More economic data – more reasons to be cautious

In February, existing home sales fell 0.6% according to the National Association of Realtors.  This was better than the expected decline of 2.0%.  Additionally, the median price of a home fell 1.8%.

Analysis: Home sales are important data to track right now because homes are the biggest purchases that most consumers make.  Those purchases require taking on huge amounts of debt in order to purchase.  So home sales are indirect evidence of consumer confidence, consumer spending, consumer spending, and the willingness of banks to lend money.  That existing home sales fell 0.6% (basically a statistical error) is less important than that they have fallen for a third straight month.  This is not a good sign of a robust economic recovery but is indicative of an economy still treading water.

Frankly, all of the economic data continues to suggest an economy moving sideways.  In contrast, the financial markets continue to climb.  This is a puzzling and troubling disconnect.  I am spending my time in cash right now, but investigating possibilities for my investment dollars.  If the economy continues to struggle and the financial markets collapse then it will be a great buying opportunity for strong businesses.  If, on the other hand, the financial markets rise, I am happy to give up some upside return in exchange for greater certainty that the economy is stronger.  Mitigating against these bearish things is my intuitive sense that the U.S. consumer is feeling ok about herself/himself for the first time in a couple of years.  Additionally, it is unlikely that we will see additional layoffs at U.S. companies.  These are bullish things.

Importance grade: 4; because homes are so expensive they are not a great indicator in a sideways economy of consumer confidence.  If, however, the data showed an increase of existing home sales of 5% then the importance grade would be 10 as it would be an unambiguous indicator of consumer confidence.  So the low score of 4 is awarded because the data only confirm that the economy is going sideways.

Jason