As a key indicator of U.S. consumer confidence continues to reflect the nation’s partisan politics, economy watchers would be wise to follow the money, as in what Americans are willing to buy and how much they’re paying for it.
Last week, the housing industry was in the spotlight. Reports on sales of new and existing homes for January showed that consumers believed the economy was solid as the new year began.
Home resales reached a 10-year high, climbing 3.3 percent, to a seasonally adjusted annual rate of 5.69 million units, the National Association of Realtors reported.
"Existing-home sales continue to shine, and this bodes well for consumer spending, which helps the economy go. Team Trump is trying to boost economic growth, and [January’s] existing home sales will make the job a little easier," Chris Rupkey, chief economist at MUFG Union Bank in New York, told Reuters.
Reuters also reported that the nation's housing inventory is still near a record low. As a result, the median price of a home rose 7.1 percent from a year earlier, to $228,900 in January. Although the rate on 30-year fixed mortgages appears to be stabilizing, it is still above 4 percent as annual wage growth runs below 3 percent.
NAR chief economist Lawrence Yun said in a statement that the January sales gain signals resilience among consumers, even as interest rates rise.
"Much of the country saw robust sales activity last month, as strong hiring and improved consumer confidence at the end of last year appear to have sparked considerable interest in buying a home," Yun said. "Market challenges remain, but the housing market is off to a prosperous start as home buyers staved off inventory levels that are far from adequate and deteriorating affordability conditions."
On Friday, the Commerce Department said new-home sales rose 3.7 percent in January, to a seasonally adjusted annual rate of 555,000 units.
The pace was slower than expected. Bloomberg said the median forecast in its survey of economists was for a rate of 571,000 units and said the figures suggest measured improvement in the market as buyers adjust to higher borrowing costs and prices.
"It is clear that the economy is moving forward solidly,” Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pa., told Reuters. “Consumers are confident and are buying homes, but builders are not getting their share of that demand.”
Taken together, the housing data reveal that consumers who have enough money to consider a house are confident about the future, regardless of what the politically skewed results of recent consumer confidence surveys show.
The University of Michigan’s final Consumer Sentiment Index for February fell to 96.3 from 98.5 at the end of January, but the index remains at a relatively high overall level despite the bitter partisan divisions that the survey’s results reveal.
“Overall, the sentiment index has been higher during the past three months than any time since March 2004,” Richard Curtin, chief economist of the university’s Surveys of Consumers, said in a statement. “Normally, the implication would be that consumers expected Trump's election to have a positive economic impact. That is not the case since the gain represents the result of an unprecedented partisan divergence, with Democrats expecting recession and Republicans expecting robust growth.”
Curtin said that because neither a recession nor strong growth are expected this year, “both extremes must eventually converge. Although the data indicate a growth rate of 2.7 percent in consumption during 2017, the data also indicate we can expect greater volatility and discretionary spending differences across subgroups.”
The Federal Reserve is watching political developments closely. The minutes from the Jan. 31-Feb. 1 meeting of the Federal Open Market Committee, the central bank's policy-making arm, show committee members focusing on the new Trump administration and the changes the president might bring — lower taxes and regulations and higher domestic spending, if Trump gets his way.
"Many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon" if data on jobs and inflation are "in line with or stronger than their current expectations" or if the risk increased that the Fed might overshoot its goals, the meeting summary said.
"There's more discussion of upside risks than we've had in a long time,” Brett Ryan, senior U.S. economist at Deutsche Bank, told CNBC. “This is a Fed that's turning the ship. They're gradually getting more confident that they're going to meet their goals."
Ryan also said, though, that the minutes provided no "smoking gun" to suggest that a rate increase is likely at the committee’s March 14-15 meeting.
Most economists do not expect the Fed to act in March because Trump is still developing his long-term plans for the economy. The circumstances create many unknowns and leave policy-makers wary.
The Fed and other economy watchers will be studying the new week’s reports, which include the results today of the other major consumer survey — The Conference Board’s Consumer Confidence Index, for February. The median forecast of economists is that the index will show a reading of 111.5, only slightly below the 111.8 level of January. The index retreated a little last month after reaching a 15-year high in December.
Other important reports due this week include data Wednesday from the Commerce Department on personal income, consumer spending and core inflation for January and the auto industry’s car and light truck sales for February.
Forecasts are that consumer spending will rise 0.4 percent, nearly as much as the solid 0.5 percent gain in December, and that personal income will continue to climb at the 0.3 percent pace of the previous month.
Such results would help allay fears among the business community of the pessimism that Democrats, in particular, have shown in consumer confidence surveys as the nation waits to see what the new president can accomplish.