Today the Commerce Department's Bureau of the Census reported that new home sales for September rose 3.3% above the revised number for August. The rise in sales since September of last year was 5.2%.
Referring back to the equation for the demand model for GDP [See Economic Indicators for 10/18 and 10/19], we see that Residential Construction is a constituent of the I [Investment] component of GDP. Moreover, we saw in Economic Indicators for 10/24 that Residential Investment accounts for about 4% of GDP. Now, this doesn't seem like a lot [a paltry $221 billion], but; its of the same order of magnitude as the estimated third quarter change in GDP that we talked about on 10/27. So, New Home Sales could have a significant impact on GDP.
As I indicated last month, the month-to-month changes in new home sales seem to jump around quite a bit. I suggested then that it might be better to look at the trends in this data rather than the monthly changes. Pursuant to this, I plotted up the monthly figures for the past 14 months to see what I could see. And, here's what I saw: From July to October of 1994 sales of new single-family homes rose steadily to peak at an annual rate of 707,000 units. From October of 1994 to February of 1995 the rate dropped to 575,000 units. Finally, from February through September of this year the rate rose to 727,000 units. So, despite an 11.1% drop from July to August, the current rate is still higher than the peak of last October. What's more, this year's seven-month, February-to-September rise of 26.43% translates into an annualized rate of increase of 45.31%. This is consistent with the six-month uptrend in Building Permits reported on 10/19. All-in-all, the residential segment has been making an increasingly positive contribution to the overall economy.
The committment to buy a house, for most families, is the biggest investment decision they will ever make. The recent trends in housing permits and sales indicate that more and more families have sufficient confidence in their economic future to make that committment.
Speaking of confidence, today the Conference Board released the preliminary estimate of its Consumer Confidence Index for the month of October. It appears that the respondents to the Board's survey are almost as confident today as they were last month; less confident now than they were a few months ago; but more confident today than they were a year ago. Today's number was 97.0, just slightly lower than September's final value of 97.3. Today's value is 5.4 points lower than the August figure of 102.4, but is 7.9 points higher than the reading of 89.1 a year ago.
Both this index and the University of Michigan Consumer Confidence Index are classified as leading indicators. They usually top out before the onset of recessions. Both of these indexes are currently below recent highs. Are they predicting a recession? I doubt it. There is too much evidence to the contrary, like the GDP report a few days ago.
The University of Michigan index is one of eleven components that make up the Commerce Department's Composite Index of Leading Indicators [LEI]. Tomorrow we'll see what the other 10 are saying.
Byline: Lafferty (MF Merlin)