Markets & Finance

Consumers Keep a Stiff Upper Lip


How are consumers—and homebuyers—holding up amid the current financial-market and geopolitical uncertainty? Surprisingly well, in Action Economics' view, judging from two economic reports for June released July 25. Though U.S. consumer confidence figures are being weighed down by high gasoline prices, falling stock prices, a tightening Fed, and a deteriorating situation in the Middle East, the numbers remain notably robust, with significant strength in the important "present situation" index.

Similarly, though the June existing-home-sales release of July 25 and other recent reports on the housing market continue to reveal moderation in 2006 from the robust figures of 2005, the drop-back continues to remain orderly, and prices continue to post year-over-year increases.

Here's our look at these two closely followed reports:

Consumer confidence: The Conference Board's consumer confidence index rose to 106.5 in July, from 105.4 in June (revised from 105.7). The present-situations component improved to 133.0, from 132.2 (revised from 132.7). The expectations index edged up to 88.8, from 87.5 (revised from 87.6). The employment index shows jobs plentiful at 28.6, from 28.0, and the hard-to-get index at 19.9, from 20.0. The expected-inflation rate index held steady at 5.1. The July index rise of 1.1 points bucked the July moderation in the preliminary July Michigan sentiment report, where the index fell by 1.9 points, to 83.0.

Generally, confidence remains relatively high for the middle years of an expansion by all these measures, especially as gauged by the current conditions index, which for this survey is at a lofty level—just off May's 136.2 high for the expansion. This strength is occurring despite the weight in July of stock market declines, a persistent Fed tightening path, high energy prices, and the escalating Israel/Lebanon conflict.

Existing home sales: Sales fell 1.3% in June, to a 6.620 million-unit annual pace, from a 6.710 million rate in May (revised from 6.670 million). Single-family sales dropped 0.9%, marking a fourth straight monthly decline. Condo sales fell 5.5%. The supply of unsold homes rose to 6.8 months, from 6.4 months. The median price was up 0.9%, to $231,000, both on a month-over-month and year-over-year basis.

The report revealed less weakness for sales and prices than was expected, though the downtrend in this real estate measure remains intact. The sales rate in June has now dropped back to the rates of early 2004, though it remains well above the rates of 2003 and earlier. For prices, the drop-back in year-over-year price growth to 0.9%, from 5.5% in May, was due to the tough comparison with the 5.5% monthly price surge in June of last year.

We will continue to assume a 4.4% drop in new home sales in June alongside a stronger 1.1% gain in the median price due to a much easier comparison for that report. We will continue to assume a 0.3% gain in construction spending in June that reflects the diverging ramifications of strong construction employment figures on the month, but a 5.3% drop in June housing starts and a 1.2% drop in units under construction.

The big picture: The U.S. economy remains poised for a reduced growth pace in gross domestic product in the second half of the year that we peg at 3%-3.5%, which will still leave a solid 4.0% fourth-quarter-over-fourth-quarter gain for 2006, alongside a 3.7% growth clip for the year, on a year-average basis. The forecasts mark a second-half slowing from the 4.0% average growth of the last 13 quarters, but one that has only moderate impact on the annual data.

The continued moderate pace of the correction in the likely "problem areas" of residential construction and consumer spending at this point in the cycle bodes well for the economy in the second half of the year and in early 2007. The negative cyclical effects of the patterns in these sectors will face countervailing effects in the booming commercial construction market, ongoing strength in corporate profits and business fixed investment, diminishing import growth, and rapid growth in exports. If the contraction in housing and slowdown in consumer spending remain gradual, the economy should stay relatively healthy.


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