There was a slew of economic releases this morning.  The theme remains the same, strong demand and consumer confidence continue to propel the economy forward.  Expectations remain optimistic and point to further growth.  Housing continues to be hampered by a lack of inventory and elevated home prices.  Input costs and the potential for higher wage pressures are leading to rising inflation expectations.    

The Case-Shiller national home price index rose 0.4% in May and was up 6.4% year-over-year.  Home prices are still strong, but the rate of growth is decelerating, which is good news for potential first-time homebuyers.  The 20-City Composite rose to 211.20 in May, up 6.5% year over year, compared to 6.7% year over year in April. Seattle led the way with an increase of 13.6% year-over-year. Nineteen of the 20 cities reported prices increases month-over-month. Seven of the 20 cities saw higher prices in the year ending May 2018 compared to the year ending April 2018.     

Affordability is still a concern as home prices continue to outpace wage growth and inflation.  Core personal consumption expenditures (PCE), which measures the prices paid by consumers for goods and services, excluding food and energy, rose 1.9%.  Today’s release of the second quarter employment cost index showed wages and salaries increasing 2.8%.  However, both numbers are lower than the 6.4% increase in home prices.     

• Benefits +2.9%
• Compensation +2.8%

A report released by the Urban Institute’s Housing Finance Policy Center, reported that the Millennials home ownership rate was approximately 8-9% lower than the two previous generations (Baby boomers and Generation Xers) of the same age group (25-34).   There are numerous reasons contributing to the lack of home ownership, from higher student loan debt to a preference of living in high cost city areas.  One area of concern the report highlighted was the wealth effect and how home ownership and the wealth effect go hand in hand.             

Personal Income and Spending

Personal income increased 0.4% in June month-over-month.  It is a positive that consumers are spending less than what they get paid in wages.  The difference will hopefully be going into savings.  In June, the personal savings rate as a percent of disposable income was unchanged at 6.8%.    

June Personal Income & Spending

• Income +0.4%, year over year +3.1%
• Spending +0.3%, year over year +2.8%

Note: spending revised to +0.5% from initial +0.2%

Consumer Confidence

Consumer confidence came in at 127.4 for July, compared to an upwardly revised 127.1 (from 126.4) in June.  One-year inflation expectations rose to 5.1% from 4.9% as input prices and wages remain a concern. 

• The Present Situation Index moved higher to 165.9 from 161.7
• The Expectations Index declined to 101.7 from 104.0. 

Small Business Jobs Index

Paychex Small Business Jobs Index decreased 0.06% to 99.34 in July. The index is comprised of small businesses with less than 50 workers.  The index has been on a downtrend going back the past 18 months, while large employers are expanding their payrolls.   Hourly earnings growth slowed to 2.42%, up $0.63 year-over-year to $26.70. 

Small business owners, who don’t plan to raise wages this year, were surveyed as to why.  Most (65%) said they were not making enough in profits to raise wages.  Others (28%) indicated they planned on investing money back into their business.  Small businesses did not benefit from tax cuts to the same extent as large companies. 

Highlights:

• Manufacturing saw positive year-over-year employment gains
• Leisure and Hospitality ranked first in wage growth (3.98%)
• Arizona and Phoenix rank first in both jobs and wage growth among states and metro areas
• Construction wage growth remained steady at above 3%

The lack of significant wage growth continues to mystify the markets, while keeping rate hike expectations in check.   

Industrials are benefiting from the encouraging reports out today.  The Dow Jones Industrial Average is higher by 176 points, 0.70%, being led by transportation stocks. 

Chicago PMI

The MNI Chicago Business Barometer, Chicago PMI, rose to a six-month high of 65.5 in July up from 64.1 in June and above consensus of 62.0.  New Orders and Production were up 8% and 10.6%, respectively, indicating demand remains robust.  Prices Paid remained elevated, hitting the highest level since September 2008.     

This month’s special question asked firms if they expected new orders in the third quarter to be higher, unchanged or lower.    More than half of respondents were optimistic, expecting demand to increase, 13.7% expected demand to drop off and 6% were unsure.  

Comments

My observation is that investors are distorting home prices, buying properties they intent to use for AirB&B. Michael Crawford on 7/31/2018 5:06:29 PM

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