- INDICATOR: August Consumer Confidence and Philadelphia Fed Survey, July New Home Sales and June Home Prices
- KEY DATA: Confidence: +10.5 points; Home Sales: +5.4%; Phila. Fed: +7.3 points: National Home Prices (Year-over-Year): +5%
- IN A NUTSHELL: “It is hard to make the case that the stock market mess has anything to do with the U.S. economy as the data are all pointing to solid growth.”
WHAT IT MEANS: Last week I repeated that markets may be efficient but that doesn’t mean they are rational. Yesterday we saw that point driven home. But the violent moves were likely way overreactions that had little to do with the U.S. economy, which is in good condition.
Take consumer confidence, which according to the Conference Board surged in August. It had declined sharply in July and I noted at the time that the drop made no sense. It didn’t.
Rising confidence makes sense as the labor market is solid and the housing market is also picking up some steam. New home sale rose solidly in July with large increases in all regions except the Midwest.
Another positive sign was the surge in the percentage of homes sold that had yet to be started. People are out buying not just finished buildings but houses that will soon be built. That points to even strong housing starts going forward, and starts have been moving upward solidly already.
As for new home prices, they seem to be going nowhere. The median home price was up only 2% over-the-year. In contrast, the S&P/Case Shiller national home price index rose 4.5% between June 2014 and June 2015. The deceleration in price gains has stabilized and is picking up a little for the larger metro areas surveyed.
Finally, the Philadelphia Fed’s nonmanufacturing index jumped in August as respondents saw both the region’s economy and their own business conditions improving. It looks like firms are changing their hiring decisions as a growing number of companies expect to hire more full-time workers and a fewer firms expect to hire part-timers. Looking outward, almost none of the respondents thought conditions will deteriorate over the next six months. Indeed, the index measuring expectations for firm business hit its second-highest level on record.
MARKETS AND FED POLICY IMPLICATIONS: Going into the stock-market craziness, consumer and business confidence were rising and the housing market was improving.
So why did the equity markets collapse?
Uncertainty, largely about China, finally was recognized. I was not the only economist to note that the Chinese data were hard to believe.
Everything seemed to go as planned with only small ups and downs. The Chinese economic puppet-masters were viewed as savants who did no wrong.
Well, wrong. They are neither as brilliant nor as clueless as the markets seem to believe on any given day.
In reality, we know little about the true condition of the Chinese economy.
Anyone who thinks the data are accurate is living in a dream world.
And if you don’t have accurate data, how can you accurately make the economic and financial decisions that the centralized policymakers are required to make?
Is China a mess or just slowing? Who knows? And that is the real worry.
What we do know is that the U.S. economy is in good shape.
So what should the Fed do? Yesterday’s wild equity-market moves show precisely why the Fed has to move rates back to normal.
What would the Fed do if the markets continue to decline and the world economy falters? Are we talking QE 4, 5 or 6?
The Fed has removed the interest-rate arrow from its quiver and it needs to get it back in as quickly as feasible because the business cycle has not been repealed.