INDICATOR: Revised 3rd Quarter GDP, Housing Prices, Consumer Confidence and Philadelphia Fed Non-Manufacturing Index
KEY DATA: GDP: 2.1% (up from 1.5%)/ S&P Home Prices (Year-over-Year): 4.9%/ Confidence: -8.7 points/ Philadelphia Fed: up 8.8 points
IN A NUTSHELL: “The economy is growing at its potential and home prices are accelerating, so why all the long faces?”
WHAT IT MEANS: With terror being on everyone’s minds, it is hard to focus strictly on the economic data, but we must do that so we know where things are given the risks the world is facing. And the data look fine. It turns out that the economy grew at a solid pace in the summer. I use the term “solid” because we have to base out evaluation of growth on what the economy can do, not what we would like it to do. Trend or potential economic growth is running between 2% and 2.25%, so the upwardly revised GDP number comes in right at that pace. It is strong enough to keep the labor market tightening and to maintain modest upward pressure on prices. The revision was mostly due to more inventory building than initially thought. Equipment and residential spending were also revised upward, while consumption came in a touch lower. It looks like growth this year growth will come in at about 2.5%, above trend, but not strong enough to create major bubbles. That said, wage pressures are building.
On the housing front, prices continue to rise. Both the S&P/Case Shiller and CoreLogic indices rose faster over-the-year in September than they did in August. S&P/Case Shiller had prices rise by 4.9% for its national index while CoreLogic came in at 6.4%.
The Conference Board’s Consumer Confidence Index fell sharply in November. There is growing concern about the labor market as more people thought jobs were hard to get and fewer found it easier to get a job. How much the terror news affected the results is unclear.
The Philadelphia Fed reported that the regional economy picked up some steam in November. But at the same time, non-manufacturing firms reported that their business grew a little less rapidly. There were some very interesting results in this report. Compensation rose faster and firms seem to be reacting by slowing hiring. Looking toward 2016, firms expect prices and compensation to increase by about 3% over-the-year, which is above what most people have been predicting. Rising labor costs and pricing power may be returning to the economy.
MARKETS AND FED POLICY IMPLICATIONS: There are growing calls for the Fed to once again put on hold its first rate hike because of the uncertainty created by the Paris terror attacks. But while that is a logical reaction, history tells us that major negative events don’t usually cause the economy to falter. Despite the horrors of September 11th, fourth quarter 2001 growth was positive and the recession ended in November. That is not to say there will not be any short-term or even longer-term dislocations. Because of the need for heightened spending on security, the economies of just about every nation look different today than they would have had there been no terror attacks. The current attacks will only add to increased security spending. And while consumers tend to become more conservative initially, they usually bounce back fairly quickly. We may have to mark down fourth quarter growth a little, but that could mean a somewhat stronger first quarter 2016 expansion. Barring a domestic terror attack, I still expect the Fed to raise rates in December.
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