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KEY DATA: Sales: +10.8%; Year-over-Year: +14.5%; Prices (Year-over-Year): -4.3%/ Workforce Vitality (Year-over-Year): +4%
IN A NUTSHELL: “It was a great year for housing and workers didn’t do that badly either.”
WHAT IT MEANS: Looking at the two feet of snow in my backyard makes it hard to remember the December record warm weather, but today’s new home sales number brings that back into my mind. Builders ended the year on a major high as new home sales surged in December. While the wonderful conditions helped, another factor may have been at work: Consumer desires for more reasonably priced units were being matched by supply. Indeed, there was a sharp drop in median prices. The share of homes sold in the middle market, $200,000 to $500,000 jumped from 64% to 68%. In the $500,000 and up segment, the share fell from 16% to 13%. Basically, homebuyers seem to be losing a little of their desire to own the big, expensive McMansions. In December, the large increase was driven increases in all regions, though the gain in the South was modest. For all of 2015, sales were up sharply despite a double-digit drop in the Northeast. Roughly 20% increases in the South and West led the way, while new home purchases rose modestly in the Midwest.
I often note that the hourly wage data are confusing. They have not been around long enough to determine a trend. Worse, they are averages that are affected by the type of hiring that occurs. For example, a firm may be raising wages for their continuing workers but if turnover brings in new workers at lower wages, the math tells us that wages may not be rising much. So, how do we really determine what is happening? ADP’s Workforce Vitality report fills in some of the gaps. The overall index rose strongly over the year, but what was eye opening were the wage numbers. Though overall wages rose 2.1% over the year, wages for full-time workers who stayed in their positions jumped 4.1%. Full-time workers who switched positions saw their wages increase 4.7%. In other words, the headline number hides the extent to which wage pressures have built. And with the unemployment rate likely to fall to 4.5% or even lower by the end of the year, those wage pressures will only build further.
MARKETS AND FED POLICY IMPLICATIONS: The Fed is meeting today and will issue a statement soon. Those who worry about the equity markets expect the FOMC to back off their rate increase plan. But the economic data are okay. Yes, fourth quarter growth looks like it was soft, but let’s look at the composition when it comes out on Friday. Housing is solid, the consumer is buying lots of vehicles and the job market is strong. The U.S. economy is still solid and outside the energy sphere of influence, it is very good. Excluding energy, inflation is slowly accelerating even with the strong dollar. And the pressure on wages will only add to the belief that inflation will move back up to normal rates, especially when the oil price declines end. But the markets are focused on oil and to the extent that falling energy prices lead to falling stock prices, the Fed will have to decide how much the financial economy trumps the real economy. That will be true not just in today’s statement, but in comments the members will make going forward. I believe they should stay the course, but that is not a consensus view.