Johnson: More of the Same for GDP

Jason Stipp: I'm Jason Stipp for Morningstar. We're checking in with Morningstar director of economic analysis Bob Johnson for a look at this week's economic data and also a look ahead to next week.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Stipp: They managed to cram five days' worth of economic data into three days on this Thanksgiving week. We have a lot of things to cover. Let's start with GDP. They revised it up. What's your take on that.

Johnson: They moved it from 1.5% to 2.1%, and almost all the growth was in consumption. 2.0% of the 2.1% was due to the consumer. That is really the driving engine of the economy. And that number was little changed from the last version of this report that we had.

The increase was largely due to the inventory data not being as subtractive as people thought it was going to be. So given that we really focusing on the ex-inventory number, there really wasn't much of a change.

But still, the 2.1% is a decent growth rate. It's off from the higher, almost 4% growth rate of the second quarter, and we'd expect the fourth quarter growth rate to be even higher than the 2.1%. So I think the news there was relatively good, but expected.

Stipp: And your full-year forecast is staying the same.

Johnson: It is. I'm still thinking we're going to grow pretty close to 2.5% on a year-over-year basis. We have these quarters that are so volatile. It's just not a great way to look at the numbers. It's a lot better to look at it year-over-year, and those numbers have been so consistent at 2.2%- 2.5%. I think we'll be in the same ballpark next year and probably even the year after that.

Stipp: Durable goods data looked pretty good for the last month. So maybe some signs of stabilization in this area, which hadn't looked as great before.

Johnson: We've started to see some slow improvement there. Manufacturing did terribly, starting November 2014 through March. Some of that was weather related. Some of that was slowing growth in China and commodities, and some of it was cutbacks due to the oil situation. Those three things really hit manufacturing hard for five sequential months. But they haven't gotten any worse for a while, and now they are actually starting to look a little better. We had the ISM PMI kind of stabilize for the last three or four months. We've seen industrial production stabilize and begin to improve on a year-over-year trend basis.

And now we got the durable goods report, which is a little bit more of a look-ahead because durable goods are things that last long time and they cost more money. So you like to look at those because it's an indicator of confidence on the business side. It also indicates, because it takes so long to manufacturing these things, this is the ammo we need to build production growth in the next say three or four months ahead.

There the news was very good. On the capital goods ex-transportation orders we were up over 1% month-to-month. The numbers for the previous month, September, were revised sharply upwards. So the trend has clearly improved, and even the year-over-year data has stopped going down, and actually was up a tick. So we're now only down 4% year-over-year.

And now we're going to start lapping those really bad months of a year ago. That number could break into the black by the end of the year. So I'm optimistic that we've seen the bottom in manufacturing, and that's certainly good news for the economy.

Stipp: We got a lot of housing data this week--existing and new home sales as well as some data on home prices. Can you wrap it up for us? What are they saying about the housing market?

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Johnson: I think what it says about the housing market is that we had a very nice 2015. We saw some sharp improvements early in the year, and now we are moving back towards trend, and I am thinking existing homes sales are in the 6% to 8% range. The actual month for October was down compared to September. But we'd had a couple of really great months. The numbers jump around month-to-month, but I think we're still in a 6% to 8% trend line growth. Unfortunately, I think it will be a little bit less than that next year, because we've had very tight inventories, higher prices and higher mortgage rates. So those things will make it a little bit of a tougher year next year. But still an OK year for existing home sales and for new home sales as well.

The data in new home sales was good. We like to see that, because that's a bigger impact on GDP. We had a terrible month in September, after many, many good months, and now we had a little bit of a bounce-back in October--still not a great month. But we are pleased to see that a lot of the activity was in homes not even started yet. So that will begin to flow into housing starts and economic activity in the months ahead. Like the durable goods orders, it's a nice precursor that there are some good things to come. That was a best thing I took away from the new homes report. Even though the headline number wasn't as robust as maybe some of us had hoped.

In terms of pricing, you look at the Case-Schiller data, the FHFA, all of them are now pointing to growth in prices of pretty close to 6% for all of this year. Inventories have been incredibly tight. In fact, low inventories of new homes and inventories of existing homes are so low I think they are going to hold back sales. The bigger problem getting home sales up is that there is not enough for sale right now, not that there aren't enough willing buyers, which kind of an unusual turn of events. And the 6%-plus growth rate we could see by the end of the year in home prices is quite a bit better. We'd said maybe they'd do 4% to 6% for the full year, and then we narrowed it to 5% to 6%, and now things would have to completely fall off the wagon to do anything under 6%. So clearly, as inventories have gotten tighter and incomes have gone up, people have really bid up the prices of homes.

Stipp: We also got consumption data this week, and it looks like a continuation of a trend with pretty anemic consumption growth. Your thoughts on that?

Johnson: The particular number we got, was anemic--there was no doubt about it, at 0.1% month-to-month growth. You've got to keep in mind, there isn't much price growth. October was one of the warmest months on record, and so it had a lot of impacts on the number. It kept back apparel sales, because people weren't buying winter clothes when it was so warm out. And also utility sales are a big part of the consumption data. I actually like it when people don't spend so much on home fuel, and they spend it instead on other things. So I wouldn't read too much into a single month's report. Maybe wasn't as evident in the data we got for October. But certainly auto sales have been on a tear for the full year and have really added to GDP growth. In fact, in the third quarter, we mentioned there was 2.1% growth; 0.5% of that was from auto production. So autos have been on fire. We thought that maybe 2015 would be the year that auto sales slowed up a little bit. Perhaps helped by low interest rates, loan availability, and cheap gasoline prices, auto sales have done a lot better than we thought, and even though the headline numbers have slowed a little bit, more of it are going to American manufacturers, because people are buying pickup trucks and vans and SUVs that are more likely to be manufactured in the U.S. So it's helping the U.S. auto industry.

Stipp: You mentioned auto sales--looking ahead to next week, we will get new auto sales data. What are you expecting to see there? A continuation of these great trends we are seeing?

Johnson: The trade data that we've seen so far in trade rags is suggesting that we are going to have another month of more than 18 million unit sales. And it will be the best November on record ever in terms of car sales. So we've really come a long ways. We had a great October, and I thought in the back of my head, maybe November won't be such a great number. But apparently from what they can see talking to dealers, they're thinking it's going to be another of 18 million units. And that's great category to see do well, because it promotes high-paying jobs. It's a great indicator of consumer confidence. They aren't buying shoes and wristwatches; instead they are buying bigger-ticket items. They are showing greater confidence. So we really love it when auto sales do well. We'll be looking forward to that number more than any other number next week.

Stipp: Also next week a lot of people will be watching the employment report. This is a key piece of data the Fed is going to be looking at ahead of their December decision on interest rates. Talk about what you are expecting to see in that report.

Johnson: Every month, the data is all over the place, but I am thinking 200,000 to 220,000 jobs added. We had a really great month, closer to 300,000, in October. So that kind of suggests that maybe November won't be as hot, maybe I am a little aggressive. But lately November, for some reason, has looked pretty good in the employment reports. August usually looks pretty terrible, and November is one of those months that looks pretty good usually, for some reason, even though they supposed to statistically adjust. So I am still hopeful that maybe they get to the 200,000 to 220,000 jobs.

I am a little worried that with conventional retail being a little soft--people are buying cars and meals and not stuff at Macy's--I'm a little afraid that may impact the retail employment numbers a little bit. So that's another thing to watch if the report is disappointing. Overall, I am still thinking it will be a good number, but you never can tell with this report from month-to-month, and it is the last report on employment that we're going to get before the Fed meeting, so it's going to take on a life of its own in terms of importance. I'm really hoping this isn't one of those months with a nasty surprise, either way, that forces their hand more than they'd like.

Employment is the second factor that's supposed to be in their rate decision--number one is inflation. They've already got the last piece of inflation data, which showed some acceleration. So it's all-clear for raising rates from that standpoint. So now if the employment report next Friday comes in anywhere between 150,000 and 250,000, I think we're OK. They'll raise rates just a little bit and then not touch them again for six months is my guess.

Stipp: And then lastly next week you are also going to be looking at some China data, and that's been closely watched data recently. What are you expecting to see there?

Johnson: You are talking about the PMI data. They have changed the way that that's been reported a little bit. We didn't get the flash data like we did on the European and the U.S. data this week. So this puts double emphasis on report. Of course China in general has been slowing, and it had many months in a row of poor purchasing manager data. Then we had a great month on October. So now people are going to see if that can be extended in November. This report, other than Fed data, is probably the single most market-moving piece of data that we have these days--maybe the employment report would be the other. Those are the biggies.

The U.S. trade data suggests that maybe things won't be necessarily wonderful, but we are still hoping for some stabilization there. The PMI data we saw this week, the flash data out of Europe was particularly strong.

Stipp: You mentioned Europe as one of the things that's been a surprise for you this year.

Johnson: In the last three months. We had written off Europe and really not talked too much about their long-term growth prospects. They've got a lot of structural problems. But it looks like they are slowly but surely dealing with some of those. I mentioned the PMI data. The level surpassed that of the United States for the month of November. It was a multi-month high, and the services sector was even doing better than the manufacturing, according to this data, at a four- to five-year high. Other than France, the strength is across the board. Not only is it Germany, which has been powerful for some time, but the peripheral country data is also looking excellent. So we're really pleased with what's happening there. Europe may turn out to be the biggest surprise for the last few months of 2015.

Stipp: A lot of data this week, some key data coming next week. Thanks for helping us stay on top of it all.

Johnson: Thank you.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.