Manufacturing activity on the wane
New orders for manufacturers' durable goods rose 2.3 percent in November, reversing about one-third of the 6.5 percent drop recorded in the previous month. As usual, the sharp variation was caused by aircraft orders (falling in October, rising in November). Excluding transportation, new orders edged up a modest 0.4 percent in November - not even approaching a recovery to October's 3.1 percent drop. Relative to the third quarter, orders are down for the second straight quarter. Indeed, total orders for October and November decreased at a 5.2 percent rate relative to the third quarter. Nondefense capital goods orders, a precursor of capital spending activity, fell at a 9.5 percent rate in the October-November period relative to the third quarter. This does point to slower production schedules going forward. Total orders and nondefense capital goods orders last recorded back-to-back quarterly declines in the first two quarters of 1998.

Other evidence also suggests that manufacturing activity is moderating. The Philadelphia Fed's business outlook survey decreased in December to -6.1 on the general conditions index from a positive level of 5.2 in November. Any index level below the zero mark means that manufacturing activity is declining. This indicator has done a good job of predicting industrial production for the month and thus points to a drop in December.

Consumer spending sags
Personal income edged up 0.4 percent in November after dipping 0.1 percent in October. Personal income was skewed in the past few months by farm subsidy payments (sharp gains in September, followed by declines in October and November). Wages and salaries, the lion's share of income, increased 0.3 percent in November, half the pace of the past two months. Slower income growth coupled with a less than stellar equity market does suggest that consumer spending is headed for a slowdown.

Personal consumption expenditures rose 0.3 percent in November after a 0.4 percent hike in the previous month. Both October and November spending was curtailed by declines in motor vehicle sales. In November, nondurable goods spending was flat, although spending on services rose 0.8 percent. Disposable income (personal income less taxes) and consumption expenditures both rose 0.3 percent for the month. The personal savings rate edge down further to -0.8 percent. At some point in the near future, we may start to see a reversal in the savings rate. Typically consumers will start saving more when they believe that economic conditions are deteriorating.

Indeed, the University of Michigan's consumer sentiment index fell to 98.4, its lowest level since October 1998. More important than the index level is the magnitude of the decline - the largest one-month drop since November 1991 when the economy was first starting to come out of the 1990-91 recession, then at a time when employment was still deteriorating. This severe drop in consumer optimism could be felt at the register. Retailers have been complaining of soggy sales this holiday season.

But the consumer is not yet in dire straits. Housing starts rose 2.2 percent in November, more than offsetting the 0.6 percent drop posted in the previous month. The gain was entirely due to the more volatile multi-family sector. Starts of single-family homes decreased 0.4 percent for the month, the ninth drop in 11 months. Single family starts are down 9.2 percent from year ago levels.

Overall housing activity is still pretty decent even though it is well below its peak. Mortgage rates have fallen off dramatically these past several months. In the first three weeks of December, 30-year fixed mortgage rates averaged 7.38 percent. On a weekly basis, mortgage rates peaked at 8.64 percent in the week ending May 19. The data for the latest week ending December 22 showed a 30-year loan rate at 7.17 percent. The 150 basis point drop in mortgage rates could spurt some activity in the near term, or some refinancing activity.

Foreign sector drag
The international trade deficit on goods and services narrowed slightly in October to $33.2 billion after recording a $33.7 billion shortfall in September. Exports declined 1.5 percent and imports fell 1.6 percent during the month. On a year-over-year basis, both fell for the month. Among merchandise exports, declines were registered across the board, but the largest drops were for nonauto capital goods and nonauto consumer goods. Among merchandise imports, the largest declines were for industrial supplies and materials, and nonauto capital goods. The drop in capital goods may be somewhat disconcerting since capital goods orders have been dropping off domestically as well. The decline in industrial materials may reflect a slight downshift in oil prices. The trade deficit will likely remain a negative factor on fourth quarter GDP even if it remains at current levels.

Old news
The Commerce Department revised down its estimate of third quarter real GDP to a 2.2 percent rate from last month's estimate of 2.4 percent. The downward revision was mostly due a smaller rise in exports, which led to a larger trade deficit. Inventories were also revised down a tick. All in all, the third quarter GDP figures tell us nothing new about the state of the economy. Corporate profit figures were unrevised and showed a robust 15.9 percent gain in after-tax profits from year ago levels. However, the chart below depicts the relationship between stock price movements and profit growth. Notice that profits tend to dip with stocks. The downward trend in the Dow Jones Industrials average in the past several quarters points to a downward trend in profits in the next few months as well.