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  • KPB & Co Research

Economic data coming from out of the USA are still largely positive, but the future is still uncertain as these data points are backward looking. With trade tensions between the USA and China reaching fever pitch, continued high corporate debt levels, and the deceleration of growth in Europe, the downside risk to growth is fairly high. The S&P Case-Shiller index of house price indicate that house prices are still rising, albeit at a slower pace. Recent data from the Conference Board indicate that consumer confidence is still at historically high levels.

Consumer Confidence Boosted By Job Gains, BUT WILL It CONTINUE ?

In May 2019, The Consumer Confidence Index increased by 4.9 points to 134.1 on the back of better job prospects and employment levels. According to the Conference Board, The Present Situation Index expanded to 6.2 points to 175.2, while The Expectations Index expanded by 3.9 points. The monthly survey indicated that more people felt better about their ability to the get a job now and in the short term. Business conditions are generally seen as positive by consumers, at the same time US consumers do not expect to see material income gains in the short term. With the unemployment rate at 3.6%, it is no surprise that US consumers are more confident about their current situation. Over the next year or more, the economy will surely be tested given rising trade tensions and elevated debt levels. Given that a significant portion of the optimism is due to job gains, any reversal of the job numbers could lead to a reduction in confidence levels.

Home Prices are Rising, But Slower Than Usual

Data from the S&P CoreLogic Case-Shiller index show that for the month of march 2019, home price nationally rose by 3.7%, coming from a decline of 3.9% in February. The biggest gains in home prices were seen in Las Vegas and Seattle. Recent growth in home prices represent a sharp slowdown from the pace of growth the S&P CoreLogic Case-Shiller home price index recorded up until early 2018. While mortgage, and the unemployment rates are still low, sales of new homes had been declining since Q3 of 2018, and only recently began to show small signs of stability. Data released from the US Census Bureau show that Sales of new single-family houses in April 2019 came in at 673,000, which was 6.9% below the revised March 2019 rate, but was 7.0% above the April 2018.

As you begin to put the two pieces of information together, the picture that is painted is one where the economy continues to benefit from the positive momentum that had been established in earlier quarters. Going forward, sustained growth depends to a large degree on the good implementation of fiscal and monetary policy. Given the high level of corporate indebtedness, any material increase in interest rates or tightening of monetary conditions could force companies to freeze hiring and expenditure on capital goods. Fiscal policy is currently having a negative impact on the economy, as trade tensions between the US and China continues to escalate. Continued tit-tat battles between the USA and China could lead to higher prices for goods and services which would negatively impact consumer and business sentiment, particularly in an environment where disposable incomes are not expected to increase.

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