Thursday, October 18, 2012

The US housing market, consumption and near-term growth prospects

I like what I’m seeing in America at the moment:  the housing market is staging a modest recovery, consumer confidence is moving up and consumer spending has had another relatively good quarter.   I’m almost tempted to have another crack at predicting a more sustained recovery in the US economy.  The key word there is “almost” – there are still a number of headwinds, not the least of which is the uncertainty around fiscal policy in 2013.

There’s only one way to describe US September housing starts: a surge.  Starts were up 15% in September to an annual pace of 872,000 – the highest level since the depths of the GFC.  Furthermore previous months’ data was revised up and it was good to see the gains were broad-based across single-family and multi-family dwellings.   Permits rose 11.6%.  After such a hefty rise in the month we wouldn’t be surprised to see a bit of a correction next month.  That excitement of course continues to be tempered by the fact the improvement is off a low base but the trend is undeniably positive.  Housing starts are now nearly back up previous cyclical troughs!!
That news comes right on the heels of another good retail sales result in September.  That shows that higher (less bad to be precise) consumer confidence levels are feeding through into real activity.  I’m a little bit surprised at that – although the overall consumer confidence index rose 9.0 points to 70.3 in September, most of the improvement came through in the expectations (forward looking) series which rose 12.6 points to 83.7.  The current economic conditions series rose a more subdued 3.7 points and remains depressed at 50.2. 

Obviously improved expectations about the future have been sufficient for folk to open their wallets.  Sales rose 1.1% in the September month following a stronger-than-initially-reported 1.2% gain in August.  The first thing to do when you get a stronger than expected retail sales result is to look at core sales (which takes out car sales, petrol and building materials), but that also put in a solid 0.9% m/m gain.  Sales were strongest in electronic stores (the Apple effect?).

Nominal sales are up a 5.5% annual rate over the September quarter.  That suggests that consumption is likely to make a slightly stronger contribution to Q3 GDP than it did in Q2.  We continue to expect Q3 GDP to print at around a 1.6% seasonally adjusted annual rate (saar).

But what about further out?  The improvement in the housing market, the rise in consumer confidence and relatively robust retail sales are inextricably linked.  The recent stronger share market will also be having a positive impact on confidence.  But there are reasons to be cautious, as indicated by still soft current conditions readings in the consumer confidence surveys.  We think that reflects still high petrol prices, uncertainty around the “fiscal cliff” and the continuing softness in the labour market (although the surprise drop in the unemployment rate to 7.8% in September will have helped).  All are likely to conspire to see a lower GDP growth outcome in Q4.  We’ve currently got 1.2% (saar) pencilled in.  More generally however, the improving housing market will help lend an element of stability to the albeit subdued rate of GDP and employment growth.