Economic Notes – December 3, 2012


Written by: Jon McGraw

Durable goods orders for October came in at a bit better than expected, even though it was a flat reading (expectations called for a -0.8% drop). Results were fairly consistent across all sectors, as the ‘non-headline’ durable goods ex-transportation figure actually gained a percent and a half. The surprise came from the fact that Hurricane Sandy didn’t appear to have as much impact as originally thought, although it still was present (especially in the capital goods shipments area).

The Richmond Fed manufacturing survey did quite a bit better than expected, at a reading of positive +9 versus an expected -9 result. Most items within the survey, such as new orders, shipments and expected capital spending were generally all positive. Analysts who track these regional surveys quite carefully noted the less extreme impact of Sandy on the Richmond region versus the New York and Philadelphia areas, which saw much more damage and slowdown effects.

The Chicago PMI survey came in at 50.4, which was just a bit short of the expected 50.5 figure—close enough to call it a flat reading. The new orders component of the survey weakened a bit, while the employment and production components both improved, and the prices paid index also rose. This region wasn’t impacted by the hurricane, so analyst assessments point to this index being a ‘cleaner’ read than some on the East Coast. That said, the reading isn’t really positive or negative for the most part.

Personal income for October was flat, which slightly lagged the +0.2% expected gain. There was a large downward adjustment to wage and salary income due to the hurricane, which likely accounted for the lag. Consumer spending (aka ‘consumption expenditures’) was a bit weaker than expected in October, falling -0.2%, versus a forecasted flat reading. Lower durable goods spending and weak auto sales accounted for much of this drop (hurricane-related no doubt), while services gained. The core PCE price index moved up +0.12% month-over-month for October, which trailed the consensus expectation of +0.2%—inflation in the short term continues to maintain a moderate course.

The Conference Board consumer confidence survey for November rose to 73.7, which was a bit higher than expected (73.0). Assessments of current conditions were little changed, but the big part of the improvement was in expectations about future conditions. The employment component, which asks about how ‘plentiful’ jobs prospects are, were a little better but remain largely negative relative to history.

In housing, the Case-Shiller House Price Index rose—in keeping with other strong housing measures recent months. The index gained +0.4% on a month-over-month basis, which was right on target with forecast, and led by broad-based gains—notably in San Diego, Atlanta and Phoenix. For the whole one-year period, the index is up +3.0%, which is the best in over two years and another reassuring sign of bounceback. The FHFA Home Price Index (which takes into account the prices of homes with agency-conforming loans) rose +0.2%, which was a bit light of the forecast +0.4%, but similar to the Case-Shiller figure.

New home sales for October came in at an annual rate of 368k (a decline of -0.3%), which fell below the forecasted number of 390k (which would have been a gain of +0.3%). The subpar numbers here were mostly due to a revision to September figures, while Hurricane Sandy’s impact appears to be tempered, for now. Forward-looking pending home sales, on the other hand, rose +5.2% in October, which beat out the estimate of +1.0%. The NE region’s pending numbers weren’t altered much, which again points to less of an expected impact of the hurricane.

Initial jobless claims came in 23k lower to 393k for the Nov. 24 week, compared to an expected 390k number. The hurricane effects appear to be dissipating a bit, but are still existent for the East Coast reports. Continuing claims for the Nov. 17 week were 70k lower to 3,287k, which was below expectations as well.

On a broader economic note, the revised third quarter real GDP reading was published, and the final figure was a little different than expected. This estimate was revised to 2.7% real growth, which was just a tenth of a percentage point lower than expected; however, consumer spending and disposable personal income were revised down while inventories were revised up—a net wash, but a deterioration in fundamentals. Ideally, you’d like to see income and spending rise instead of business’ just making products to sit on the shelf. This is an oversimplification, obviously, and these imbalances are often self-correcting from quarter-to-quarter. As it stands, the past year represents one of the better growth periods of the recovery.

What are the estimates for Q4? Always better to err on the conservative side, but 1.5-2.0% continues to be a good guess. Of course, Hurricane Sandy may play a negative role in the number, which could be made up for in the first quarter of 2013 or even trickling in through some later quarters. We continue to plug along at a low level of growth, which is not surprising, considering the level of de-levering that has gone in response to and in repair of the 2008 meltdown. These structural fixes affect the growth phases that follow severe crisis. However, the positive news is that we are beginning from a much lower base, such as in housing and capital goods, so chances of overheating remain tempered—which could elongate this recovery process.

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Stock markets were up slightly on increased hopes for bipartisan political resolution on the fiscal budget situation. Small-caps fared better than large-caps generally. In the S&P, utilities and telecom outperformed, while energy and financials underperformed and experienced the only negative results on the week. Same store sales for many retailers disappointed, possibly due to the effects of the hurricane, although the Christmas results are still to be determined.

Foreign names performed well overall, with strong weeks from India, Singapore and several smaller European nations like Austria, the Netherlands and Switzerland. Brazil, China and Russia brought up the rear Greek stocks continued to show volatility, losing -8% on the week, although performance for the quarter has been quite good—surprisingly—but obviously, news-driven. In recent weeks, uncertainty about Greece receiving its next tranche of bailout payments has undermined sentiment; however, European finance ministers approved the latest installment of these payments on Friday.

Bonds had a decent week, with shorter- and intermediate-term rates falling slightly. Credit, including high yield corporates and emerging market debt gained the most, followed by another strong week from munis. Floating rate and mortgage-backeds fared weaker. As part of our ‘deeper dive’ into U.S. fixed income this month, we had in-depth conversations with several of our managers in the areas of domestic corporate and government bonds and have some timely thoughts to share at our next monthly advisor meeting.

In real estate, European REITs led with strong gains of nearly 5%, while U.S. mortgages, retail and industrial also gained, and more so than equity markets. Asian REITs also fared positively, while U.S. residential names lost a bit of ground last week.

As a whole, commodities were little changed on the week, but individually, the industrial metals group (led by aluminum and nickel) had the strongest week, followed by agriculture. Precious metals lost -2.5% and brought up the rear, followed by livestock and energy, which lost ground by a lesser amount.

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