Trade deficit narrowing?
The drop in domestic demand may be playing a role in the downward drift in the international trade deficit. The trade deficit on goods and services narrowed in November to $33.0 billion from $33.6 billion in October. As indicated in the chart below, this is the second straight downtick in the monthly deficit figures. While the deficit is only marginally smaller, there is no question that import demand is coming down. Some of the decline in imports stems from lower crude oil prices and a drop in oil volume. But declines are also evident in capital goods. In the boom years, U.S. businesses were buying capital equipment from abroad as rapidly as they were buying domestically. Seems like we hit a peak in September. Softer export demand comes from the stronger foreign exchange value of the dollar. In recent months, the euro has turned around and this could lead to some improvement in exports with Western Europe.

Housing activity holds steady
While overall production declined in December, housing starts edged up 0.3 percent during the month after posting a 2.7 percent gain in November. The total level of housing starts were within their margin of error, suggesting that despite the modest gains housing activity has been essentially unchanged over the past several months. Not surprisingly, construction of single-family homes has picked up the past couple of months. But notice the sharp drop in the mortgage rate since its peak earlier this year. By December, the 30-year conventional mortgage rate had fallen to 7.38 percent. While income growth is steady and stock prices have not shown much appreciation, the lower mortgage rate reduces monthly payments and makes housing more affordable.

The steady pace of housing activity could help the furniture and appliance industries in the near term. But on the whole, it is unlikely that retail spending on durable goods will increase significantly in the near term.

After plunging in December, the University of Michigan's consumer sentiment index took another dive in the first half of January. If you look closely at the chart below, you'll see that this two-month drop is the largest since 1998 - and the level of the index is at its lowest level since mid-1996. Consumer optimism appears to be waning more dramatically with respect to the future, as sentiment on current conditions is still relatively favorable. Consumers are beginning to worry that the next six months will show deterioration in personal finances and the labor market. On the plus side again are lower mortgage rates, which are allowing a new round of home mortgage refinancing. But this impact will likely be small in spurring retail sales over the next six months. Rates never got high enough for long enough to suggest that the bulk of the home buyers will refinance.