Today’s Commerce Department report on personal income and spending for November suggests that U.S. GDP growth may be in the 3% to 4% range in the quarter just ending. Wage income continues to push higher at a gradual pace, and even if it shows no growth in the month of December, consumer spending is headed toward a growth rate of nearly 4% based on last month’s growth and upward revisions to prior months’ estimates. For the most part, as goes the U.S. consumer, so goes GDP. Inventories will not contribute to Q4 GDP the way they did in Q3, but barring a complete rundown in stocks by business, this negative inventory swing should be offset to a greater or lesser degree by exports and, yes, even residential construction, which should be less negative a factor. (And if inventories are run down, then that would likely mean a positive effect from restocking in 2011.) As the chart below shows, the trend in wage and salary income in the current economic cycle (through November), if not quite normal, is at least headed in that direction (and better than both the 2001-03 recovery and pre-revision data indicated).
Durable goods orders, ex the volatile transportation sector, increased more than expected in November (2.4% vs 1.8%) and the October estimate for new orders was less negative than estimated one month ago (-1.9% vs -2.7%). Orders for nondefense capital goods outside aircraft rose 2.6%, a little under the expected bounce of 3.1%, but here too the prior month’s estimated decline was reduced by nearly a full percentage point. On balance, Thursday’s data – including the jobless claims and consumer sentiment reports – were up to a bit better than the Street was projecting. The exceptional industry remains housing, where November saw a modest increase in new home sales to a 290k annual rate, from October’s 275k rate, which after last August’s 274k sales, were the lowest since the early 1960s, when data availability begins. On the positive side – and it’s just a modest positive – the inventory of unsold homes fell to a 42-year low last month and average home price rose.
At 2:00 EST, at which time the U.S. bond market closed ahead of tomorrow’s Christmas Eve holiday, the Dow was trading at a two-year high, up nominally on the day, while the S&P 500 and Nasdaq were down roughly 20 basis points from Wednesday’s highs. Treasury bonds ended Thursday trading lower in price (by about one-third point at 10 years) and higher in yield (by roughly four basis points). Crude oil prices continued their climb above $91 a barrel, while gold was slightly lower for a second day in a row. The euro was slightly higher vis-à-vis the dollar, which was slightly lower against the yen.
INVESTMENT OUTLOOK…Despite the recent escalation in inflation expectations and recurring credit anxiety in Europe, a respectable year-end rally has been fashioned out of improvement in leading economic indicators and perhaps a sense that the two parties in Washington may be able to come together and get something positive done in 2011. It is important to remember that at some point the U.S. economy will have to do without the trillion dollar stimulus packages – past and prospective – that have been contributing to the quickening seen in economic activity. In the end, strong corporate earnings can overcome a lot of this market’s shortcomings, and the profits outlook for 2011 is improving with the better economic prospects.
Michael Flament (203-783-4360) <a href=mailto:email@example.com>firstname.lastname@example.org</a>