A Holiday Gift From The Federal Reserve – Market Update

The Federal Reserve had its December meeting last week and we got the first indication that cuts in the federal funds rate might be on the way. While this is certainly a welcome holiday gift, timing is uncertain.

Headline News

Sections of this report were aided by the analysis of our friends at Econoday.¹ You can blame me for our holiday verbal tinsel, however. This is the last Market Update of the year. Let’s have some fun!

New Residential Construction

The elves may be hard at work constructing toys, but residential construction hasn’t kept pace with North Pole output, according to the Department of Housing and Urban Development (HUD) and the Census Bureau.

Completions were down 4.6% in October to a seasonally adjusted annual rate of 1.478 million. Meanwhile, on the single-family side, completions were down 0.9% at 1.002 million, with 408,000 multifamily units.

Housing starts measure new construction by shovels in the ground. These were up 1.9% at an annual rate of 1.372 million, but 4.2% below the same time last year. Single-family starts were up 0.2% at 970,000. There were 382,000 units started in buildings with five units or more.

Building permits were up 1.1% at 1.487 million. This is down 4.4% from last October. Single-family permits were up 0.5% at 968,000 to go along with 469,000 multifamily permit authorizations.

Rocket Homes^SM Listings Report

We decided to take a look at our own November data to give some further insight on the trends we’re seeing. Look for this to become a regular feature.

First, let’s take a look at some price trends. Sellers had to do some discounting. The median list price was $365,030. Meanwhile, by the time of sale, the median price fell to $349,830. When we look at a distribution, 50.2% of homes sold under asking with 26.7% going for more than the owners asked and the remainder coming in on the dot.

The average days on market is steadily increasing the last few months in our data, up to 45 days in November from 43 in October.

Existing Home Sales

In October, existing home sales were down 4.1% to 3.79 million units on an annual basis. This has fallen 14.6% since the same time a year ago. On the single-family side, the National Association of REALTORS^® (NAR) said sales were down 4.2% at 3.38 million units. Meanwhile, multifamily units were down 2.4% at 410,000, both a 14.6% decline since last October.

The supply of existing homes did improve slightly, up to 3.6 months from 3.4 months. People aren’t so willing to sell and give up low rates. Days on market stand at 23 days according to this data. Meanwhile, the median price of an existing home was down 0.3% to $391,800.

Durable Goods Orders

Durable goods orders for October were down 5.4% overall, but when excluding transportation, they were flat. Core capital goods orders were down 0.1%, according to the Census Bureau.

Transportation orders specifically were down 14.8%. There were also downturns in orders for primary metals, electrical equipment, appliances and components.

Orders were up for computers, electronic products and fabricated metals. Shipments fell 0.9%. Unfilled orders and inventories were both up 0.3%.

New Home Sales

New home sales were down 5.6% in October on a seasonally adjusted annual basis at 679,000. The good news is that is 17.7% higher than sales were in October 2022, according to the Census Bureau and HUD. The median sales price was $409,300, which is down 3.07% for the month. Supply was also up a full month to 8.8 months, relative to the current pace of sales.

Case-Shiller Home Price Index

The Case-Shiller index looks at home prices across 20 major metropolitan areas regardless of how those homes are financed. The latest data for September shows that the overall price of homes was up 0.2% and 3.9% annually. When seasonal adjustment is taken into account, that’s actually an increase of 0.7% for the month.

Looking at individual cities, Detroit tops the list with 6.7% annual price growth. San Diego is also feeling like their stockings are filled with holiday sweets, as property values are up 6.5%, with New York at 6.3%.

On the other end of the spectrum, Las Vegas and Phoenix probably feel like they got coal, as property values were down 1.9% and 1.2%, respectively.

FHFA House Price Index

Unlike the Case-Shiller index, this one from the Federal Housing Finance Agency covers the entire nation, but it only looks at conforming loans backed by Fannie Mae or Freddie Mac. Prices were up 0.6% for the month and 6.1% compared to last September.

Consumer Confidence

Consumer confidence was up 2.9 points to come in at 102 in November. The downside is that October numbers were revised down 3.5 points, so the makeup wasn’t quite there.

When looking at present conditions, these were up 0.4 points at 138.6. Meanwhile, the index for expectations rose 5.1 points to come in at 77.8. Overall, consumers feel better about business conditions, if slightly less positive about the current job market. However, they do expect personal incomes to rise in the next 6 months.

Gross Domestic Product (GDP)

In the second reading for the third quarter from the Bureau of Economic Analysis, overall GDP rose 0.3% to 5.2% as compared to prior estimate. On the downside, consumer spending came in a little softer than previously noted at 3.6% as compared to 4%.

Spending on durable goods was down to 6.8% and services fell to 3% of spending. Meanwhile, nondurable goods expenditures on things like gasoline went slightly higher.

Gross investment and government spending were both way up at 5.5% and 10.5% of the contribution respectively and that made a big difference in this estimate. Net exports also have a narrower deficit.

Personal Income And Outlays

Personal incomes were up 0.2% in October, which matched the increase in personal spending. The good news is prices were flat. Overall inflation is starting to come down, up 3% on the year. However, in core categories prices were up 0.2% and 3.5% annually. The Fed’s holiday wish list would include core inflation getting down to 2%.

Looking at incomes, the Bureau of Economic Analysis said wages and salaries were up 0.1%. Wages in goods production are up 0.2% and services are flat, while government wages were up 0.7%. Unemployment insurance payouts were up 5.8%, but it’s pointed out that a lot of this may have been to do with the UAW strike.

In other spending categories, durable goods spending was down 0.5%, but people were spending 0.4% more on services.

Pending Home Sales Index

The Pending Home Sales Index from NAR measures the number of homes under contract for sale. That number was down 1.5% in October and the index is at a very low 71.4. This doesn’t bode well for November existing home sales.

ISM Manufacturing Index

The Institute for Supply Management said its index came in at 46.7, flat for the month of November. Numbers below 50 indicate contraction in the sector. Demand has yet to really pick up.

At the same time, employers are having a hard time finding people to fill key positions. The employment portion of the index came in at 45.8, down 1 point. A lot of that has to do with the UAW strike though. The production index itself is down 1.9 points at 48.5, meaning production was slower for the month.

Customers inventories were up 2.2 points at 50.8. With inventories on a growth trajectory, they won’t be in a hurry to reorder items.

International Trade

The U.S. trade deficit increased by $3.1 billion in October to $64.3 billion, according to the Census Bureau. The goods deficit was up $3.5 billion to $89.8 billion. The good news is the services surplus increased by $400 million to $25.5 billion.

On the goods side, there were increases in imports for vehicles and capital goods. Increased capital goods investment is generally good for business. There were also higher imports for computers and oil drilling equipment.

On the export side, there were gains in services led by transport, finance and business. When looking at goods, a gain in exports of industrial supplies wasn’t enough to make up for a decline in consumer goods, mostly attributed to downturns for gem diamonds and vehicles.

Employment Situation

There were 199,000 jobs added to U.S. nonfarm payrolls in November. This led to a drop in the unemployment rate to 3.7% from 3.9% the prior month. At the same time, the labor force participation rate ticked up 0.1% to 62.8%. Average hourly earnings were up 0.4% and these have gone up 4% on the year.

Although fewer jobs were added than expected, things are still headed in the right direction. The Fed has to be happy with this as they work for a soft landing in this rate-tightening cycle. There were 150,000 jobs added in private payrolls with the rest coming from government.

Turning to individual sectors, 28,000 jobs were added in manufacturing. Health care and social assistance added 93,200 jobs while leisure and hospitality saw 40,000 jobs added. The end of the Hollywood strike also meant 17,000 jobs added in the motion picture and sound recording sectors.

One potential sign of weakness is that retail dropped 38,400 workers, which may be a bad sign for consumer demand heading into the usually busy holiday season.

Consumer Price Index (CPI)

The Fed’s preferred measure of inflation comes from the personal income and outlays index from the Bureau of Economic Analysis discussed earlier, but that doesn’t mean they don’t look at all metrics.

This measure from the Bureau of Labor Statistics (BLS) shows that inflation on the consumer side was up 0.1% in November and 3.1% for the year. Taking out food and energy, it increased 0.3% for the month and has risen 4% since last November.

Shelter prices were up 0.4% overall with matching increases of 0.5% for both rent and the equivalent if an owner wanted to lease a similar space. Prices for used cars and trucks were up 1.6% following 5 months of decreases. Auto insurance was up 1%.

Meanwhile, apparel prices were down 1.3%, and the cost to furnish a household was down 0.4%, with a 0.6% drop in communication costs. The cost of recreation, plane tickets and new cars and trucks all fell as well.

Producer Price Index (PPI)

BLS data shows that prices on the production side were flat in the month of November and have only risen 0.9% since last November. Prices were also unchanged when excluding food and energy, although these prices have gone up 2% over the preceding 12 months.

Finally, when further taking out wholesale and retail services, prices were up 0.1% and increased 2.5% for the year. While food prices were up 0.6%, they were down 4.9% compared to the same time a year ago. Energy prices were down 1.2% and have fallen 8.4% over the course of this year.

On the goods side, prices have gone down 1.5% for the year after being flat for the month. Services prices were also unchanged in November. They’ve gone up 2.1% since last year.

Retail Sales

Retail sales were up 0.3% in November, according to the Census Bureau. When vehicles were taken out, the number was a 0.2% increase. Finally removing vehicles and guests, sales were up 0.6%. Sales of motor vehicles and parts were up 0.5%. Gas station sales were down 2.9% as prices continue to fall in the sector.

There was a 1% rise in sales at nonstore retailers – think e-commerce. Restaurants also saw a 1.6% uptick in spending. Meanwhile, furniture spending was up 0.9%, as were sporting goods, rising 1.3% in a sign of the changing times. Department store sales were down 2.5% and there was a 0.2% drop in general merchandise sales.

Spending is still fairly robust, but people are no longer relying on anchor stores at the mall to get their gifts.

Industrial Production

Industrial production was up 0.2% in November, according to the Federal Reserve, with manufacturing output increasing 0.3%. Capacity utilization was up 0.1% in factories to 78.8%. We’ve mentioned it multiple times in this report, but manufacturing was helped by the end of the UAW strike. Motor vehicle production was up 7.1%

Looking at some other categories, utility output was down 0.4%. There was a 0.7% drop in electricity production only partially offset by a 1.3% increase in natural gas utilization. Mining was down 0.3%.

Mortgage Rates

If I could give the Fed something for the holidays, it might be a course on clear communication. The press releases are so full of economic language that it’s good to have them translated to plain English.

The Fed held the federal funds rate unchanged in December. That much was expected. But what traders were really looking forward to was the economic projections the members do every quarter. The fact is that the median projection for the federal funds rate is 0.8% lower than it is now, meaning up to three rate cuts, depending on pacing.

And yet, New York Fed president John Williams says they aren’t talking about rate cuts right now. Something doesn’t add up. The stock market did react with exuberance to the dot plot over the past couple of days. Perhaps they don’t want traders running around like kids on a holiday sugar high. That’s understandable.

Whatever happens with rates in the future, it’s really important to know just how good they’ve gotten the past couple weeks. According to Freddie Mac data, they’re back under 7% for a 30-year mortgage. While a far cry from historic lows, this should help with affordability. Lock the rate if you like it.

The average rate on a 30-year fixed-rate mortgage was down 8 basis points to 6.95% last week in a survey that would have been completed prior to the Fed announcement. This is up from 6.31% a year ago at the same time.

Meanwhile, the average rate on a 15-year fixed was up 9 basis points to 6.38%. It has risen from 5.54% last year.

We wish everyone a happy and safe holiday season! See you in the new year!

¹ Important Legal Notice: Econoday has attempted to verify the information contained in this calendar. However, any aspect of such information may change without notice. Econoday does not provide investment advice, and does not represent or warrant that any of the information is accurate or complete at any time. Copyright 2023 Econoday, Inc. All rights reserved.