Another record high close for the Dow Industrial Average and the S&P 500 index. That’s the 47th record high for the S&P this year. Volume was light, heading into the holiday. The markets will be open for a half day on Friday, but volume will be incredibly light.
Yesterday we told you about the New York Fed report that consumers were taking on more debt; household debt increased $78 billion in the third quarter, and the NY Fed thought that meant the end of deleveraging. It was the end of an era. Good news for the economy as well. American households have been cleaning up their finances during the painful post-crisis era, with less debt and lower financing costs for the debts they still owe. They are now in a better position to spend in the years ahead, good for the economy and their own sense of well-being.
I said “not so fast”, let’s wait and see if a trend develops. Today, the Commerce Department reports consumer spending increased 0.2 percent last month after being flat in September. Maybe Americans have cleaned up their debt problems, or not, but we aren’t yet in a spending mood. The amount of money individuals save was flat at 5%, but the saving rate was revised down sharply to 5% in September from a first read of 5.6%.
Meanwhile, inflation as gauged by the PCE price index rose 0.1% last month, while the core rate excluding food and energy climbed 0.2%. And over the past 12 months this gauge of inflation is up just 1.4%, well below the Fed’s target of 2%. Annual price gains have undershot that target since April 2012. The Fed, in its Oct. 29 policy statement, said that “inflation in the near term will likely be held down by lower energy prices and other factors,” though it’s expected to move back toward 2% over time as the economy heals.
Low gasoline prices are lifting confidence; the Thomson Reuters/University of Michigan’s consumer sentiment index was revise down from 89.4 to 88.9 in November, that is still the highest level since July 2007, but that increase in confidence is not resulting in more spending, at least not now.
And just as consumers are holding onto their dollars, businesses are holding back on purchases. Aside from a huge bump in military aircraft contracts, orders for durable goods were surprisingly weak in October for the second straight month. Orders for durable goods rose a seasonally adjusted 0.4% last month, but that includes a huge 45% spike in orders for military aircraft. We’re still fighting a few wars. Excluding defense, orders fell 0.6%. They fell an even sharper 0.9% if the large and volatile auto and commercial aircraft sectors are stripped out.
Outside the defense sector, orders were weak. Bookings for primary metals used in the production of many industrial goods fell 2.4%, the biggest drop since December. Orders also declined 1.2% for heavy machinery and 3.1% for electrical equipment. A broad measure of business investment known as core capital orders sank by 1.3% for the second month in a row. That’s the biggest two-month decline since the beginning of the year and perhaps a sign that companies might be paring back. Shipments of core capital goods, a category used to calculate quarterly economic growth, also fell 0.4% in October.
The number of people who applied for new unemployment benefits in the week before Thanksgiving jumped to an 11-week high and topped the 300,000 mark for the first time since early September. This is just one week, and does not indicate a trend, but it is a move in the wrong direction.
Also today, the Commerce Department reported that sales of new single-family homes ticked up 0.7% in October to a seasonally adjusted annual rate of 458,000, the fastest pace in five months. For October the sales pace rose 15.8% in the Midwest and 7.1% in the Northeast, but fell 2.7% in the West and 1.9% in the South. The median price of new homes sold rose to a record high of $305,000 in October.
The National Association of Realtors says pending home sales fell 1.1% in October. The index of pending home sales hit a seasonally adjusted 104.1 in October, compared with 105.3 in September.
So, we’ve had a lot of economic data crammed into just a holiday shortened week, and most of the data was not strong; the exception was the third quarter GDP, revised from 3.5% growth to 3.9% growth, but as we are in the fourth quarter, it looks more like the global slowdown is starting to affect the US economy and the indications are that fourth quarter GDP will be about half the third quarter number.
If you are driving for the holiday, you might be thankful for lower gas prices; the flip side is that more people will be driving this holiday, so the traffic might be problematic. Earlier, the Energy Information Administration said U.S. crude inventories rose by 1.9 million barrels last week, defying forecasts for a 100,000 barrel drop. Nymex crude has dropped nearly 3.7% since the beginning of the week. Oil futures are down more than 30% from their midyear high. The Organization of the Petroleum Exporting Countries will meet on Thursday to decide whether to lower oil production levels to alleviate the current glut in global markets, and, more importantly, whether to boost oil production prices. Saudi Arabia’s oil minister indicated that he wouldn’t push for a cut in production targets, but we’ll have to wait and see.
If you’re flying somewhere for the holiday, good luck. The east coast is getting pounded with another storm, and even though the weather in the southwest is fantastic, the flight cancellations tend to ripple across the country. So far today there have been a little over 600 flight cancellations. If you are calling on family or friends back east, just a reminder that it is not polite to gloat.
When the weather gets bad enough, not only does it ruin travel plans, it starts ruining economic data and forecasts. So far, there’s no reason to believe this winter’s storms will wreak exceptional havoc on the data. Because most winters feature some disruption, seasonally adjusting economic reports helps prevent every winter from reducing our visibility into the economy’s strength. But it’s worth remembering that unusually bad weather is not always an “excuse” for bad data, sometimes it really is just the weather.
And neither rain nor snow nor sleet nor dark of night shall keep shoppers from their holiday rounds. Over the next few weeks, and especially this weekend, we will hear stories about the importance of holiday shopping on the economy. And it is important, but most of the stories are hyped up. The National Retail Federation forecasts that holiday sales this year will total $616.9 billion, which is a lot of money but it is not the amount of holiday sales. You see, we spend money in other months, not just November and December. You buy gas in October, just like you do in December and just because you fill up the tank in December, it doesn’t make that gas a “holiday purchase”. There’s no question that December is the strongest month for retail sales. From 1992 to 2013, December retail sales averaged 23 percent higher than the rate from January through October. November was also a good month, averaging 4 percent higher than January through October. So, to get a realistic idea on holiday sales we should compare the difference between sales in November and December with the rest of the year. Using this measure, if retail sales in November and December of this year exceed normal months this year by the long-term averages, a reasonable forecast for holiday shopping in 2014 would be $16 billion in November and $90 billion in December.
In other words, holiday sales should be about $106 billion this year. Maybe more, maybe less; could be as much as $150 billion; could be as little as $80 billion. It is a lot of money, but the difference between a good holiday spending season and a bad holiday spending season is about 0.4% of the economy. And it isn’t enough to make the economy take off like a rocket or fall like a rock.
Anyway, I hope you have things you are thankful for. I hope you have family or friends that you will be around this weekend. And I am thankful that we get together on a regular basis right here. Happy Thanksgiving.