Tepid Data Will Not Motivate the Fed to Raise Interest Rates Tomorrow

  • The Consumer Confidence Index ticked down slightly in July from 97.4 to 97.3.
  • New Home Sales for June increased by 3.5 percent to a 592,000 unit annual rate.
  • The U.S. National Case-Shiller Home Price Index was up 5.0 percent in May from a year earlier.

New home sales in June increased by 3.5 percent to a 592,000 unit annual rate. While the series is still below its historical average of about 650,000 units per year, it is once again trending up. This will show up in the GDP accounts as a boost to residential fixed investment in the second quarter. Given our expectation of ongoing job creation and low mortgage rates, we expect to see new home sales continue to improve through the second half of this year. The months’ supply of new homes available for purchase dipped in June to 4.9 months’ worth, fairly tight conditions. This will motivate builders to boost single-family permits and starts, which have been range-bound over the last year. The median sale price of a new home increased in June to $306,700, a 6.1 percent increase over the previous 12 months. As previously reported, existing home sales increased by 1.1 percent in June to a 5.57 million unit annual rate.

Overall house prices, as measured by the Case-Shiller U.S. National Home Price Index, continue to increase. However, price gains through the first five months of 2016 have not been as strong nor as evenly distributed as they were at the end of 2015. In May, the national index increased by 0.2 percent for the month, and was up 5.0 percent over the previous 12 months. Several cities in the Case-Shiller 20 city index reported slight price declines for the month, including Atlanta, Cleveland, Detroit and Los Angeles. New York house prices were down a moderate 0.5 percent in May, while San Francisco registered a bigger 1.3 percent drop.

The Conference Board’s Consumer Confidence Index ticked down slightly in July to 97.3, after increasing in June to 97.4. The index has been range-bound since early 2015. It is above its historical average of 93.6 since 1967, but it has not shown a typical mid-cycle surge so far in the current business cycle. However, we could turn that analysis on its head and say that this is the typical mid-cycle surge, and it is happening at a lower level. Time will tell.

The Federal Reserve Bank of Richmond released a couple of data points for South Atlantic states. Their survey of Fifth (Federal Reserve) District manufacturing activity improved in July, as did service sector activity. We do not expect the Federal Open Market Committee, which is meeting today and tomorrow, to increase the fed funds rate. We will read the policy statement tomorrow to see if there are any hints about a later interest rate hike, possibly coming as early as September 21. Between now and then, the Federal Reserve will also have its annual conference in Jackson Hole, Wyoming in late August. That will be another opportunity for Federal Reserve officials and global central bankers to compare notes.

Market Reaction: U.S. equity markets are mixed. The 10-year Treasury bond yield is up to 1.58 percent. NYMEX crude oil is down to $42.86/barrel. Natural gas futures are down to $2.69/mmbtu.

Economic Alert 072616

For a PDF version of this Comerica Economic Alert click here: New_Home Sales 07-26-16.

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