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Economic Update


October 30, 2012

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The strong increase in real consumer spending (+0.4%) in September reflects gains in purchases of durables (+1.3%) and non-durables (+0.5%) and services (+0.2%). Real disposable income was nearly steady in September and advanced only 0.2% in the third quarter. The Fed’s preferred inflation measures indicate a contained picture as both price gauges posted increases that are below the Fed’s target of 2.0%. Looking ahead, fourth quarter consumer spending is most likely to repeat the performance seen in the third quarter. Beyond the near term, consumer spending is projected to maintain only a moderate trend as households are most likely to be engaged in rebuilding their net worth through the old fashioned route of increasing their savings.

The housing sector is another sector of the economy that continues to convey positive news by way of home sales to starts and prices. The seasonally adjusted Case-Shiller Home Price Index moved up 0.5% in August, marking the seventh straight monthly gain. From a year ago, the Case-Shiller Home Price Index advanced 2.0%, the largest increase since November 2006, excluding the brief period when the first-time home buyer program was in place during 2009 and 2010.

Essentially, home prices are stabilizing. Breaking the data down by metro areas, home prices in seventeen out of the twenty metro areas posted gains, with Atlanta, Chicago, and New York as the three exceptions. The improvement in the price picture reduces the number of homes with mortgages exceeding the value of homes and brings about stability in home prices. The end result of a mending housing sector is that it has a positive impact on household net worth and bank balance sheets, and delivers favorable ripple effects across the economy. In sum, a bird’s eye view of the US economy shows that consumer spending and the housing sector continue to support economic growth but a robust a performance is not here yet.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.