Recent data points to continued improvement in both housing and consumer spending, which is crucial given that other areas of the economy are stuck in neutral, says Morningstar’s Bob Johnson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Bob Johnson--he is our director of economic analysis. He thinks that the consumer and housing will be the key drivers to growth going forward. I'm going to talk to him about why that is and his take on where both of those things are headed.
Bob, thanks for joining me.
Bob Johnson: It's great to be here today.
Glaser: Why do you think that consumer and housing are going to be so important to economic growth in the months ahead?
Johnson: Well, the consumer is always important because it's about 70% of the economy. So, that's obviously always a big deal. It's more about what's happening in other sectors that's making housing so important this time around--and the fact that that can move relatively quickly. That's the other key thing about that. But with sequestration and all the things going on there, government spending is going nowhere. That's one of the other big components of GDP. Exports is another big component; with the combination of a strong dollar and weak commodity markets, that's certainly not going to be of any help to GDP growth.
So, that's what's holding things back. Business investment spending on equipment and structures will probably also be modestly limited. It's not as though they have to add a bunch of new greenfield plants because there's so much demand out there. We've been in a very slow-growth economy, and that's made it easy to just inch up productivity instead of partaking in big new building projects. So, that won't be helping the numbers. That really just leaves the consumer and residential spending.
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Glaser: Let's look at that housing market, then. We had homebuilder-sentiment data this week. What did it show?
Johnson: The homebuilder sentiment was the highest it's been since about 2005. Clearly, they have been kind of a bullish crew lately--the number is at 61. [A reading of] 50 kind of says more builders see positive than negative; 61 is a relatively high reading. It was probably in the 60s for most of the housing boom. So, we're clearly near the stage where things were really hot the last time. That's certainly good to see; but like I said, they've been a little bit overly bullish in the past. But it's good to see them positive.
Glaser: If they are positive, is that also showing up in the starts and the permits data?
Johnson: We also got the official data on housing starts and housing permits, and housing starts were particularly strong, as we surmised they might be, because of the strong permit data in previous months. They were even higher than people's expectations. We were at 1.2 million starts, which is a very high number, and they revised the previous month as well. And again, that's way better than the 500,000 or so we were at at the low, but still meaningfully below where we were when we had 2.3 million starts in the mid-2000s. So, clearly, it's a nice comeback from the bottom, but we're still not back to where we were at one time.
Also, in the starts data was that single-family homes did well. We've had multifamily homes dominating the starts story. The multifamily is almost back to what we call normal, and the single-family homes not so much. We've been trending for starts in single families in the high 600,000 range. We almost touched 800,000 in the July data. So clearly, there's a little bit more interest in the single-family home, and we always love to see that because that requires a little bit more labor. It shows a little bit more consumer confidence. So, we were really glad to see a pickup in that number. It's almost a little too good to be true, but we suspect that the single-family market will do better in the next couple of years, compared with the past.
Glaser: What about those permits?
Johnson: The permits data was off a little bit from June levels, but the reason that was off was because it was unusually strong--about 1.3 million units, which was higher than the starts were. So, clearly, we've done a little catch-up; but now it fell back a little bit this month for the July report. That was because the numbers were artificially high because of a potentially expiring tax credit in New York City. They've actually decided to extend that; but clearly, that was responsible for a good part of the drop in permits. So, nothing really to worry about there.
Glaser: On the consumer front, we got inflation data this week. What did that data show about what the consumers will have to spend?
Johnson: I think, from a consumer standpoint, it was pretty good news. There was a number of price categories that were down, which would seem to indicate that they will have more money overall to spend; but unfortunately, some of the other categories weren't necessarily all good news there.
Glaser: What did the headline number look like?
Johnson: The headline number overall was 0.1%--both on core (that is, excluding food and energy) and on the reported level. So, it's a low number--below expectations of about 0.2%. Again, not a big difference, but people are watching this really closely because the Fed says their numbers are all based on what inflation is going to do, and everybody thought it would be just a little bit higher than it was. So, this number kind of says that's maybe not going to happen.
Glaser: What categories, then, contributed to that lower-than-expected number?
Johnson: Certainly, the energy categories were a bunch of it. But it was actually more that a lot of categories hardly did anything. They were right at zero or 0.1%. Restaurants and health care were both up about 0.1%. Typically, we'd expect to see about 0.2% or 0.3%. It was really strong at the beginning of the year, and I think there may be a little seasonality creeping into these numbers because we're only up about 2%, year over year, in health care. So, [inflation is] still under surprisingly good control given all the increased demand that's out there. So, we were really pleased by that number. Those were the key numbers from sectors that were kind of on the low inflation side.
Glaser: Anything on the high side?
Johnson: Apparel was a little bit higher at 0.3%, but probably the single most worrisome number in the report--and for consumers and consumer spending--was rents. Rents were up 0.4%. We've had relatively high numbers in the past, but this is the first one that has kind of clicked in at 0.4%. It's been 0.2% and 0.3%, but now we're up to 0.4%, which annualizes to almost 5% a year. That's certainly putting a dent in what consumers can spend. Speaking of things that can dent consumer spending, the other bad news was that food from the grocery store was up 0.3%--as the egg thing continues to roll through in a lot of other prices. Food was obviously another tough category for consumers--and one that's very visible. So, that hurt as well.
Glaser: So, what are you expectations, then, for consumer spending for the rest of the year?
Johnson: I think the consumer will continue to do well. It's been the key driver of the recovery all the way along. With employment data relatively healthy and inflation under good control, I think the consumer is going to be willing to spend and will have a good second half in terms of consumer spending. I would expect maybe even retail sales to pick up a little bit. It's been a little weaker. We've seen a little bit more spending on services. I think maybe in the second half we're going to see a little bit more spending in conventional retailers.
Glaser: Great. Bob, thanks as always for your thoughts.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
