Economic First Look: Focus on Consumers

 | Dec 24, 2011 | 8:30 AM EST
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  • All markets closed in observance of the Christmas holiday.


  • S&P Case-Shiller Home Price Index, 9 a.m. (all times EST)
  • Consumer Confidence (Conference Board measure), 10 a.m.


  • EIA Petroleum Status Report, 10:30 a.m.


  • Jobless Claims, 8:30 a.m.
  • Pending Home Sales Index, 10 a.m.


  • Chicago PMI, 9:45 a.m.
  • SIFMA recommended early market close, 2 p.m., for New Year's holiday.

As this is a holiday-shortened week, trading will likely be very light, and there are no economic indicators of earth-shattering importance scheduled. Still, I will be looking closely at three economic indicators that are all somewhat related: consumer confidence (on Tuesday) depends in part on housing prices (also on Tuesday), which in turn depends in part on real estate sales activity (on Thursday) -- and that, of course, is driven by consumer confidence.

Given the role of consumer spending in the economy -- and the willingness of consumers to continue to spend in the absence of wage gains -- I believe the consumer confidence metrics are the most important data this week. If wages were growing by a meaningful amount -- which they are not -- I would place less emphasis on the confidence figures. Considering how tight budgets are in this environment, however, the decision by consumers to spend vs. save is a much more difficult equation for them to solve.

To begin, though, the Pending Home Sales Index from the National Association of Realtors attempts to compensate for the fact that that organization's Existing Home Sales report counts sales when contracts are closed, which can occur a month or two after a contract is signed. The New Home Sales report from the U.S. Census Bureau counts a sale when the contract is signed, so there's a time period differential that makes comparing the two series difficult, especially since some contracts never close.

Last week, we learned that sales of new homes rose by 1.6%. If consumers signed contracts for existing homes as they did for new homes, it would imply a similar increase in the Pending Home Sales index. But as foreclosures are more attractively priced than new homes, consumers may shift their preference to existing homes (which are measured in this coming week's data), or home builders might discount their properties. Either of these actions may skew existing home sales vs. new home sales.

Mortgage rates reached a record low of 3.91% for 30-year mortgages, which can only help real estate. For the latest existing home sales report, the Realtors made massive backwards revisions to the existing home sales data (also this past week). So the 4.42 million rate of existing home sales was actually better than the consensus expectation for 5.08 million homes sold. In a perverse way, sales increased more than expected (4.0% vs. 1.4%) on a base that was 14% less than what analysts thought it was the week before. The main takeaway is that prices firmed up 2.1% from the prior month (but were down 3.5% from a year ago) to reach a median to $164,200. This may be reflected to some extent in the Case-Shiller Index, but unlike the Realtor's data, that index matches repeat sales of the same house. Inventory also fell to 7 months from 7.7 months.

Fewer unsold homes in neighborhoods and firming prices are both good for consumer confidence. Last week, the Thompson Reuters/University of Michigan Consumer Sentiment Index's measure rose to the highest in six months. (While that is good news, another way of reading that statement is that consumer sentiment is lower now than it was seven months ago.) This particular measure tends to be correlated to gas prices, which have come down, while Tuesday's measure from the Conference Board tends to be more correlated to jobs and incomes. Both measures have been improving.

The Michigan Survey's index rose to 69.9 from 64.1 at the end of November, compared to an average reading of 89 in the five years prior to the beginning of the recession in 2007. The measure of consumer expectations for six months from now, which more closely projects the direction of consumer spending, surged to 63.6 this month from 55.4 in November. It marked the fourth straight gain and the biggest point increase since May. The index of current conditions, which reflects Americans' perceptions of their financial situations and whether they consider it a good time to buy big-ticket items like cars or houses, increased to 79.6, the highest since June, from 77.6 the prior month. News from Europe may have depressed confidence somewhat, so such a strong rebound is actually quite impressive.

I will be looking for confirmation of this trend in The Conference Board's data. I will pay more attention to the expectations component, since that is tied more to future spending patterns than is the measure of current conditions. I am also curious to see the metric of the jobs that are hard to get vs. the ones that are easy to get, as this can shed some light on why the government's twin surveys (households and businesses) for the jobs report, show more job gains for the former than the latter. (The household survey has a small sample size and is subject to a larger margin of error than the establishment survey.) I will also focus on the metrics for buying intentions (such as of houses, cars, appliances, etc.) and the survey respondents' expectations for income gains. Both of these are important to consider for assessing the outlook for consumer spending and the housing market.

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