EconPundit

Personal spending in real dollars was flat in October, after falling 0.3% the prior month. Thus far in Q4 the trend in real consumption is -0.6% annualized. However, this likely overstates the degree of actual slowing that will take place this quarter from the 6.4% growth rate in personal outlays last quarter. Nondurable goods plus services have slowed by about 1-1/2%, to 2-1/2% from 4%. Factoring in what likely will remain a much slower pace of auto and truck sales, I'd look for around 1.0-1.5% growth in total personal consumption for Q4. That would still make for a 4% average H2 growth rate, which is solid if not extraordinary.

Household income growth has picked up a bit of speed lately, which should help to keep consumption from slumping too far. Total current-dollar personal income is now climbing at around 4-1/2% annualized, which is about 1-1/2% stronger than six months earlier and it translates to a bit more than 3% in inflation-adjusted terms.

The boatload of economic reports the day before Thanksgiving provided a uniformly very positive impression of momentum in the goods-making part of the US economy. In particular:

1. Durable-goods orders are surprisingly robust. Bookings outside the volatile defense and sircraft groups were up a total of 6% over September and October combined. New orders for nondefense capital equipment other than aircraft rose a further 1.7% last month, and were revised up solidly for September. Additionally, orders for noncapital goods such as consumer durables and hardgoods materials were up 4.1% last month. This is a sign the rundown in inventories of such items reached an extreme point, and replenishment is now firmly underway to the boon of factory growth.

2. Capital goods makers should be ramping up activity swiftly. Unfilled order backlogs for nondefense capital goods excluding aircraft soared 2.1% in October, on top of a 1.7% September surge. This indicator is closely followed by Chairman Greenspan, and it bodes for faster production and shipments of business equipment into early 2004.

3. Chicago purchasing managers report much stronger factory activity. The PMI for the region hit 61.4% in November, up nearly 6-1/2 points to the highest point since April 1999. The new orders component -- typically a leading indicator -- was at 73.3%, the peak since May 1994.

Taken together, these figures indicate that an inventory building cycle has taken hold, and this should provide fuel for employment and output gains for many months.

It has occurred to me that forecasters may not have factored into their estimates for October personal income (consensus: +0.4%) the damage to rental earnings that may have been caused by the Califormia wildfires.

Sales of existing single-family homes declined 4.9% in October, yet remained extremely strong at 6.35 million annualized. This dip had been foreshadowed by a nearly 10% drop-off in mortgage applications for purchases between July and August (existing home sales lag the applications data by a couple of months, reflecting the timing gap between contract signing and closing).

House prices continue to surge, with the unadjusted median price of sales in October up 8.2% year/year. That compares to a 7% rise in all of 2002, and 6.3% in 2001. Price strength was most evident in the Northeast (+19.5%) and West regions (+10.6%). The rapid pace of price appreciation may help to sustain firmness in consumer spending, to the extent that housing turnover remains high and this produces large capital gains for sellers.

The 1% upward revision to Q3 real GDP growth (8.2% from 7.2%) was highly concentrated in the inventories component. Fully 93% of the adjustment derived from a higher estimate of company stockpiles on hand, although still on balance there was net liquidation of inventories during the period. Final sales growth was revised up just 0.2% (to 8.0%), as higher construction spending and firmer business investment in technology and software were mostly offset by lower federal and consumer spending.

This report points to a huge upward revision to nonfarm business productivity growth for Q3, perhaps to 9.5% or more from the 8.1% preliminary number. That's because farm output was revised down sharply (to 3.8% growth from 6.2%), meaning that the nonfarm component of GDP advanced 1.5% (annual rate) faster than first estimated. It is this component of GDP that feeds through most directly to the productivity series.

Housing starts posted another surprise increase in October (+2.9%), as exceptional leanness in the supply of unsold new single-family homes and favorable financing conditions have spurred builders to fresh heights of activity. The single-family starts component surged 5.7% to the strongest level for any month since 1986. Meanwhile, building permits jumped 5.2%, led by a 12.9% gain in multi-family dwelling units, where this indicator tends to have its greatest value as a leading indicator.

These data point toward continued robust contributions to real GDP growth from residential investment.

The October CPI figures reveal a bit more firmness in nonenergy services pricing than had been evident previously. They rose 0.4% month/month, led by gains in lodging away from home (+2.3%) and public transportation (+1.1%). The latter increase is likely a function of state and local government budget problems.

Nevertheless, disinflation remains the underlying trend. If one excludes food, energy, tobacco and owners' equivalent rent to get at a core-core measure of the CPI, it has risen just 1.1% in the past year, barely above the 1.0% record low recorded for the year through September. This measure of price change is down 0.5% from October 2002, which is consistent with what output-gap analysis would suggest should be occurring in terms of the degree of price deceleration just about now.

Most of the surprising strength in the October PPI report came from two sources: (1) Motor vehicles, with passenger cars up 1.6%, and (2) food, which pole-vaulted up 2.2% on top of the 1.2% rise during September.

Still, this report shows some evidence that lean inventory conditions have enabled producers to lift prices in certain sectors. One example would be motor vehicles, where robust summer sales whittled supplies of popular models at dealerships. Also, intermediate goods quotes excluding food and energy rose 0.3% on the month, the third consecutive rise and the largest since March.

The October retail sales report confirms that personal spending on goods has decelerated markedly this quarter, after the explosive gains of Q3. In particular:

1. Core nonauto sales are on a much weaker trend. Excluding vehicles, building materials (which are reclassified as intermediate housing investment purchases), and gasoline (where price changes dominate movements), retail outlays are rising 3.2% annualized in Q4, down from almost 11% last period.

2. Motor vehicle sales are down in unit and dollar terms. The retail report showed a 1.9% drop in receipts at vehicle dealers, on top of the 2.2% drop in September. This is fully consistent with the steep falloff in unit deliveries reported by the automakers.

This impressive pullback in retail demand is unsurprising, given that last quarter's tax rebates were a nonrecurring factor that boosted purchasing power over the summer, and also the infusions of liquidity to households from mortgage refinancing are drying up.

The rebound in the US trade deficit recorded in September was certainly no surprise, and indeed the shortfall is apt to grow sharply in the months immediately ahead. At $41.3 bn, the monthly deficit remained well shy of the $43.0 billion record last March. Imports posted a predictable sharp rise (+3.9% excluding petroleum and products), yet the gap was contained due to an equivalent surge in core exports (+3.9% excluding aircraft and related items, as well as nonmonetary gold).

Much larger trade deficits loom ahead, because the process of rebuildig inventories should generate huge demands for foreign-produced materials and consumer goods. None of this has occurred to date, but it almost certainly will very soon. For example, imports of consumer goods other than autos were essentially flat in August/September versus the Q2 average, and industrial suplies over the same interval climbed only 3.5% annualized. Look for those trends to hit double-digit growth rates in the not-too-distant future, and it's highly improbable that export gains will offset much of the change.

There is no sign to this point that consumers have taken off their shopping shoes this quarter, at least when it comes to items other than cars and trucks. The BTM-USWB index surged 1.2% in the latest week (ending Nov. 8), for a year/year gain of 5.8%,which matches the recent high-water mark. This is only the third time in the past 4 years that this chain-tore sales measure has been running consistently stronger than up 5% from a year earlier. The two earlier times were: (1) Spring 2002, when the economy was just emerging from recession and there was a lot of pent-up demand, and (2) the tail end of 1999, when spending enthusiasm was aided by a buoyant stock market and special demands and liquidity related to the Y2K scare.

It seems to have escaped notice that long-term US yields haven't risen all that much over the past several weeks, despite a run of almost uniformly far-stronger-than-expected economic growth data and resulting whispers that the Fed might be overstaying its welcome at rock-bottom money market rates. The Treasury 10-year note yield is up only 10 basis points since October 14 (to 4.45% from 4.35%). During that period, investors have witnessed September reports ranging from strong to very robust covering nonauto retail sales, housing starts, new and existing home sales, and durable-goods orders, followed by a blockbuster third-quarter real GDP gain of 7.2% (annual rate), and surprisingly sturdy October data on employment and purchasing managers' indexes.

What accounts for surprising bond price resilience in the face of this impressive run of news? In my view, it shows that the "strong-US-growth" story is already well discounted in current long-term asset valuations, and therefore probably is also factored into pricing in other key markets, such as stocks, industrial commodities, and precious metals. This means the risks may now be tilted so that a run of weaker-than-anticipated reports would trigger remarkable upward pressure on bond prices (yields down) for a time, and also short-term selloffs in equities and the commodity complex.

Unlike some other recent reports, the latest jobs figures didn't leave a lot of room for debate about the trends in business hiring. Almost every conceivable element of the report was not only positive, but notably more upbeat than virtually anyone expected.

That said, here are some important elements that were either glossed over or not mentioned at all in analyses I have read:

1. Surging breadth of service-sector employment gains. The percentage of nonmanufacturing industries adding to payrolls over the past three months was 57.5%, the highest since early 2001 and up more than 16% since the August report. While there remains some distance to travel before this indicator can be characterized as robust -- readings of 70% or more are common in times of brisk job additions -- the recent surge in hiring breadth among service enterprises is very encouraging as it should aid public awareness of improved employment opportunities.

2. A rebound in the employment/population ratio. This indicator had been one of the most worrisome in the entire constellation of jobs statistics, falling steadily to 62.0% in September from 62.5% as recently as January. In the past, a drop of 0.5% or more in the percentage of working-age persons holding jobs has been a reliable harbinger of recession. Last month, however, it climbed back to 62.2%, due to a 1/3% (441,000) jump in employment as measured by the household survey.

3. A continued appreciable slowing in hourly wage growth. The 0.1% uptick in average hourly earnings means this measure has increased only 0.8% annualized in the past three months, and just 2.1% year/year. The latter wage gain figure appars to be the lowest in over 16 years. Thus, while businesses are loosening their tight grip over total headcount, they remain very stingy in regard to what they are willing to pay for labor. These data also are inconsistent with some media reports of expanding real compensation gains -- it's hard to see any evidence of such a phenomenon in this report.

Hello, this is the first, test post in what I plan to be a sustained blogging effort focused on economic and political developments. Although the focus will be on the US, from time to time as events dictate there may also be comments and links regarding international matters in these same realms.