Housing market grows despite fading consumer confidence
By Daryl Delano -- Industrial Distribution, 1/1/1999
Despite recent declines in consumer confidence, the housing market continues to turn in stellar numbers. Clearly, there are other factors that mean as much, or more, than consumer sentiment in determining demand for new and existing homes.The Conference Board's composite Consumer Confidence Index fell sharply again in October, following dips in July, August and September. The 9.1 point decline in October brought the CCI down to a level of 117.3 (1985 = 100). The CCI has now dropped a cumulative 15.1 percent since it reached a 30-year-high in June of this year.
Unlike previous months, when consumers remained relatively sanguine about current economic conditions, although apprehensive about the future, both the "Present Situation" CCI and the "Expectations" measures fell significantly between September and October. Consumers' rating of current conditions fell 7.2 points in October, and their six-month outlook soured by 10.2 points.
All but one of the nine regions for which the Conference Board computes separate CCI's recorded declines in confidence over the last month. The CCI was up a scant point in the Mid-South, but plunged by more than 10 points in New England and in the Middle Atlantic States.
Yet, through all of this, housing starts, new home sales, and existing home sales have held up remarkably well. In fact, as consumer confidence was declining more than seven percent between September and October, housing starts were jumping by exactly the same amount. An example of perfectly ironic symmetry, and an object lesson in how important other factors, like the unemployment rate, household income growth, and the availability/affordability of credit, are in determining housing demand.
And the Federal Reserve's recent moves on interest rates should ensure that the fundamentals remain generally positive for the construction industry, that consumer confidence will stabilize (and probably bounce back), and that the economy continues to grow in 1999.
It's become clear that the Fed now considers its "Job No. 1" to be ensuring continued economic expansion in the U.S., with inflation-fighting relegated to the still important, but subordinate, role of "Job 1-A." Not that there's anything wrong with that, or that Fed officials would admit that containing inflation was anything less than its top priority.
With three interest rate cuts in just seven weeks, monetary policy makers signaled their intention to do whatever it takes to keep the economy growing. With layoffs rising dramatically in some industries, consumer confidence plunging, and corporate profits declining for the first time in a decade, the odds of an economic downturn in 1999 more than doubled between mid-summer and early fall.
The Fed's actions have effectively quelled those fears. With the November cut coming on the heels of economic reports that suggested the economy continues generally stronger than had been expected, the Fed signaled that they're going to step aside for a while and see how the next few months unfold domestically and globally.
The Fed is showing an encouraging new pragmatism by adjusting its policy sails to the prevailing wind conditions, rather than blindly focusing its attention on the shoals of inflation. The construction industry should be a major beneficiary of this more enlightened sense of seamanship by Admiral Greenspan.
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