Cold weather, warming economy

INDICATOR: January Consumer Confidence and November Home Prices

KEY DATA: Conference Board Consumer Confidence: up 3.2 points/Case-Shiller Prices: +0.9%; Year-over-Year: +13.7%

IN A NUTSHELL: "The weather outside really is frightful but that is not causing people to cool their feelings about the economy and the future."

WHAT IT MEANS: In so much of this country, it's cold and snowy and downright unpleasant, so why are people happy? The Conference Board's reading of the consumer was upbeat in January. The view of current conditions improved as more people thought business conditions were good while fewer said they were bad. Similarly, the percentage of respondents who thought jobs were plentiful also increased while those describing the work as hard to get edged downward. Looking outward, hopes for the future were also up. However, while more people are expecting wage increases, there was some growing uncertainty about job opportunities. Still, this was a solid report.

One of the reasons that consumer confidence may be rising is the continued strength in the housing market, at least as far as home prices go. The S&P/Case-Shiller 20-City index of home prices jumped again in November and the rise over the year was the highest in nearly eight years. The yearly increases ranged from 6% in New York and Cleveland to over 27% in Las Vegas. There were double-digit gains in thirteen of the twenty cities. In other words, most of the country is seeing the value of houses increase and the added liquidity is likely warming people at least a little.

MARKETS AND FED POLICY IMPLICATIONS: Rising home prices and consumer confidence is the tonic for bad economic numbers, especially if they are the result of temporary factors. At least I hope this winter is only temporary. Going forward, we need consumer spending to really pick up if the recovery is to really accelerate. If people are feeling better, the economy should benefit. Not only does the rise in home prices help confidence, it adds to mobility by allowing more people to sell their homes because people now have enough equity to put their homes on the block. Over time, that should add to job growth as supply expands. Though investors were probably bummed by the weak durable goods report, they likely took heart from the solid housing price and confidence numbers. The rising confidence should play a role in the Fed's deliberations since the members know that as consumer goes, so will go the recovery and their ability to end quantitative easing and get back to more normal monetary policy.