Q4 CONSUMER SPENDING COULD
BE BETTER THAN Q3
But Weakness Will Persist
Northern Trust
by Asha Bangalore
December 24, 2008

Nominal consumer spending fell 0.6% in November, the fifth monthly decline. However, the personal consumption expenditure price index fell 1.1% and raised real consumer spending 0.6%, following five monthly declines. Effectively, consumer spending in the fourth quarter will post a reduction but probably slightly smaller than the 3.8% drop seen in the third quarter.

Chart 1

Lower gasoline prices appear to have lifted consumer spending in November. Purchases of durables (+0.6% vs. -4.0% in October) and non-durables (+1.5% vs. -0.9% in October) showed notable gains. Service outlays were barely positive (+0.1% vs. +0.3% in October).

Personal income fell 0.2% in November due to significant weakness in the labor market. The personal saving rate moved up to 2.8% in November, putting the average of the first eleven months of the year at 1.5%, partly boosted by tax rebates of 2008. Assuming the December saving rate does not alter this average too much, the 2008 saving rate will be the first reading above 1.0% since 2004 when the saving rate was 2.1%. The saving rates in 2005, 2006, and 2007 were 0.3%, 0.7%, and 0.5%, respectively.

Chart 2

The core personal consumption expenditure price index, which excludes food and energy, has held steady for two straight months. From a year ago, this price index rose 1.9% in November, down 52 bps from peak in August 2008 (see chart 3). A further moderation of consumer prices is widely expected.

Chart 3

Initial Jobless Claims Post New Cycle High
Initial jobless claims for the week ended December 19 rose 30,000 to 586,000 , a new cycle high. Continuing claims, which lag initial claims by one week, moved down 17,000 to 4.37 million and the insured unemployment rate held steady at 3.3%. The main message is that labor market conditions remain significantly weak but it should be noted that the level of these claims should be seen in the context of a large labor force today compared with the 1980s.

Chart 4

Noticeably Lower Mortgage Rates Translate To Surge in Mortgage Refinance Activity
There is some good news from the housing market. The Mortgage Purchase Index of the Mortgage Bankers Association rose to 316.5 for the week ended December 19 from 286.1 in the prior week. Also, sharply lower mortgage rates have initiated a boom in refinancing of mortgages. The Mortgage Refinance Index rose to 6758.6 during the week ended December 19 vs. 1254.0 a month ago (see chart 5).

Chart 5

The 30-year fixed mortgage rate was 5.04% for the week ended December 19, down 95 bps from a month ago and 40 bps lower than the week ended December 5 (see chart 6).

Chart 6

Strength in Non-Defense Capital Goods Orders Is Probably a Temporary Bounce
Durable goods orders fell 1.0% in November following a 8.4% drop in October. A nearly 38% drop in orders of aircraft, a volatile component of this report, accounted for the weakness in the headline number. Excluding transportation, durable goods orders were up 1.2% in November. Also, orders of non-defense capital goods excluding aircraft rose 4.7% in November and bookings of non-defense capital goods increased 5.9%. In light of the weakness of consumer spending and overall weakness of the economy, the strength of these orders appears to be temporary.

Chart 7

Shipments of durable goods fell 2.6% during November after a 3.4% decline in the prior month. Shipments of non-defense capital goods excluding aircraft edge up 0.2% vs. a 3.8% drop in October. The inflation adjusted average of the October-November shipments of non-defense capital goods excluding aircraft, a proxy for capital spending in the GDP, remains weak ( -15.6% vs. -4.7%in Q3) and is likely to make a significantly negative contribution to GDP in the fourth quarter. Real capital spending in the GDP report fell 7.5% in the third quarter after a 5.0% drop in the second quarter.

Happy Holidays and a Calm New Year!
Publication of the Global Daily Commentary will resume on January 2, 2009.

© 2008 Asha Bangalore
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