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KEY DATA: Confidence: +1.8 points; Philadelphia Fed NonManufacturing Index: -21.6 points; Case-Shiller Home Prices (Year-over-Year): +5.3%
IN A NUTSHELL: “The stock market is falling and with it business confidence, but to households, it’s full speed ahead.”
WHAT IT MEANS: I remarked last week that Wall Street and Main Street were operating in parallel universes and nothing says that more than today’s data. The equity markets wild ride has hardly hurt consumer confidence. Actually, the Conference Board’s index rose nicely in January, led by a solid increase in expectations. I guess people have learned that markets go up, they go down and sometimes they just go. The days of the retail investor watching the indices and reacting look to be long gone. The details of the report also don’t show that the market volatility is having much of an impact, at least on households. Current conditions were flat and while jobs weren’t as easy to get, they didn’t get any harder to find. And respondents expect the labor market and business conditions to improve going forward.
While households are shrugging off the market changes, business owners are worried. The Philadelphia Fed’s index of nonmanufacturing activity in the region cratered in January. But when respondents were asked about their own business, they didn’t think conditions had declined very much. Sales, orders and hiring all were up, though at a slower pace than in December. But looking forward, business owners were really concerned. Expectations fell sharply. Let’s see: Current firm business conditions were largely stable, orders kept growing and hiring continued yet respondents became fearful. Hmm. That seems likes an emotional not a business conditions change reaction.
As for the housing market, The S&P/Case-Shiller national home price index rose solidly in November and the increase over the year accelerated. Using the seasonally adjusted data, every one of the twenty markets shown posted an increase in prices between October and November. There remain wide variations in price increases. Washington, Chicago and Cleveland were in the 2% range but Portland, San Francisco and Denver were up double-digits. Basically, the housing market, as measured by prices, is in good shape and the more prices rise, the more homeowners have the equity to make a move. That is good news.
MARKETS AND FED POLICY IMPLICATIONS: Hey market commentators: It isn’t all about stock prices! If consumers are becoming more confident while stock prices fall, guess what will happen when they start rising again? Households aren’t worried about the labor market so they will continue to spend and in an economy that is two-thirds consumer based, it is hard to see how growth will slow significantly. The decline in the equity markets will not change Fed policy if the real economy, led by the consumer, keeps expanding. Fourth quarter growth was probably disappointing, but the largest part of the negative effects of the decline in oil prices has likely been felt already. How much more can investment be cut back when it was cut to the bone in 2015? Meanwhile, consumers are beginning to believe the low energy prices might be here for a while and they should start spending that windfall. Going forward, the positive effects of low energy costs will start overwhelming the diminishing negative effects and the economy should do just fine. Barring a meltdown in either China or the equity markets, don’t expect much change in the Fed’s rate hike strategy. I don’t.