GDP Expanded by 2.9% in the Fourth Quarter, is up 2.2% for the Year… Personal consumption increased 2.1% last quarter and businesses added to inventory. Fixed residential investment dropped.
What it means— The numbers might give the Federal Reserve room to raise rates again after next week, but building inventory isn’t a great foundation for economic growth. Business spending declined along with home sales, adding to worries that the first half of 2023 could be difficult. Interestingly, this puts the economy in the “Goldilocks” range, where it’s not growing so quickly as to threaten higher inflation, but not falling so quickly as to suggest an ugly recession is ahead. Investors love this, because the current numbers suggest the Fed won’t raise rates much more, which will lead to falling long interest rates and rising growth stock prices.
Personal Consumption Expenditures Index Rose 0.1% in December, Are up 5% Over Last Year… This marks the smallest increase in PCE in 15 months.
What it means— The core Personal Consumption Expenditures Index (PCE), stripping out food and energy, rose 4.4% over last year, down from 4.7% in November. The Consumer Price Index (CPI) increased 6.5% last year, whereas the core CPI expanded by 5.7%. The Federal Reserve prefers the PCE to the CPI because the PCE adjusts faster to changing consumer spending habits. Decelerating prices will give the Fed more room to slow down or even pause rate hikes in the months ahead if the bankers want to change course.
December New Home Sales Rose 2.3%, but Were Down 26.6% Over Last Year… For the year, 644,000 new homes were sold, more than 35% fewer than the peak annualized number of 1.04M from August 2020.
What it means— The median sale price is the thing, but it’s quite volatile for new homes. The median sale price last month was $442,100, which is roughly 10% less than the peak of $490,000 last October but still 8% higher than December 2021. Supply rose to 9 months, but that reflects slower sales more than increased building. All cash buyers, investors and second home buyers have decided to wait, perhaps expecting further price drops.
On a cautionary note, KB Homes reported that 68% of clients who signed contracts in the fourth quarter cancelled, a cancellation rate higher than at the peak during the Great Financial Crisis and more than five times the 13% cancellation rate for the fourth quarter of 2021.
Leading Economic Index Down for Tenth Consecutive Month… Housing starts dropped 21.8% over last year. The Leading Economic Index (LEI) dropped 1.0% last month, well below the 0.7% expectation, and the National Bureau of Economic Research (NBER) revised the November reading down to 1.1%.
What it means— The NBER shows weakness across manufacturing, home building, employment in general, and the financial markets. But there’s a funny thing about the LEI: it doesn’t really lead, it’s more coincidental, so we’re living through slowdowns in each of these areas at the moment. It’s more instructive to estimate where we’re headed next. If the LEI has been correct for almost a year and inflation has fallen to the Fed’s target for the last six months, then everyone looking for a 0.25% rate hike next week and a Fed pause will be very happy.
Drunk Thief Steals St. Michael Statue, Trips, Stabs Himself with St. Michael’s Sword… Carlos Alonso, 32, broke into the Christ the King parish churchyard in downtown Monterrey, Mexico, to rob the church. He jumped the fence, broke a window to gain access, and then tried to leave with a statue of St. Michael. On the way out, Alonso tripped and stabbed himself in the neck with the statue’s sword. Passersby saw Alonso on the church grounds and called for medical help. The statue of St. Michael was unharmed.
Data supplied by HS Dent Research
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