Economic Update Provided by Conner Strong & Buckelew
Joel L. Naroff . President and Chief Economist. Naroff Economic Advisors, Inc.
INDICATOR: December Existing Home Sales and Leading Indicators
KEY DATA: Sales: +2.4%; 2014: -3.1%; Prices (Year-over-Year): +6.0%/ Leading Indicators: +0.5% IN A NUTSHELL: “The signs are pointing to better growth ahead and with housing continuing to improve, that growth could be strong.” WHAT IT MEANS: It looks like the housing sluggishness may be coming to an end, though it cannot be said that conditions are strong. Yesterday’s report by the Federal Housing Finance Agency that prices continue to rise at a solid pace was reaffirmed with today’s report that in December, existing home sales improved. While purchases during 2014 were down slightly from 2013, the winter played a major part in that decline. The sales pace during the second half of the year was nearly 7% faster than the first half. In December, the increase was not broad based. Demand rose solidly in the South and West, but fell moderately in the Northeast and Midwest. Don’t know how to explain that. One issue facing the market is a sharp drop in the number of homes for sale. That is restraining sales, but is helping keep price increases up. The increase over the year in median prices was the same as the government reported. Housing is important for growth, but not even modest gains in this sector are keeping the indicators of future growth down.
The Conference Board’s Index of Leading Indicators is soaring, with most components pointing to better growth ahead. One of the laggards has been residential construction, but since that could turn soon, there is reason to be really optimistic. MARKETS AND FED POLICY IMPLICATIONS: The Fed meets next week and is facing economic data that is all over the place and a world economy and currencies that are being buffeted by slowing inflation and sudden actions by central banks. That is not an environment for changes in policy and I don’t expect one. But let’s wait until the GDP report comes out at the end of next week before we assume the economy has slowed. The soft December retail sales may only be a function of demand being spread across several months. And the data are not price adjusted and most importantly, they don’t include services.
I expect growth to be in the 3% to 3.5% range, which would be great after two huge increases in the second and third quarters. And even European QE is good news. It should ultimately lead to better growth in Europe and even if the dollar remains strong, our exports should grow. Let’s not forget, the labor market is near full employment so wage gains are going to accelerate, it is just a matter of time. And that time could be short. So the economic outlook is pretty positive, and while the FOMC may remain cautious, they may only be able to do so for a few more months