New high on new home sales
New home sales jumped 5.7 percent in November to a 1,069,000-unit rate - reaching its highest level in the lifetime of the series (that began in 1963). The chart below shows why home sales are so strong - mortgage rates have fallen dramatically over the past two years and have reached levels not seen in more than 30 years. With only one month to go before year-end, new home sales are 7.6 percent higher than 2001.

New home sales were not uniform across the major regions of the country, though. Sales in the Northeast posted as many declines as increases in 2002. In the South, sales posted a modest 3 percent gain. The bulk of the activity was concentrated in the Midwest and the West where sales surged 12.4 and 15.8 percent, respectively. The gains of the past few months should help spur spending on home furnishings, furniture and appliances.

Durable goods orders drop
In contrast to the ever-expending housing sector, the manufacturing sector is mired in the dumps. New orders fell 1.4 percent in November nearly reversing October's 1.7 percent hike. Excluding defense, orders declined even more sharply in November. In a similar fashion, nondefense capital goods orders, a leading barometer of capital spending, fell 3.2 percent in November after gaining 4.8 percent in October. As depicted in the chart below, the fourth quarter will show a sharp drop relative to the third based on October and November figures. Even if new orders rise in December, there is no doubt that the quarterly pattern is already set - in downward mode. Certainly, new orders could pick up again in the first half of 2003, but the fourth quarter drop in durable goods orders will keep industrial production depressed for a few more months.

November income and consumption carry on...
Personal income rose 0.3 percent in November, matching the pace of the three previous months. Personal consumption expenditures increased 0.5 percent, the fastest pace since July. Lately, whenever consumption expenditures post healthy gains, it is due to increases in durable goods spending - namely, motor vehicles.

Consumption expenditures have recorded solid gains the past several months, but personal disposable income (personal income less taxes) has grown even more rapidly. The yearly pace in real (inflation-adjusted) income growth has surpassed the yearly pace in real personal consumption expenditures in nine of the past eleven months. This has allowed small increases in the personal savings rate over the period. The savings rate typically rises when consumers are feeling uncertain about their financial conditions. While the savings rate has increased over the low levels recorded in 1999 and 2000, it is still below 1998 levels and certainly remains anemic by historical standards. During the boom years, consumers were said to be more interested in the stock market than in their savings accounts. If so, then the reverse should be true in leaner times. If even market sentiment gets no worse, we are likely to see the savings rate continue to rise in the coming year.