Implications:  New home sales rebounded in November after one-off factors stemming from Hurricanes Helene and Milton temporarily delayed sales in the previous month.  However, the 5.9% gain was not quite as strong as the consensus expected, and new home sales appear to be stuck in low gear, running at a similar pace to 2019.  The biggest question for the housing market is whether the recent string of rate cuts from the Federal Reserve would be enough to get homebuyers off the fence and into the housing market, resulting in a new upward-trend in sales.  But a major problem has been that since the Fed started cutting rates in September, 30-year fixed mortgage rates have risen back above 7%.  So at least so far, the widely anticipated shot in the arm to the housing market from improved affordability on the financing front hasn’t happened and most buyers continue to sit on the fence.  The good news for potential buyers is that the median sales price of new homes is down 6.3% in the past year.  It does look like a small part of this decline reflects a lower price per square foot as developers cut prices.  The Census Bureau reports that from 2022 to 2023 (the most recent data available) the median price per square foot for single family homes sold fell 1.1%. While that decline is modest, it represents a stark reversal from the 45% gain from 2019 to 2022.  That said, most of the drop in median prices is likely due to the mix of homes on the market including more lower priced options as developers complete smaller properties.  Supply has also put more downward pressure on median prices for new homes than existing homes.  The supply of completed single-family homes is up nearly 300% versus the bottom in 2022 and is at the highest level since 2009. This contrasts with the market for existing homes which continues to struggle with an inventory problem, often due to the difficulty of convincing current homeowners to give up the low fixed-rate mortgages they locked-in during the pandemic.  While the future cost of financing remains a question, lower prices and an abundance of inventories are giving potential buyers a wider array of options that will eventually help fuel a rebound in new home sales.

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Implications:  Ho Ho No! New orders for durable goods fell for the third time in four months in November, and are down 5.2% in the past year.  Transportation drove orders lower in November, but can swing wildly from month to month as aircraft orders tend to come in chunks rather than steadily over time.  That was the case once again in November, as commercial aircraft orders fell 7.0% and defense aircraft orders declined 2.6% after both showed double-digit increases in October.  Excluding the transportation sector, orders for durable goods fell a more modest 0.1%.  Fabricated metal products led non-transportation orders lower, falling 1.6% in November, while computers and electronic products (-0.7%) also declined.  This weakness was largely offset by rising orders for machinery (+1.0%), primary metals (+0.7%) and electrical equipment (+0.4%).  The most important number in the release, core shipments – a key input for business investment in the calculation of GDP – rose 0.5% in November following a healthy 0.4% increase in October. If unchanged in December, these shipments would rise at a 2.5% annualized rate in Q4 versus the Q3 average.  That would be a welcome return to positive movement following declines in shipments in both the second and third quarter of the year, a clear sign that all is not well on the economic front.  Meanwhile, overall orders for durable goods – both including and excluding transportation – haven’t kept pace with inflation over the past twelve months, with headline orders down in the past year.  Change is on the horizon, with the Trump Administration heading back to Washington with a mandate to cut taxes, cut regulations, and trim the size of government.  This will likely continue the volatility in the data over the months ahead as businesses figure out how the new policy environment changes the outlook for investment and growth.  In turn, the Federal Reserve will navigate what these changes mean for the path of inflation.   The lagged effects of the Fed’s tightening of monetary policy are still working their way through the system, and the country hasn’t fully weaned off the government’s morphine-like stimulus response to COVID.

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The Bible story of the virgin birth is at the center of much of the holiday cheer this time of year.  The book of Luke tells us that Mary and Joseph traveled to Bethlehem because Caesar Augustus decreed a census should be taken.  Mary gave birth after arriving in Bethlehem and placed baby Jesus in a manger because there was “no room for them in the inn.”

Some people think Mary and Joseph were mistreated by a greedy innkeeper, who only cared about profits and decided the couple was not “worth” his normal accommodations.  This version of the story (narrative) has been repeated many times in plays, skits, and sermons.  It fits an anti-capitalist mentality that paints business owners as greedy, or even evil

It persists even though the Bible records no complaints and there was apparently no charge for the stable.  It may be the stable was the only place available.  Bethlehem was over-crowded with people forced to return to their ancestral home for a census – ordered by the Romans – for the purpose of levying taxes.  If there was a problem, it was due to unintended consequences of government policy.  In this narrative, the government caused the problem.

The innkeeper was generous to a fault – a hero even.  He was over-booked, but he charitably offered his stable, a facility he built with unknowing foresight.  The innkeeper was willing and able to offer this facility even as government officials, who ordered and administered the census, slept in their own beds with little care for the well-being of those who had to travel regardless of their difficult life circumstances.

If you must find “evil” in either of these narratives, remember that evil is ultimately perpetrated by individuals, not the institutions in which they operate.  And this is why it’s important to favor economic and political systems that limit the use and abuse of power over others.  In the story of baby Jesus, a government law that requires innkeepers to always have extra rooms, or to take in anyone who asks, would “fix” the problem.

But these laws would also have unintended consequences.  Fewer investors would back hotels because the cost of the regulations would reduce returns on investment.  A hotel big enough to handle the rare census would be way too big in normal times.  Even a bed and breakfast would face the potential of being sued.  There would be fewer hotel rooms, prices would rise, and innkeepers would once again be called greedy.  And if history is our guide, government would chastise them for price-gouging and then try to regulate prices.

This does not mean free markets are perfect or create utopia; they aren’t and they don’t.  But businesses can’t force you to buy a service or product.  You have a choice – even if it’s not exactly what you want.  And good business people try to make you happy in creative and industrious ways.

Government doesn’t always care.  In fact, if you happen to live in North Korea or Cuba, and are not happy about the way things are going, you can’t leave.  And just in case you try, armed guards will help you think things through.

This is why the Framers of the US Constitution made sure there were “checks and balances” in our system of government.  These checks and balances don’t always lead to good outcomes; we can think of many times when some wanted to ignore these safeguards.  But, over time, the checks and balances help prevent the kinds of despotism we’ve seen develop elsewhere.

Neither free market capitalism, nor the checks and balances of the Constitution are the equivalent of having a true Savior.  But they should give us all hope that the future will be brighter than many seem to think.

(We’ve published a version of this same Monday Morning Outlook during Christmas week, each year, since 2009.)

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications:  We hope you are having a happy holiday season; consumers certainly are! Strong income gains and healthy spending continued in November, while headline inflation took a breather.  Personal income rose 0.3% in November (and a more robust 0.5% when including upward revisions to prior months) and is up 5.3% in the past year.  Private-sector wages and salaries represented the bulk of income gains in November, up 0.6% on the month and up 5.7% in the past year.  That said, government activity continues to run hot as well, as government pay rose 0.5% in November and is up 6.4% in the past year, hovering near the largest twelve-month increase in decades. At the same time, government benefit payments to individuals are up 8.6% and are accelerating in the past year, the largest 12-month increase (excluding the COVID stimulus period) in more than a decade.  We don’t think the growth in government pay – or massive government deficit spending – is either sustainable or good for the US economy, which is why we’re also hoping recent budget-related events in DC represent a shift in thinking on the growth of government.  On the spending side, consumption rose 0.4% in November, led by outlays on goods which increased 0.8% and are up 3.0% in the past year.  Spending on services rose 0.2% in November and up a strong 6.6% from a year ago.  Arguably the best news for the consumer in November is that high inflation took the holidays off.  PCE prices, the Fed’s preferred measure of inflation, rose 0.1% in November, so even when adjusting for inflation, consumption rose a comfortable 0.3%.  PCE prices are up 2.4% in the past year, compared to a 2.7% increase in the year ending in November 2023.  “Core” prices, which exclude the ever-volatile food and energy categories, also rose 0.1% in November and are up 2.8% versus a year ago, an improvement from the 3.2% reading for the twelve months ending November 2023.  These numbers will be tracked closely by Fed policymakers in 2025, as their forecasts from Wednesday’s meeting showed they expect headline inflation to end next year slightly higher (2.5%) than it is today.  While the Fed cut once again at their final meeting of 2024, they acknowledged that the path forward is more uncertain, and cuts are likely to move much more slowly in 2025.  Risks remain that an overly aggressive path of cuts could also bring with it a pickup in the M2 measure of money, which would lead to a return of inflation pressure. We wish the Fed would acknowledge past faults and prioritize the money supply in their inflation analysis moving forward, but that would take a Christmas miracle.

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With Bitcoin recently surpassing $100,000 per coin, this week’s “Three on Thursday” explores the cryptocurrency in depth. Bitcoin’s appeal lies in its secure, borderless, and inflation-resistant nature, offering an alternative to traditional financial systems.

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Implications:  Existing home sales continued to show signs of life in November, rising for the second month in a row. While the headline gain of 4.8% is positive news, sales activity is subdued.  The 4.150 million pace of November is well below the roughly 5.250 million annual pace that existed pre-COVID, let alone the 6.500 million pace during COVID.  One problem recently is that since the Federal Reserve began cutting interest rates in September, 30-year fixed mortgage rates have risen back above 7%. So at least so far, the widely anticipated shot in the arm to the housing market from improved affordability hasn’t happened and most buyers continue to sit on the fence. Meanwhile, home prices are rising again with the median price of an existing home up 4.7% from a year ago. Speaking of price, it looks like the housing market has bifurcated along these lines. While the sales of homes worth $500,000 and above are up at double-digit percent rates in the past year, sales for homes below this threshold have continued to struggle. On a positive note this demonstrates that, at least at the higher end of the market, both buyers and sellers are beginning to adjust to the new reality of higher rates. However, it also suggests that inventory at the lower end of the price spectrum has all but disappeared after the inflation of the past few years. Moreover, many existing homeowners remain reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022.  This remains a major impediment to activity by limiting future existing sales (and inventories).  However, there are signs of progress with inventories rising 17.7% in the past year.  That has helped push the months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) to 3.8 in November, a considerable improvement versus the past few years, but still below the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market.   A tight inventory of existing homes means that while the pace of sales looks like 2008, we aren’t seeing that translate to a big decline in prices.  On the manufacturing front, the Philadelphia Fed Index, a measure of factory sentiment in that region, fell to -16.4 in December from -5.5 in November.  Meanwhile, the Kansas City Fed Manufacturing Index, the counterpart in that region, declined to -4 in December from -2 in November.

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Implications:   The final reading for real GDP growth in the third quarter was revised upward from last month’s estimate, coming in at a 3.1% annual rate, and, the underlying components showed a slightly stronger mix. Upward revisions in consumer spending (primarily services), net exports, business investment (equipment & software), home building, and government purchases more than offset a downward revision to inventories. For a more accurate measure of sustainable growth, we focus on "core" GDP, which includes consumer spending, business fixed investment, and home building, but excludes the more volatile categories like government purchases, inventories, and international trade. "Core" GDP grew at a 3.4% annual rate in Q3, above the prior estimate of 3.2%. However, the second look at economy-wide corporate profits for Q3 revealed a downward revision, with profits declining 0.4% from Q2 (compared to the -0.3% initially reported) but still up 6.0% year-over-year.  Since Federal Reserve profits are included in this data – and the Fed has been posting substantial losses – we focus on corporate profits excluding the Fed, which are up 4.7% year-over-year.  Using pre-tax profits, our Capitalized Profits Model suggests stocks remain overvalued.  We also received a second look at Q3 Real Gross Domestic Income (GDI), an alternative measure of economic activity.  Real GDI was revised slightly lower to a 2.1% annual growth rate but is up 3.0% from a year ago.  GDP inflation was unrevised at 1.9% annually in Q3, and GDP prices are up 2.2% over the past year.  Meanwhile, nominal GDP (real growth plus inflation) increased at a 5.0% annual rate in Q3 and is up the same year-over-year. A 5.0% trend growth rate in nominal GDP suggests the Fed should be reluctant for at least the near future.  On the labor front this morning, initial jobless claims declined 22,000 last week to 220,000. Meanwhile, continuing claims declined 5,000 to 1.874 million.  These figures are consistent with continued job growth in December, but at a slower pace than earlier this year.

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The Federal Reserve cut interest rates for the third time this year but signaled the path forward will likely be more gradual – and less certain – than previously forecast.  The Fed cut by a quarter percentage point today, following on the half point cut in September and a quarter in November.

Today’s statement saw very few alterations from the November meeting.  Language was added that the Fed will consider “the extent and timing” of additional adjustments to interest rates, which Powell later clarified was meant to signal a slower pace of cuts moving forward.  It is also worth noting that Cleveland Fed President Beth Hammack voted against today’s rate cut, preferring instead to keep rates unchanged. 

The Fed also released an updated Survey of Economic Projections (the “Dot Plots”) showing their expectations on GDP, employment, inflation, and rates in the years ahead.  Fed members paired back cut expectations in 2025, from four cuts forecast when projections were last released in September, to a more modest two cuts for 2025 projected today.

Justification for the slower pace of easing comes in the form of higher inflation expectations for 2025, with PCE prices now forecast to end this year at 2.4% and then rise in 2025 to 2.5% (back in September, the Fed forecast inflation to decline to 2.1% in 2025).  Along with higher inflation expectations, the Fed is forecasting 2025 to see a slightly lower unemployment rate (now 4.3% from 4.4% in September) and slightly faster inflation-adjusted GDP growth (up to 2.1% from 2.0%).

Given the Fed has prioritized headline PCE prices as the best measure of inflation experienced by consumers – and with their forecasts today that these prices will rise, not fall, in the year ahead – it begs the question why the Fed believes that further rate cuts are warranted in 2025.  The cooling labor market has brought the employment side of the Fed dual mandate into balance with inflation risks, and the Fed may be forced to choose if rising inflation trumps weaker jobs growth if (or when) push comes to shove.

During the press conference Powell was once again peppered with questions around how the election results and potential policy changes ahead have impacted their forecasts. In short, Powell stated that the election results have little impact on their short-term views.  The Fed does not know what – or when – policy changes will be implemented under the new administration and has no plans to speculate.

What Powell didn’t get much of in today’s press conference was real pushback on the hard questions. Why has the Fed abandoned the “SuperCore” inflation metric they prioritized two years ago? Why has the Fed continued to ignore the money supply in their analysis when it outperformed virtually any other measure in predicting the inflation the Fed said would never occur? How is the Fed running operating losses of more than $100 billion per year and still paying for non-monetary research?  We didn’t expect any reporters to step up to the plate and press Powell, but these are questions that need answers.  

The stage is set for an epic battle in Washington over the year ahead. Tax cuts and deregulation stand to boost businesses, while a clamping down on government excess could slow the outsized deficit spending that has propped up economic growth. What will we be watching?  If M2 growth remains modest, both inflation and economic growth will slow, but the Fed will have room to continue cuts. If, however, rate cuts lead to a rapid rise in M2 growth, the Fed has shown an active neglect of the warning signs that would have preempted this inflation debacle to begin with. 

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications:  November was another tough month for homebuilders, as housing starts missed consensus expectations and declined 1.8%, falling to a four-month low.  However, the details for November were not quite as bad as the headline.  The decline in starts in November was entirely due to a 23.2% drop in the volatile multi-family category, which more than offset a 6.4% rebound in single-family construction as hurricane weather delayed activity in the South and Northeast regions the previous month. Another silver lining is that permits for new builds jumped 6.1% in November to a nine-month high, although that was driven by a 19.0% jump in the multi-family category.  Still, building permits and housing starts appear to be stuck in low-gear, down 0.2% and 14.6%, respectively, from a year ago, and sit at roughly the same levels as 2019.  The same cannot be said for completions.  Despite a third straight monthly decline, completions are up 9.2% in the past year and were at a faster pace in November than any month from 2021-2023.  With strong completion activity and tepid growth in starts, the total number of homes under construction continues to fall, now down 14.6% since the start of 2024.  That type of decline is usually associated with a housing bust or recession.  The home building sector seems strangely slow given our population growth and the ongoing need to scrap older homes due to disasters or for knockdowns. We think government rules and regulations are likely the major hurdle for builders in much of the country, but home construction might also be facing headwinds from a low unemployment rate (which makes it hard to find workers) as well as relatively high mortgage rates.  Notably, while mortgage rates were trending lower leading up to the first rate cut announcement from the Federal Reserve in September, these rates are up roughly 50bps since then. That said, there are some tailwinds for housing construction, as well.  Many owners of existing homes are hesitant to sell and give up their fixed sub-3% mortgage rates, so prospective buyers will often need new builds.  In addition, Millennials are now the largest living generation in the US and have begun to enter the housing market in force, which represents a demographic tailwind for activity.  Putting it together, we don’t see housing as a major driver of economic growth in the near term, but we’re not expecting a housing bust like the 2000s on the way, either.  In other recent housing news, the NAHB Housing Index (a measure of homebuilder sentiment) remained at 46 in December.  A reading below 50 signals a greater number of builders view conditions as poor versus good.

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Implications:  Industrial production fell for a third consecutive month in November, coming in weaker than expected. It was widely anticipated that the resolution of the Boeing strike and the end of the lingering effects of recent hurricanes would be enough to spark a rebound.  That said, the details in today’s report painted a mixed assessment on the manufacturing sector.  Overall, manufacturing output rose 0.2%.  However, production in the volatile auto sector was entirely responsible, with activity jumping 3.5%. Meanwhile non-auto manufacturing (which we think of as a “core” version of industrial production) posted a modest decline of 0.1% in November. Notably, manufacturing activity in aerospace (the sector directly affected by the end of the strikes) continued to fall in November, posting a decline of 2.6%. The only bright spot in this “core” measure came from production in high-tech equipment which rose 0.4% in November, likely the result of investment in AI as well as the reshoring of semiconductor production.  High-tech manufacturing is up 7.4% in the past year, the fastest for any major category.  The mining sector was also weak in November, falling 0.9%.  Declines in oil and gas extraction, the drilling of new wells, and the extraction of other minerals and metals all contributed.  Look for gains in that sector in 2025 as the incoming Trump Administration takes a more aggressive stance with permitting.  Finally, the utilities sector (which is volatile and largely dependent on weather) also posted a decline in November, falling 1.4%. In other recent manufacturing news, the Empire State Index, which measures manufacturing sentiment in the New York region, dropped to +0.2 in December from +31.2 in November.

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