Around the Street

Experts Talk Confidence Drop, Home Prices, Inflation


Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Feb. 23.

Michael Englund, Action Economics

Was U.S. February [consumer] confidence depressed by the East Coast storm [early in the month]? Perhaps not directly, but it does appear that large East Coast [winter] storms such as one in January 1996 depress employment, hours [worked], jobs, and spending. Indeed, with the 1996 storm, consumer confidence posted a 10.8 point drop, to 88.4, that was almost-identical to the 10.5 point drop reported today. In 1996 we also saw a 0.4 hour January workweek drop, a 1.3% drop in hours-worked, payrolls falling by 19,000, vs. a 150,000 to 200,000 [growth] trend, and retail sales falling 0.9%. Interestingly, personal income posted a fairly normal 0.6% gain that month.

Given the parallels, we have lowered our payroll forecast for this February to -50,000 despite an assumed 50,000 boost from Census hirings, while the work week falls 0.1 hours to 33.8…while hours worked [is] expected to fall by 0.4%. Though income was seemingly unaffected in 1996, we are trimming this February's forecast slightly to 0.2% and we now assume just a 0.2% February retail sales increase that incorporates a lean 10.5 million [annual] vehicle sales rate. If we get ongoing evidence of February disruptions, we may later lower these estimates further and might also lower our already trimmed 0.2% industrial production forecast for February.

David Reisler, Nomura Securities

The Case-Shiller house price index declined by 0.2% month-over-month, or 3.1% year-over-year, on a nonseasonally adjusted basis in December, as expected. The seasonally adjusted index rose by 0.3% month-over-month. U.S. house prices typically fall in winter months due to weaker sales volumes. The small decline in the nonseasonally adjusted index is therefore not surprising and is consistent with our view that house prices have effectively reached bottom. House prices rose or were unchanged in 7 of the 20 cities of the composite index and declined in the remaining 13.

House price appreciation was the strongest in San Francisco (+4.8% year-over-year), Dallas (3.0%), and San Diego (2.7%). Declines were the largest in Las Vegas (-20.6%), Tampa (-11.0%), and Detroit (-10.3%). However, even for these cities the weak year-over-year figures largely reflect declines in the first half of 2009. Prices in most cities have stabilized in more recent months. In only a small number of U.S. cities are house prices still definitively falling (beyond normal seasonal variation).

Edward McKelvey, Goldman Sachs

[A] 0.14% drop in the core consumer price index (CPI) [in January] helped the case for U.S. disinflation by unwinding all but a small portion of the recent pickup in the year-to-year inflation rate of this key indicator. Other measures of underlying CPI inflation…have shown a more consistent pattern of disinflation over the past year and a half. Although these alternative measures of core inflation have definite advantages, the traditional core index does permit analysis of whether sharp changes in food [prices], and particularly in energy prices, are passing through to other prices, a key issue for Fed officials.

We find that more than three-quarters of this index has exhibited disinflation over the past year, while in many cases the exceptions are unlikely to respond to excess capacity in the economy at large (medical costs, college tuitions) or reflect special factors, such as state and local budget pressures (tuition, public transportation, and tobacco), the exchange rate (apparel), or energy costs (public transportation). We continue to expect year-to-year core CPI inflation to recede during 2010, from 1.5% currently to about 0.5% by year-end.


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