Wallet Health Improves
Positive personal income data is exceptionally important at this stage of the recovery, says Morningstar's Bob Johnson.
Investing Specialists
As I indicated last week, Wednesday's personal income report for November was by far the most important piece of data this week. The report analyzes what consumers bring in, what they spend, and finally what they save.
Overall personal income growth came in at 0.4% representing the best results since May. Given that consumers represent about 70% of GDP, the income data is exceptionally important at this stage of the recovery. The total income number includes wages, rents, dividends, and small business income, amongst other things. Ultimately it takes better incomes to enable consumers to spend more, so it is nice to see this piece of the puzzle drop into place.
The small business (identified as proprietors' income) component was up 1.2% for November, following a 1.4% gain in October. Small businesses had previously shown three straight months of decline. Given that small businesses are usually the largest source of employment growth coming out of recession, the recently improving numbers are particularly gratifying. Wage growth also exceeded 0.3%, its best performance since way back in March. Better wages (driven mostly by more hours worked, not more pay per hour) combined with a better stock market performance should boost both consumer confidence and holiday spending.
Consumers managed to spend most of that additional income, plus a little, as consumer expenditures increased 0.5% in November after increasing 0.6% in October. Even adjusting for inflation, consumer expenditures are now at the highest level since August 2008, despite the huge runup in unemployment since then. It is further confirmation of my theory that it is the 90% of the people who do have jobs, and their levels of income and confidence, that drive spending.
The overall savings rate for November was just about flat at 4.7%. The savings rate has been incredibly stable at this level since April except for June, when the savings rate was inflated as seniors saved their one-time government checks from the stimulus plan, and August, when consumers dipped into their savings to buy cars under the cash for clunkers program.
The savings rate bottomed at around 1% in early 2008. At just under 5%, I think the savings rate is in a Goldilocks range, not so high as to ruin the short-term economy and not so low as to make long-term investments impossible. A 4% higher savings rate amounts to close to $500 billion of additional investment capital each year. Just to put that into perspective, the stimulus bill amounts to $787 billion to be spent mostly over a three-year period. Not measured in the savings rate is the appreciation of consumer stock holdings, both directly owned or through intermediaries, which amounts to several trillion dollars since the end of 2008, dwarfing the new savings number.
Home Sales
I confess that I blew my analysis of the new home versus existing home forecast in last week's column. It turns out the supposed expiration of the first-time homebuyers credit still had an extremely powerful effect on November results.
Given the extension of the credit and the fact that I believed everyone had already done their last-minute house shopping, I expected the trend of lower new home sales (which take longer to close) and much stronger existing home sales (which close much faster) would reverse in November as homebuyers would feel less pressure to purchase right away before the credit expired.
Instead the trend was amplified; it appears no one got the message that the credit was being extended. And I thought I was a procrastinator. Anyway, existing home sales jumped a higher-than-expected 7.4% to 6.5 million units. Existing home sales are now up in eight of the last 10 months. Just as a reminder, existing home sales were as low as 4.5 million units in January, and we have increased significantly since then. The dramatically higher level of sales may drive higher expenditures for consumer goods over the months ahead, as owners move in and stock those homes.
New home sales, on the other hand, fell 11.4% to 355,000 units. New homes are a tiny, tiny portion of the overall market. Our housing analyst, Eric Landry, points out that despite the slow sales, inventories of new homes haven't been this low since 1971 when the population was considerably smaller. I suspect both new and existing home sales will not look nearly as good in the months ahead as some of the pressure of the expiring tax credit goes away and the fact that the prime spring selling season won't kick off until after the Super Bowl.
GDP Revisions
The GDP estimate for the September quarter suffered another blow this week, as the originally reported 3.5% growth rate was reduced again this week to 2.2% after being reduced in November to 2.8%. The November adjustment was largely due to a change in retail sales estimates for September (given this large adjustment two months after the fact, I have to ask: why is everyone so hung up on daily holiday sales reports?).
This month's adjustment is largely related to business investment spending and inventories. The good news is that a higher inventory reduction in the third quarter means more room for inventory restocking in the fourth quarter. The mix between 4Q and 3Q still appears to be in a bit of flux; I am still holding to total growth in the second half of 2009 of over 3%
On Tap
Next week's calendar is exceptionally light with the only notable reports being the Case-Shiller home price indexes and initial unemployment claims. Morningstar analyst Eric Landry warns that the Case-Shiller index is due for a bit of a dip in the months ahead. While some of that is exaggeration of normal seasonal trends, Eric believes that new foreclosures may be behind part of the price weakness. In my opinion, a small amount of weakness for a couple of months is no big deal, though the markets may choose to disagree. All observers would agree a large drop over several months would be a very bad thing that would likely break consumer confidence. I will be keeping my wide eyes open. Below are Eric's direct comments:
Tough Days Ahead for Case-Shiller Indices: S&P will release its Case-Shiller home price indexes for October on Tuesday of next week, and the results will not be pretty. After an impressive streak of five straight sequential increases, the party is likely over until at least next spring.
Our measurement of real-time median listing prices across nearly all 20 markets has shown persistent weakness since September. Because Case Shiller employs a three-month moving average, it typically lags our data, indicating these price declines will likely show up starting with the October data (which is released next week). Cities that enjoyed considerable strength earlier this year--such as Denver, Boston, San Diego, San Francisco, and Washington, D.C.--have recently turned down, while cities that were weak earlier in the year such as Chicago, Las Vegas, and Phoenix have remained so in the later part of 2009.
As a result, we think the popular Case-Shiller indexes will turn down starting with the October reading. Some price weakness is very typical for the fall and winter months throughout the country. In fact, it's what happens in most years. What we're seeing now, however, is more than just seasonality, as prices are declining even when seasonally adjusted.
We still hold out hope for a stabilization this spring, as the amount of new production being put into the market is at an all-time low. Foreclosures will undoubtedly be problematic for the foreseeable future, but we wouldn't be surprised if a hefty amount of activity in this space is already priced into most regions.
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