INDICATOR: August Existing Home Sales/Conference Board Index of Leading Indicators/September Philadelphia Fed Survey
KEY DATA: Existing Home Sales: up 1.7%; Prices (Year-over-Year): up 14.7%/Leading Indicators: up 0.7%/Philadelphia Fed: 9.3 (up 13 points)
IN A NUTSHELL: "It looks like the higher rates seem to got the fence-sitters' attention as home sales, not surprisingly, surged."
WHAT IT MEANS: Yesterday, Mr. Bernanke made it clear that the Fed was concerned about the impact of higher rates on the economy. He may have a point. Existing home sales jumped in August and the initial reaction would be that the Fed Chairman was confused. No, higher rates don't lead to more demand in the long run but they do in the short-term as fence-sitters panic. Sales rose in most areas with only the West reporting a drop. Gains were pretty evenly distributed between condos and single-family units. On the price front, the news remains great. Median prices were up robustly from last year with the increases ranging from a low of 7.6% in Northeast to a high of 18.8% in the West.
The Philadelphia Fed's survey of manufacturers popped in early September as orders rose sharply. As a consequence, backlogs started building again and hiring accelerated. We had begun to see a turnaround in manufacturing nationally and this report raises expectations that the improvement is continuing, especially since respondents were much more optimistic about the future. Indeed, looking outward, the Conference Board's Index of Leading Indicators posted a large gain and that seems to point to stronger growth over the next six months. Finally, the weekly jobless claims numbers came out and they were up. However, two states have backlog issues related to systems changeovers so it is hard to know what is happening with claims.
MARKETS AND FED POLICY IMPLICATIONS: As most economists have been warning, when mortgage rates rise, the first thing that happens is the procrastinators start buying. That was likely the case in August. The real issue for the housing market and the Fed is what happens when the demand that was pulled into the summer disappears. We may start seeing that in either September or October but it is likely to appear. Basically, while this was a great housing report, we just don't know what the sales pace is likely to be going forward. If it is the future data that will drive Fed decision-making, there is reason to think the economy is poised for better growth in the near future. Yes, housing sales may tail off but if manufacturing picks up and the claims levels are anything close to reality, we could see higher industrial production and better job gains. Given the tone of Mr. Bernanke's remarks yesterday, I think we can take off the table the beginning of tapering at the October 29-30 meeting. But improving growth could put it back in play for the mid-December FOMC soiree. Of course, this is predicated on Congress not acting like a bunch of children and shutting down the government. That may be too heroic an assumption to make. In between, a new Fed Chair will be named. That is likely to be Janet Yellen, who I have always argued was the best candidate, bar none. She is likely to keep the focus on the economy, where it belongs.