10/29/2014
By Jennifer Coombs

The economic data released in the latter half of the morning session on October 28th indicates that consumer optimism is not only high, but lower prices (in housing and gas) should boost spending in the near-term.

According to the Case-Shiller 20-City Home Price index, prices have contracted yet again in August for the 4^th month straight. The index showed a monthly decline of 0.1% and was well below analyst expectations of a 0.1% gain. Overall, prices declined in 12 of the 20 cities, not much improved from July when prices declined in 13 of the 20 cities. Narrowing in the August data was most severe in Chicago, Minneapolis, and Detroit with Chicago and Minneapolis also posting very soft year-on-year rates of only +2.9% and +3.9%, respectively. The total year-on-year adjusted rate fell quite sharply to +5.6% from +6.7% and +8.0% in June and July and a positive double-digit trend going back to the start of 2013. The 5.6% rate is the lowest year-over-year rate since November 2012. The unadjusted data is watched very closely by analysts and it tells the same story of price weakness as the adjusted data. Month-over-month the unadjusted 20-city index increased by 0.2% which was quite low compared to consensus’ expectation for a gain of 0.4%. On a year-over-year basis, the unadjusted index was up 5.6% (the same as the adjusted reading). The unadjusted year-on-year rate is also the lowest rate since November 2012. While the price erosion in Case-Shiller is a negative for current homeowners, it’s a positive for sales as lower mortgage rates should boost the number of buyers going forward.

While lower prices should mean an increase of homebuyers, the bigger market mover today (aside from durable goods) is the Conference Board’s October reading for consumer confidence. For the month of October, consumer confidence has reached a new recovery high of 94.5 – well above the upwardly revised 89.0 reading in September and well surpassing the previous recovery high of 93.4 from August. The last time the index posted a reading this strong was just prior to the Great Recession in October 2007. The most encouraging part of this report was the expectations component, which jumped by a whopping 8.6 points in October to a reading of 95.0. This isn’t quite a recovery high, but it’s pretty close to that of February 2011 at 97.5. Strength in expectations is important because it reflects optimism in the outlook for both jobs and personal income; both of which show convincing gains in the October report. The chart below shows the recent changes in the expectations component relative to the confidence index.

While consumer outlook looks good, the present situation component only rose by 7 tenths to a reading of 93.7 in October. This is still a very strong reading as it was only surpassed once during the recovery, back in August 2014 at 93.9. The reading on jobs-hard-to get, at only 29.1 % compared to 29.4% in September, hints that there might be some good news in the October jobs report. Inflation expectations ticked slightly higher to +5.4% percent which is actually pretty quiet for this reading. Consumer buying plans are soft, namely for cars, which is most likely due to the boost in summer auto sales. We note that the consumer sector is far from kicking into higher gear, but the confidence data is starting to point towards a breakout. This is definitely realistic in this holiday shopping season since low gas prices is sure to boost the level of money spent.

Jennifer Coombs
Wall Street Strategies

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