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Can the US avoid the China chill?

By Mark Hamrick · Bankrate.com
Monday, September 21, 2015
Posted: 6 am ET

economics-blog-can-the-us-avoid-the-china-chill

There's a disconnect between the strength of the U.S. economy and problems in China and emerging markets. The Federal Reserve opted out of an interest rate increase last week, citing low inflation and problems in the global economy. The downdraft from China has sent a chill wind through the U.S. stock market. Data due in the coming week will likely show that while other economies have a cold, the U.S. hasn't really sneezed.

Here's what we have on tap:

Monday

  • The National Association of Realtors reports on August existing home sales.

Thursday

  • The Labor Department reports on new claims for unemployment benefits.
  • The Commerce Department releases August figures on new home sales and durable goods orders.

Friday

  • The Commerce Department reports on a revision of 2nd-quarter growth (GDP).
  • The University of Michigan consumer sentiment reading is released.

Home sales on an upward trek

The 2015 housing market story is mostly positive. A single monthly reading can be volatile, creating headlines that distract from the longer-term trend.

"You see very large swings month to month, very large revisions. So, you want to take any particular month with a grain of salt. But the underlying trend of improvement is there," says Scott Brown, chief economist with Raymond James & Associates.

Taking a look over the past year, the housing sector story is an improving one. As Bank of the West chief economist Scott Anderson points out, "Total existing home sales are running more than 10% above year-ago levels. New home sales are up 26%."

Housing is more than just home sales

Thinking about the housing market, we might be tempted to consider only sales of new and previously owned homes. There's actually much more to it than that, as the housing boom and bust leading to the 2007-2008 financial crisis demonstrated painfully well. Fortunately these days, home prices are continuing to rise, Anderson notes. That's helping to lift more Americans' mortgages above water, and it adds to household wealth, consumer confidence and spending.

While domestic growth is volatile quarter to quarter and risks are being exported from faltering economies overseas, every contribution that housing can provide will help the cause.

"Housing isn't huge at 3% of gross domestic product (growth). In a world of 2% growth, that's still an important contributor," says Robert Johnson, director of economic analysis at Morningstar. If you add in furniture sales and other things linked to housing, the impact widens.

Q2 GDP revision and 2015's closing act

This week brings another revision of growth in the 2nd quarter, which was earlier estimated at a strong annual rate of 3.7%. Stuart Hoffman, chief economist with PNC Financial Services Group, looks for an upward adjustment to "almost 4%." As for the remainder of the year, he's looking to maintain a growth track of close to 3%, led by "strength in consumer spending, housing and construction, as well as non-energy-related business investment."

While wage growth has remained lackluster, inflation overall also remains quite low. Senior research analyst Jonathan Kozy with U.S. Trust, Bank of America Private Wealth Management, says the combination of "low inflation, rising home prices and a strong labor market is a very real positive for U.S. consumers." That's why he looks for consumer spending to help fuel growth through the end of this year.

The Fed keeps the drama going

With all of the positives outlined above, shouldn't the Federal Reserve be raising interest rates? That's what more than just a few observers have been asking.

At last week's Fed policy meeting, Chair Janet Yellen explained to reporters that the risks associated with weakness in China and other emerging markets  suggest that inflation will likely remain below the central bank's 2% target for the foreseeable future.

If the past is an indication, there will be no shortage of drama heading into this year's final remaining Fed meetings, in October and December. "Policies both here and abroad are moving in appropriate directions to stabilize global macro momentum, and we suspect the Fed  will have the confidence it needs to raise rates in October or December," U.S. Trust's Kozy predicts.

Grab and chair and make yourself comfortable. The wait for the 1st rate hike since 2006 is going to take awhile longer.

In business history: Muppet master's birth

economics-blog-kermit-the-frog

The late Muppets creator Jim Henson was born on Sept. 24, 1936. Nearly 8 decades later, a new Muppets TV series is debuting on ABC this week. Sadly, the man who brought so much laughter and smiles to peoples' faces died in 1990 in a New York hospital after a bacterial infection.

He was 53 years old.

The creatures created by this ingenious puppeteer 1st appeared on television in 1954. The big breakthrough came on "Sesame Street" beginning in 1969. That's when Americans first became fans of Kermit the Frog, Bert and Ernie, Big Bird, Cookie Monster and Oscar the Grouch. After taking nearly a decade to get the deal done, The Walt Disney Co. bought the Muppets in 2004.

Follow me on Twitter: @Hamrickisms

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