 12.1%.
Consumers’ assessment of the labor market was mixed. The number who believe jobs are “plentiful” decreased from 37.5% to 35.7%. Those claiming jobs are “hard to get” also decreased, from 16.8% to 15.2%, a 16-year low.
Consumers’ optimism about the short-term outlook declined sharply in December. The percentage of consumers anticipating business conditions to improve over the next six months declined from 23.1% to 20.2%, while those expecting business conditions to worsen increased from 6.7% to 9.2%.
All of the declines in the index occurred in the expectations component, noted analysts at Wells Fargo Securities, who said it likely signaled concerns about the ultimate composition of tax reform and how that would impact the economy and household finances. The cutoff date for the Conference Board’s survey was Dec. 15, and the tax reform package was still very much in flux throughout the forecast period.
Moreover, Wells Fargo said, reports on the likely impact of tax reform varied considerably, which led to increased uncertainty and weighed on consumer expectations.
Home Prices Spike
This report from Wednesday followed a separate one from the day before showing U.S. home prices in October surged 6.2% from the same time a year ago.
Standard & Poor's said the CoreLogic Case-Shiller national home price index was a solid 6% higher than the previous high hit during the housing bubble in 2006, before the Great Recession.
“Home prices continue their climb, supported by low inventories and increasing sales,” said David M. Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices. “Nationally, home prices are up…[at] three times the rate of inflation.”
He said while sales of existing homes dropped 6.1% from March through September, they rebounded 8.4% in November. Inventories, measured by months-supply of homes for sale, dropped from the already-tight level of 4.2 months last summer to only 3.4 months in November.
“Underlying the rising prices for both new and existing homes are low interest rates, low unemployment and continuing economic growth. Some of these favorable factors may shift in 2018,” Blitzer said. “The Federal Reserve is widely expected to raise the Fed funds rate three more times to reach 2% by the end of the New Year. Since home prices are rising faster than wages, salaries, and inflation, some areas could see potential home buyers compelled to look at renting. Data published by the Urban Institute suggests that in some West Coast cities with rapidly rising home prices, renting is more attractive than buying.”
Despite the downturn in consumer confidence from a more than 10-year high and increasing home prices that may put a dent in people’s wallets, other economic indicators released just before Christmas were still positive, although some were a bit below expectations.
Durable Goods Orders Less Than Expected; GDP Gives Back a Bit
Durable goods orders increased 1.3% in November following an October decline of 0.4%, according to the Commerce Department, while shipments of durable goods increased 1% in November after a 0.5% drop in October.
Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending, slipped 0.1% last month. The November drop was the first decline after four months of straight gains. Data for October was revised to show they jumped 0.8% instead of the previously reported 0.3% gain. So far in 2017, orders for the so-called “core capital goods” have improved 5.1% over the level in 2016.
Another Commerce Department report showed the GDP (the total output of goods and services) in the third quarter remained above the 3% level on a yearly basis.
The gross domestic product was revised down slightly to 3.2% from 3.3% in this third estimate, but expectations are it will stay roughly in this same level when fourth quarter and final year 2017 figures are released in late January.
Analysts at Econoday said while this latest figure is “very solid,” the gain wasn’t based on consumer spending, which rose at only a 2.2% pace.
“What held up the quarter was a very solid 4.7% showing for nonresidential fixed investment in what was the third straight strong reading for this key measurement of business spending,” they said.
Econoday said other positives included a constructive build in inventories and a nearly as constructive improvement in net exports, as exports rose and imports fell.
Looking ahead,, they noted residential investment looks to rise sharply in the fourth quarter “given the enormous gains underway in the new home market while fourth-quarter GDP, perhaps also boosted by acceleration in consumer spending, looks to roughly match the third quarter in what would be the third straight 3% quarter for GDP.”