ELLIOTT D. POLLACK
FOR IMMEDIATE RELEASE
January 6, 2020
The Monday Morning Quarterback
A quick analysis of important economic data released over the last week
This was supposed to have been a quiet week. The most important economic news release of last week was scheduled to be the December employment results which have been postponed to January 10th due to New Year holidays. The data that was released was good, or at least not unexpected. Consumer confidence was about flat but at a high level. The ISM’s manufacturing index was down again and indicated that the manufacturing sector was contracting in December. Construction spending was up and public construction was especially good. The NAR pending home sales index continued to rise in November. And home price appreciation on a national level continued to slow which is good news for housing affordability. Also notable was that pay for the bottom 25% of wage earners increased considerably more rapidly than the increase for the top 25% last year. In addition, given that minimum wage increases either occurred on or around January 1, the pay outlook for the bottom 25% will increase again. (This is a mathematical fact. I will skip the costs and benefits of the minimum wage here.)
All of this is well and good. But, the bigger story was the killing of Iranian General Soleimani, a man who was labeled a terrorist by the U.S. Iranian leadership as “avowed to avenge his death”. Why am I discussing this in an economic piece? The reason is that even though this particular crisis may blow over and the economy may continue generally as it otherwise would have, it brings into play “unknown unknowns”. This term, brought back to life by Donald Rumsfeld in 2002, originated long before Rumsfeld reintroduced it.
While no one can be sure, the odds at the moment seen to be that the ultimate retaliation by Iran that could occur is not something that would create a major change in consumer sentiment or cause meaningful economic damage to our economy. But, if it does create such damage, it could push a slowing economy into a mild recession. If it does, that “unknown unknown” would change the economic picture at least temporarily.
Is it something to plan on or really worry about today? No. But, it is something that shows that there are uncertainties out there that may not have been discounted into forecasts. That would be a problem. Let’s hope for the best.
The Conference Board Consumer Confidence index slipped a minor amount in December but sentiment remains solid. The index fell from 126.8 in November to 126.5 in December. A year ago, it was 126.6. So consumer confidence remains at a high level.
The ISM’s manufacturing index fell from 48.1 in November to 47.2 in December. A year ago it stood at 54.3. This is the lowest reading since June 2009 when it was 46.3. Any reading below 50 indicates that manufacturing is in decline. As we have discussed before, the consumer sector is doing well but manufacturing is not. This is worth watching. If the consumer sector continues to expand, it should be a matter of time before there is a need for more manufacturing activity. The dichotomy between the two sectors will hopefully resolve itself soon.
Wages for rank-and-file workers are rising at the most rapid pace in a decade. Pay for the bottom 25% of wage earners rose 4.5% in November compared to year earlier levels. Wages for the top 25% grew by 2.9% over the same period. This is the first time that wages for low skilled workers have outpaced wages for high skilled workers since 2010. Additionally, with 21 states and another 26 cities and counties boosting their minimum wage early in 2020, there could be additional pay hike coming for about another 6.8 million workers. The ultimate cost of those pay hikes is a discussion for another day.
Construction spending in November was up 0.6% from October and up 4.1% from year-earlier levels. Private construction was up 0.4% and 1.6% respectively while public construction was up 0.9% and 12.4% respectively.
The NAR pending home sales index increased to 108.5 in November. This is up from 107.2 in October and 101.0 in November 2018. Despite an insufficient level of inventory, pending sales contracts still increased in November. This is good news going into 2020.
The S&P/Case-Shiller home price index continues to show a slowing trend in national home prices. The 20 city composite index was up 0.1% in October and stood 2.2% above year-earlier levels. Since the housing market is a market of markets, to get a good feel for what is going on in any particular area one has to look at the local index. For example, Greater Phoenix saw a 5.8% year over year gain in October while San Francisco saw a decline in prices. This indicates considerable supply/demand characteristics in those markets. But, overall, supply and demand nationally seems to be more in balance than they have been over the past couple of years. This is good news for affordability.
Year-to-date (11 months) traffic at Sky Harbor Airport in Phoenix was up 2.4% with enplanements up 2.6% and deplanements up 2.2%. For the month of November, activity was down 0.4% but that was due to the timing of Thanksgiving this year vs. last. With the fourth Thursday of the month falling on the 28th this year, the big departure day was December 1. Last year, it fell in November.
As stated above, the October S&P/Case-Shiller home price index for Greater Phoenix was up 0.5% for the month and 5.8% over a year ago. This indicates a continued supply/demand imbalance in the Phoenix area as housing below $400,000 remains in short supply relative to demand.
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