|
Simply Economics will be taking off next week to celebrate
Thanksgiving. Simply Economics will return on November 30 2012.
Happy Thanksgiving from all of us at Econoday!
It’s not over until it’s over, but equities ended the week on a positive number after reconciliatory comments by political leaders on the U.S. fiscal cliff. Meanwhile, Hurricane Sandy wreaked havoc on economic data.
 Equities ended the week down moderately on worries about the U.S. pending fiscal cliff. But positive comments at week’s end slimmed the losses.
Stocks started the week little changed Monday on Veterans Day observed and thin trading and no U.S. economic news. The big worry, however, throughout the week was the pending fiscal cliff, including tax hikes and spending cuts already enacted into law unless amended. Fiscal cliff worries pushed stocks down Tuesday on little other news.
The same story continued at mid-week but with extra twists. Stocks declined as investors continued to worry about US budget negotiations and a flare-up of violence in the Middle East. Also, retail sales were soft with the impact from Hurricane Sandy uncertain. Stocks dipped Thursday on further violence between Israel and the Gaza Strip, on fiscal cliff worries, and on a sharp spike in initial jobless claims—with Sandy’s impact uncertain.
However, at week’s end stocks partially rebounded on positive comments from House Speaker John Boehner that he had constructive discussions with President Barack Obama on fiscal cliff issues—including higher government revenues and spending cuts.
Equities were down this past week. The Dow was down 1.8 percent; the S&P 500, down 1.4 percent; the Nasdaq, down 1.8 percent; the Russell 2000, down 2.4 percent; and the Wilshire 5000, down 1.5 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 3.0 percent; the S&P 500, up 8.1 percent; the Nasdaq, up 9.5 percent; the Russell 2000, up 4.8 percent; and the Wilshire 5000, up 7.8 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields were down slightly for the week in largely thin trading. The bond market in the U.S. was closed Monday for Veterans Day observed.
The bottom line is that Treasury yields moved very little the entire week. Rates moved marginally lower on additional flight to safety over fiscal cliff worries and violence in the Middle East. But many were already on the sidelines, earlier pushing rates lower.
Economic news had little impact on rates, partly due to uncertainty over the temporary effects of Hurricane Sandy on data.
For this past week Treasury rates were down modestly as follows: 3-month T-bill, down 3 basis points; the 2-year note, down 1 basis point; the 5-year note, down 2 basis points; the 7-year note, down 2 basis points; the 10-year note, down 3 basis points; and the 30-year bond, down 1 basis point.
 International worries came into play on daily swings in oil prices—though U.S. factors also stood out. The spot price for WTI eased Monday on concern about Greek sovereign debt and on negative economic news out of Japan. Crude slipped further Tuesday as the International Energy Agency lowered its demand forecast.
West Texas Intermediate gained over a dollar a barrel at mid-week on news that Israel had conducted an air strike in the Gaza Strip that resulted in the death of the leader of Hamas’ militant wing, raising concern about an escalation of violence in the region.
Oil eased Thursday on a sharp rise in initial jobless claims. However, WTI jumped a buck and a half Friday on escalation of violence in the Middle East—notably between Israel and the Gaza Strip.
Net for the week, the spot price for West Texas Intermediate rose $1.02 per barrel to settle at $87.09.
The bottom line is that Hurricane Sandy drastically affected economic indicators. It is going to take another month or two to determine where economic momentum actually is. Before Sandy, momentum was modestly positive.
 Industrial production declined 0.4 percent in October after having increased 0.2 percent in September. Hurricane Sandy, which held down production in the Northeast region at the end of October, is estimated by the Fed to have reduced the rate of change in total output by nearly 1 percentage point. The largest estimated storm-related effects included reductions in the output of utilities, of chemicals, of food, of transportation equipment, and of computers and electronic products.
In October, the index for manufacturing decreased 0.9 percent, following a 0.1 percent gain in September. Excluding storm-related effects, factory output was roughly unchanged from September. The output of utilities edged down 0.1 percent in October, and production at mines advanced 1.5 percent. Manufacturing excluding motor vehicles dropped 0.9 percent after a 0.2 percent rise in September.
Capacity utilization for total industry decreased 0.4 percentage point to 77.8 percent in October.
Overall, Hurricane Sandy has really messed with the numbers and the marginal trend is hard to determine. It looks like output is going to be depressed in any economic measure for October or the fourth quarter due to hurricane effects—which do not represent underlying economic fundamentals.
 Hurricane Sandy and its aftermath appear to have limited impact on New York's manufacturing sector. The Empire State index shows another month of contraction in general activity, at minus 5.22 in November versus minus 6.16 in October, but key details show improvement especially shipments which surged to a very strong 14.59 and new orders which at 3.08 show their first monthly increase since June. Delivery times, which are especially sensitive to storm effects, are slowing but not by much and less so than in October. To keep production moving New York manufacturers are relying on inventories which show a sizable draw, one that will have to be replenished.
But there are also negatives in the report including a big contraction for employment which at minus 14.61 underscores the big jump, also reported at 8:30 a.m. ET this morning, in the latest jobless claims data. The general six-month outlook is less optimistic including for employment where the sample sees a slight contraction.
 In contrast to the Empire State report, Hurricane Sandy definitely had a major impact on manufacturing data from the Philly Fed whose general business conditions index swung a severe 16-plus points lower to minus 10.7.
Negatives sweep the Philly Fed report including shipments, in another big contrast with the Empire State report where shipments rose strongly. Philly Fed shows a big draw for inventories, a slowing in delivery times, and another contraction for employment. A positive in the report is resilience in the six-month outlook which remains upbeat.
 Hurricane Sandy likely affected timing and components of retail sales in October. However, the bottom line is that consumer spending was down for the month. Total retail sales in October declined 0.3 percent after jumping 1.3 percent the month before (originally up 1.1 percent). Market expectations were for a 0.1 percent dip.
Motor vehicle sales dipped 1.5 percent after a 1.7 percent boost in September.
Ex-auto sales were unchanged, following a rise of 1.2 percent in September (originally up 1.1 percent). The consensus projected a 0.2 percent gain.
Gasoline sales advanced 1.4 percent in October, following a 2.5 percent spike the prior month. Excluding both autos and gasoline components, sales dropped 0.3 percent, following a 1.0 percent boost in September (originally up 0.9 percent). Core components showed broad softening.
 Headline CPI inflation eased sharply in October on energy and a few other components. However, the core rate firmed. The consumer price index in October slowed to a 0.1 percent increase after a 0.6 percent spike the prior month. Excluding food and energy, the CPI increased 0.2 percent, following a 0.1 percent rise in September.
By major components, energy dipped 0.2 percent after jumping a monthly 4.5 percent in September. Gasoline declined 0.6 percent, following a 7.0 percent surge in September. Food prices gained 0.2 percent versus a 0.1 percent rise in September.
Within the core, the shelter index rose 0.3 percent as the rent index increased 0.4 percent, its largest rise since June 2008. The index for owners' equivalent rent increased 0.2 percent, and the index for lodging away from home advanced 0.5 percent. The apparel index increased 0.7 percent in October after a 0.3 percent increase in September. The index for airline fares rose for the second straight month, increasing 2.4 percent in October. The index for medical care was unchanged in October; this was the first time since July 2010 the index failed to rise. The index for used cars and trucks fell 0.9 percent, its fourth straight decrease. Several indexes posted slight declines in October. The indexes for new vehicles, recreation, household furnishings and operations, and tobacco all fell 0.1 percent.
Year-on-year, overall CPI inflation came in at 2.2 percent versus 2.0 percent in September (seasonally adjusted). The core rate held steady at 2.0 percent. On an unadjusted year-ago basis, the headline CPI was up 2.2 percent, compared to 2.0 percent in September. The core was up 2.0 percent, matching the prior month's pace, not seasonally adjusted.
On the margin, headline inflation improved notably due to energy. The core rate, however, worsened and this could start a quandary for the Fed as unemployment is still quite high.
 Inflation came in much weaker than expected at the producer level in October. Overall PPI inflation fell 0.2 percent, following a 1.1 percent jump in September. The consensus forecast a 0.2 percent increase. The core rate, which excludes both food and energy, declined 0.2 percent in October after being unchanged the prior month.
According to the BLS, Hurricane Sandy had virtually no impact on data collection efforts or survey response rates for October, and no changes in estimation procedures were necessary.
Food inflation rose to 0.4 percent from a 0.2 percent increase in September. Energy eased 0.5 percent, following a monthly 4.7 percent jump in September. Gasoline decreased 2.2 percent in October after a monthly spike of 9.8 percent the prior month.
Within the core, lower prices for light motor trucks and passenger cars led the October decline, falling 1.5 percent and 1.6 percent, respectively.
For the overall PPI, the year-ago rate in October posted at 2.3 percent after 2.2 percent in September (seasonally adjusted). The core rate in October came in at 2.1 percent, compared to 2.3 percent the prior month. On a not seasonally adjusted basis for October, the year-ago headline PPI was up 2.3 percent, while the core was up 2.1 percent.
One thing is certain from the latest FOMC minutes-the Fed is hotly debating policy options. No stone is being left unturned but there are differences of opinion within the Fed on what will make a difference. And there may be changes ahead for guidance.
First, at the last FOMC meeting, there was disagreement on whether additional quantitative easing would have a positive impact that exceeded potential costs-potential higher inflation.
Also, there now appears to be the start of a shift in guidance from a calendar date to an economic indicator measure-most likely related to employment or unemployment. And there was argument to extend the asset purchases program. A number of FOMC members said the Fed may need to expand its monthly purchases of bonds next year after the expiration of Operation Twist. Operation Twist is set to expire at the end of December.
"Participants also discussed the efficacy and potential costs of the Committee's asset purchases. A number of participants offered the assessment that the Committee's policy actions, to date, had been effective in making financial conditions more accommodative and that lower interest rates were providing support to aggregate spending, most notably in areas such as housing, autos, and other consumer durables. In particular, some pointed out that the favorable developments in mortgage markets over the intermeeting period suggested that the MBS purchases were likely to reinforce the nascent recovery in the housing market. Several added that, based on the experience with earlier asset purchases, the broader effects on economic activity from more-accommodative financial conditions were likely to accrue over time. Looking ahead, a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market. In that regard, a couple of participants noted the likely usefulness of clarifying the range of indicators that would be evaluated in assessing the outlook for the labor market."
Regarding the economy, the biggest positive was acknowledgement that the housing sector is improving.
The bottom line is that the Fed is leaving no stone unturned but there still is the real question of the marginal impact on the economy. Vice-chair Yellen in recent speech indicated a possible switch in guidance but regional Fed presidents are pushing the idea that it is time for the economy to get some help from fiscal policy-that marginal gains from loose monetary policy have played out.
The latest economic indicators simply cannot be relied upon for information on underlying economic fundamentals. Sandy impacted numbers are ugly. But the safest assumption—emphasis on assumption—is that modest growth continues for the U.S. The fiscal cliff issue is probably a greater uncertainty but there likely are upside risks for equities if there is a timely resolution.
This holiday shortened week for Thanksgiving is relatively light. The focus, however, is on the improving housing sector with releases on existing home sales, housing market index, and housing starts. These have been on uptrends despite volatility. For the key consumer sector, consumer sentiment is updated. Consumer sentiment has been unexpectedly ahead of expectations.
Existing home sales fell back in September, down 1.7 percent to an annualized pace of 4.750 million units for what was still the second best annual rate since the stimulus programs back in the spring of 2010. Prices dipped fractionally in the month though the year-on-year rate for the median price, at plus 11.3 percent, is in double-digit ground for the first time of the recovery. Supply, at only 5.9 months at the September sales rate, is extremely tight which is not a plus for sales though it is for prices.
Existing home sales Consensus Forecast for October 12: 4.70 million-unit rate
Range: 4.60 to 5.05 million-unit rate
The NAHB housing market index posted a one point gain in October to 41. Trends in current sales and especially in expectations of future sales have been sloping steeply higher this year though both these components, at 42 and 51, show no change this month. But the traffic component, where increases had been lagging, jumped sharply and, at 35, was at its highest level since the boom days of 2006
NAHB housing market index Consensus Forecast for November 12: 42
Range: 39 to 44
Housing starts spiked a monthly 15.0 percent in September to an annualized pace of 0.872 million units. This was up 34.8 percent on a year-ago basis. The latest increase was led by the multifamily component which jumped 25.1 percent, following a 3.2 percent dip in August. However, the single-family component also improved, gaining a notable 11.0 percent in September after a 7.3 percent increase the prior month.
Housing starts Consensus Forecast for October 12: 0.836 million-unit rate
Range: 0.780 million to 0.873 million-unit rate
Housing permits Consensus Forecast for October 12: 0.865 million-unit rate
Range: 0.830 million to 0.920 million-unit rate
Initial jobless claims surged an incredible 78,000 for the November 10 week to 439,000. Hurricane Sandy likely had impact. Adding to the pressure was a 6,000 upward revision to the prior week to 361,000. Hurricane Sandy effects add to uncertainty.
Jobless Claims Consensus Forecast for 11/17/12: 415,000
Range: 380,000 to 500,000
The Markit PMI manufacturing final index for October slipped to a final reading of 51.0 from 51.1 in September. The final reading was also slightly weaker than the flash estimate for October of 51.3. Although growing, manufacturing began the fourth quarter weakly. Output increased at the second slowest rate of the past three years, as new order growth lost further momentum. New export business remained a drag on the sector, with a fifth successive monthly decline. The weaker reading mainly reflected a slower increase in new order volumes. New orders advanced, but the rate of expansion was broadly in line with July's 34-month low. Output growth was maintained, supported mainly through domestic new orders and the erosion of backlogs.
Markit PMI manufacturing index (flash) Consensus Forecast for November 12: 51.0
Range: 50.5 to 51.6
The Reuter's/University of Michigan's consumer sentiment index in early November was up 2.3 points to another recovery best of 84.9, compared to end of October 82.6. Confidence in current conditions was especially strong, at 91.3 versus October's final reading of 88.1. But expectations were also on the rise, up nearly 2 points to 80.8. Both of these readings, like the composite index, were at recovery bests.
Consumer sentiment Consensus Forecast for final November 12: 84.0
Range: 81.0 to 87.5
The Conference Board's index of leading indicators jumped in September but with help from a lower baseline in August from a downward revision. The leading index increased 0.6 percent in September, following a 0.4 percent decline the prior month—originally down 0.1 percent. The stock market was a positive in the month as was the report's component for credit conditions. A separate reading on interest rates remains a major contributor though its methodology, which tracks the spread between long and short rates, may need a tune up, as the component's contribution to the index is waning, not increasing, as long rates are moving lower. A negative in the report was a decline in the ISM new orders component and a small drag from unemployment claims. Consumer expectations were also a negative for September.
Leading indicators Consensus Forecast for October 12: +0.2 percent
Range: 0.0 to +0.6 percent
U.S. Holiday: Thanksgiving Day. Bond & Equity Markets Closed.
NYSE Early Close 1:00 ET
SIFMA Recommended Early Close 2:00 ET
This week’s Simply Economics has Looking Ahead going out two weeks due to the Thanksgiving holiday publishing schedule. However, the second week out does not yet have consensus numbers available. Consensus numbers for November 26 through 30 will be posted on Econoday’s web calendars when available.
The Chicago Fed National Activity Index improved in September, to a zero reading on the Chicago Fed score versus minus 1.17 in August. Three of four broad categories were positive contributors to the index in the month led by employment. The drag from consumption & housing eased slightly. The three-month moving average improved to minus 0.18 from minus 0.27 but is still in the negative column, for the seventh straight month.
The Dallas Fed general business activity index rose to 1.8, registering its first positive reading since June. The production index, a key measure of state manufacturing conditions, dipped from 10 to 7.9, indicating slightly slower but positive growth. Most other measures of current manufacturing activity also suggested growth in October, although new orders declined. The shipments index held steady at 4.7, suggesting shipments rose at about the same pace as in September. The new orders index fell from 5.3 to minus 4.5, reaching its lowest level this year and indicating a decrease in demand.
Durable goods orders rebounded a monthly 9.8 percent in September after a sharp 13.1 percent plunge in August. The comeback was largely due to aircraft orders within the transportation component—where weakness was in August. Excluding transportation, orders rose 2.0 percent after decreasing 2.0 percent in August. Civilian aircraft (Boeing) has really jerked around the total and especially the transportation component. The transportation component rebounded a monthly 31.3 percent after a 33.7 percent plummet in August. Outside of transportation, new orders were mixed. Gains were seen in primary metals, machinery, and “other.” Declines were seen in fabricated metals, computers & electronics, and electrical equipment. Numbers reflect revisions from the more recent total factory orders report.
The S&P/Case-Shiller 20-city home price index (SA) advanced 0.5 percent in August, following a 0.3 percent gain the prior month. On an unadjusted basis, the 20-city composite increased a monthly 0.9 percent, following a 1.6 percent boost in July. On a year-ago basis, the 20-city index is up 2.0 percent, following 1.2 percent in August, NSA. By city, the strongest monthly gain was seen in Detroit with a 2.3 percent boost. Seattle saw a 0.1 percent dip. On a year-ago basis, Phoenix is up 18.8 percent while Atlanta is down 6.1 percent.
The Conference Board's consumer confidence index improved in October to a reading of 72.2, up from 68.4 in September. The present situation index increased to 56.2 from 48.7 while expectations climbed to 82.9 from 81.5 last month. Consumer confidence is now at its highest level this year.
The FHFA purchase only house price index rose 0.7 percent in August, following a 0.1 percent rise in July. Year-on-year, the index is up 4.7 percent, compared to 3.7 percent in July. Six of the nine Census regions posted rose in August with one down and two flat. For the nine census divisions, seasonally adjusted monthly price changes from July to August ranged from minus 0.5 percent in the East South Central division to plus 3.0 percent in the Pacific division.
The Richmond Fed manufacturing index dropped to minus 7 in October from plus 4 the prior month, a reversal that points to outright contraction in monthly activity. This index first dipped into negative ground in June. New orders are once again contracting, to minus 6 from plus 7. Backlog orders remain in contraction while shipments, like new orders, are moving back into contraction.
New home sales were up a very sharp 5.7 percent in September to 389,000 which was the best annual rate since the stimulus efforts of mid-2010. September's gain was convincing and was led, with a 16.8 percent jump, by the South which is far larger than all other regions combined. Supply, at 4.5 months for the lowest reading since 2005, is very tight and actually is limiting sales.
The Beige Book being prepared for the December 11-12 FOMC meeting is released. The Fed is now focusing on unemployment and job growth. Traders will likely react to any new information on the labor market.
GDP rose 2.0 percent for the third quarter and posted above second-quarter growth of 1.3 percent. The modest good news was that the quarter was led by final demand which is a positive indication for improving momentum going into the fourth quarter. Final sales of domestic product rose 2.1 percent which marked acceleration from 1.7 percent in the second quarter. An alternate reading that excludes net exports is even stronger with final sales to domestic producers up 2.3 percent versus the prior quarter's 1.4 percent. Inflation hawks have something to read in this report with the GDP price index, at 2.8 percent, coming in above high-end expectations. But when excluding food and energy, pressure slows to 1.3 percent from the second quarter's 1.7 percent.
Initial jobless claims for the week of November 24 are due out.
The pending home sales index rose 0.3 percent in September, following a 2.6 percent drop the prior month. However, growth for existing homes has been lagging sales growth for new homes. Still, pending home sales were up 14.5 percent on a year-ago basis.
The Kansas City Fed manufacturing index declined slightly in the Kansas City Fed District as the composite index declined to minus 4 in October from plus 2 in September. The production index eased further from minus 4 to minus 6, and the new orders and order backlog indexes also declined. The employment index moved into negative territory for the first time this year, while the shipments index inched higher but still remained negative.
Personal income in September advanced 0.4 percent, following a 0.1 percent increase the prior month. The wages & salaries component gained 0.3 percent, following a boost of 0.1 percent in August. Consumer spending was strong with a 0.8 percent increase in September, following a 0.5 percent rise in August. The good news is that auto sales lifted spending but the bad news is that so did higher gasoline prices. By components for spending, durables jumped 1.5 percent after a 1.6 percent rise the prior month. Again on higher gasoline prices, nondurables increased 1.7 percent, equaling the August rate. Services improved to a 0.4 percent boost a flat August. Turning to inflation, the headline PCE price index jumped another 0.4 percent in September, matching the August rate. The core rate rose a softer 0.1 percent, the same as the month before.
The Chicago PMI edged up 0.2 percentage points in October to 49.9 but marginally remained in contractionary territory. Business activity measures reflected weakness in five of seven indexes, most notably as the rate of expansion in production and employment slowed while new orders stalled near neutral and order backlogs remained in contraction. The production index slipped to 50.0 in October from 56.5 in September. The new orders index fell below breakeven to 47.0 from 51.0 in September.
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books, 2009.
Econoday Senior Writer Mark Pender contributed to this article.
|
![[Econoday]](images/econoday_logo_slim.gif){kind=logo}
![[Econoday]](images/logo.gif){kind=logo}