Simply Economics will be taking the holiday week off

 and will return on Monday, January 11, 2016.

Introduction

The economy is ending a soft year on a soft note. Housing is mixed and consumer spending is no better than moderate. And export weakness continues to tip the factory sector into contraction. The mix is not a positive for inflation where the Federal Reserve's central target continues to lag. But the vital statistics of the consumer are healthy, setting up a possible shopping rush that could give the 2015 economy a last-minute boost.

The Economy

Inflation in hiding

The week's biggest news is the core rate in the personal income & expenditures report which, as seen in the dark line of the graph, remains dead flat at plus 1.3 percent and well under the Fed's 2 percent target. On a monthly basis, the core edged up only 1 tenth in November which however is up from no change in October. In contrast, the core rate in the consumer price report, data released at mid-month, rose 0.2 percent with its year-on-year rate up 1 tenth to hit the magical 2 percent target. But it's the PCE that's the magical indicator, not the poor CPI where, unlike the PCE report, consumer substitution to lower priced goods is not compensated for and which inflates its readings relative to the PCE. Falling prices for imports and still declining prices for energy continue to make it an uphill battle for the Fed to reflate the economy.

Household income isn't exactly booming but it is moving higher. Personal income rose a respectable 0.3 percent in November on top of October's 0.4 percent gain. Looking at just the wages & salaries component of income, we see two substantial gains of 0.5 and 0.6 percent in the last two months. Still, however, the year-on-year gain for this component, as seen on the graph, has been moderating, to plus 4.5 percent for the lowest reading since March. Nevertheless, growth is still respectable and is being combined with strength in the savings rate, which is the light line in the graph. This rate came in at 5.5 percent in November which outside of October's 5.6 percent is the strongest rate in three years. Jobs are available, gas prices are low, and consumers are building up their bank accounts. Not that strong, however, is the spending side of the report, up a respectable looking 0.3 percent for the month that includes Black Friday — but compared with no change in October. November's year-on-year rate was only plus 2.9 percent, which along with October's 2.9 percent are the weakest showings for spending since January last year. Redbook's indications on this month's retail sales have also been lifeless, meaning consumers better hurry up and come to life to bail out the holidays.

Housing all mixed up

Housing is probably a plus for household wealth though readings have been unusually volatile and on net no better than mixed. Existing home sales are where the trouble has been, peaking out in the summer and, as seen in the bars of the graph, descending deeply into year end. Some of the weakness in November, where sales fell 10.5 percent in the month to a much lower-than-expected annualized rate of 4.76 million, appears to have been tied to new documentation rules which slowed closings. But December will really have to snap back to change the picture for this series where lack of available homes is holding down sales. The new home side of the market, however, has been bouncing back, up in both October and November as tracked in the dark line. Supply is also a problem on the new home side of the market but more homes have been coming and will be coming into the market as construction remains strong and permits continue to climb. Another sign of strength has been the housing market index where optimism among the nation's home builders remains very strong. Turning to prices, readings are mostly positive for householders including a 6.3 percent year-on-year median gain in the existing home sales report and a 6.1 percent gain for the FHFA report, which was also released in the week. But prices for homebuilders are less positive as the year-on-year rate for the new home median, though making it back in the positive column, is only plus 0.8 percent.

There's always a bad apple

There is, however, one stubborn negative in the economy and that's the factory sector which has been gradually contracting through the year. The graph tracks monthly dollar sales of durable goods, the light columns measured on the left axis and core capital goods, the line measured on the right axis. Flatness is the word for this graph with total orders barely changed over the last two years and capital goods orders barely higher. Weakness on both scores is the result of both low export demand, where strength in the dollar is at play, and also weakness in energy equipment where low prices are closing rigs and related activity (note that the latest Baker-Hughes U.S. rig count, at only 826, is down 61 percent this year). As far as November's durables report goes, it was especially disappointing for capital goods as both core orders and core shipments sank and prior strength was revised away — the former points to a slow opening to 2016 business investment while the latter points to a slow ending to 2015.

Markets: Santa's already here?

It may not yet be all Santa Clause for the economy but it has been for the stock market which rallied strongly the first three days of the week, adding a cumulative 2.8 percent for the Dow which, however, is still down more than 1 percent on the year. The weekly gain does point to reinvestment of funds that had been sidelined on the approach of this month's rate liftoff by the Fed. Rates moved higher in the week but not by much at all which, after last week's rate hike, is a testament to the clarity of the Federal Reserve's communications efforts. Oil was also a positive in the week, rising more than 5 percent and back near $38 which for the FOMC, needing to avoid a further collapse in oil prices, is good holiday news indeed!

The Bottom Line

Another report posted during the week was the third revision to third-quarter GDP which stands at a not-so-imposing plus 2.0 percent. The latest personal spending and durables reports have roughed out what we can expect for fourth-quarter GDP and it looks like it would take a rebound in December's data to match the third quarter. But a late December shopping rush is definitely possible, hinted at not only by income data but also by a jump in the consumer sentiment index where the trend suddenly appears to be at a 6-month high going into Christmas. And the weather, of course, certainly won't be holding down any last-minute shopping.

Week of December 28 to December 31

A light holiday week will start off Monday with the Dallas Fed manufacturing report which has been deeply depressed by weakness in the energy sector. Goods trade has been depressed by weak foreign demand made weaker for U.S. goods by the strength of the dollar with Tuesday's international trade in goods offering the latest. An emerging positive for the economy may be home prices which, boosted by a low supply of available homes, have been climbing and more gains are expected for the Case-Shiller report. Tuesday will also include consumer confidence which is expected to bounce back while on Wednesday, pending home sales are also expected to show strength. Thursday will finish the week with jobless claims.

Monday

The Dallas Fed general activity index has been buried in deep contraction and has been offering, along with the Kansas City Fed report, the starkest evidence of energy-price damage. The Econoday median is calling for a 12th straight month of contraction, and a little deeper contraction at minus 6.0 vs November's minus 4.9. Production in this report has been in the plus column but the outlook for future gains is not supported by growth in new orders which has been in contraction for 13 straight months.

Dallas Fed Manufacturing Index - Consensus Forecast for December: -6.0

Range: -8.0 to +2.5

Tuesday

International trade in goods came in at what is a comparatively narrow gap of $58.4 billion in October but forecasters don't see the improvement continuing. The November consensus is $60.9 billion in what would still, however, at least for quarterly comparisons, point to improvement from the deeper deficits of the third quarter. Goods exports have been depressed and are a central factor slowing the nation's economy. Imports were also soft in October, hinting at weak business expectations for the holiday shopping season.

International Trade In Goods, M/M Chg - Consensus Forecast for November: -$60.9 billion

Range: -$62.5 to -$58.8 billion

Prices of existing homes appear to be picking up a little steam, mostly the result of low supply as sales have been flat. The Econoday forecast is calling for a strong 0.6 percent gain for the Case-Shiller adjusted 20-city index with the year-on-year rate pegged at plus 5.4 percent. Note that the high estimate for the year-on-year rate, at 6.3 percent, would more than match FHFA's 6.1 percent rate released in the prior week.

Case-Shiller, 20-City Adj. Index, M/M Chg - Consensus Forecast for October: +0.6%

Range: +0.4% to +1.4%

Case-Shiller, 20-City Unadj. Index, Y/Y Chg - Consensus Forecast for October: +5.4%

Range: +5.2% to +6.3%

The consumer confidence index, pulled down by lack of confidence in the jobs outlook, simply plunged in November, down nearly 9 points to 90.4. Econoday forecasters see a roughly 3 point bounce back in December to 93.5. Assessments of the jobs market in this report are always very closely watched and the consensus is hinting at month-to-month improvement for December.

Consumer Confidence Index - Consensus Forecast for December: 93.5

Range: 90.7 to 95.0

Wednesday

Pending home sales are expected to rise a solid 0.5 percent in November vs a softer 0.2 percent rise in October. The expected gain would point to a badly increase for final sales of existing homes which were depressed in November by new disclosure rules and related time delays.

Pending Home Sales, M/M Chg. - Consensus for November: +0.5%

Range: 0.0% to +2.4%

Thursday

Initial jobless claims have been holding little changed at historic lows. More of the same is expected for the December 26 week with the Econoday consensus at 270,000. Note, however, that readings in this report can be volatile during the holiday weeks.

Initial Jobless Claims - Consensus Forecast for December 26 week: 270,000

Range: 268,000 to 300,000

The Chicago PMI is a one of a kind, a regional report that tracks the whole scope of the economy, at least for Chicago. Big swings are the norm but one isn't expected for December with the consensus calling for what would be a small 1.3 point gain for this index to dead even 50, which is about where this index has been trending.

Chicago PMI - Consensus for December: 50.0

Range: 48.0 to 53.0