INDICATOR: November Income and Spending, New Home Sales and Durable Goods Orders, December Consumer Sentiment and Weekly Jobless Claims
KEY DATA: Disposable Income: -1.2%; Consumption: -0.4%; Prices: 0%/ Home Sales: -11%/ Durables: +0.9%; Ex-Aircraft: +0.8%; Capital Spending: +0.4%/ Sentiment: +3.8 points/ Claims: -89,000
IN A NUTSHELL: “Reality is setting in and that means more moderate growth.”
WHAT IT MEANS: “Tis the day before the day before the day before Christmas and all through the federal government, the numbers are flowing. That is largely due to the president shutting things down on Christmas eve. That works for me as I don’t have to write anything up tomorrow. Of course, it means today is a data dump day and the numbers were not nearly as great as hoped for. Take the consumer, who has been spending like crazy. Well, not so much anymore. Consumption fell in November, which really wasn’t a surprise given that Amazon Days occurred in October and that change in pattern wasn’t easily accounted for in the seasonally adjusted data. That said, spending declined not just for nondurables goods, but for big-ticket items and services as well. But the more troubling was the sharp drop in income. That was driven by a fall in government support programs spending. While the unemployment compensation drop was good news, it is clear that people are not replacing their government welfare payments with private sector income. The wage and salary increase were the smallest since April, when layoffs were still exploding. Thankfully, inflation is going nowhere so households don’t have to deal with both softening incomes increases and rising prices.
The housing market may be coming back down to earth. New home sales fell sharply in November. While the declines were across the nation, huge drops in the Midwest and West created the national double-digit fall off. Still, the sales pace is still strong and the 19.1% rise for the first eleven months of the year compared to 2019 means there are few builders singing the blues. Residential investment helped power GDP growth but that is not likely to be the case going forward. As for prices, the rise tailed off as well, but let’s see where they go in the future.
Durable goods orders were pretty good in November. The only major sector that posted a decline was civilian aircraft. Boeing’s orders are starting to rebound now that the Max is back in service, so watch for that to change. Business capital spending also rose solidly, an indicator that firms are confident about the future.
The University of Michigan’s Consumer Sentiment Index increased in December, though there was a strange development in the data: Despite the start of vaccinations, the late December numbers were weaker than the early December ones. The report noted that “The pandemic has had a much greater relative impact on assessments of the overall economy than on assessments of consumers' current personal financial situations.” It appears that most households don’t think the economy is very good.
Finally, unemployment claims cratered last week. If you can explain why that happened, tell me so we both know. With shutdowns and stay at home orders increasing, you would think that layoffs would be rising as well. But they didn’t, at least in the latest report. Still, the raging virus and the unwillingness to take the necessary protective steps will uncertainly lead to an increase in unemployment over the next few months, so don’t be surprised if the claims numbers spike soon.
IMPLICATIONS: Let’s see now: Consumption, income and housing sales faltered, consumer confidence disappointed and the president has thrown a monkey wrench into the passage of a needed new stimulus bill. So, how did the equity markets react? You guessed it, they soared (at least as of my writing this piece). That is why I keep saying the markets are just not in touch with the economic fundamentals. And that is not necessarily the wrong approach to investing, especially if given that most firms that are listed are medium to large companies while the companies that are being battered are smaller ones. Since we all know that the small business sector has little to do with economic growth – really? No, that is hardly the case. What the equity markets are pricing in is the massive concentration of economic power into the hands of larger business (and fewer people) and that is what needs to be followed if you want to understand what is happening. Until we see a reversal of that trend, something that is not likely to occur until the virus is held at bay, there is little reason to think that investors will not remain optimistic.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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