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Weekly Economic Commentary


Mixed Economic Signals is Still the Predominant Flavor

November 23, 2011

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Real consumer spending increased 0.1% in October vs. a 0.5% gain in September. Purchases of durables moved up 0.9% in October, while that of non-durables increased 0.2% and outlays on services were unchanged. Although the gain in consumer spending was soft in October, the jump in consumer spending in September (+0.5%) gives an arithmetical advantage for fourth quarter consumer spending. Real consumer spending grew at an annual rate of 2.3% in the third quarter. The performance of fourth quarter consumer spending could possibly match this reading or exceed it, which is a big plus for headline GDP of the fourth quarter. However, the trajectory of consumer spending is less robust than what prevailed in early part of the year (see Chart 2) and the support from real disposable personal income is gradually declining. In addition to household deleveraging that is preventing strong growth in consumer spending, headwinds from the European debt crisis could translate into weaker economic activity in the United States and adversely affect employment and consumer spending. Therefore, the Fed remains concerned about consumer spending in the quarters ahead and this aspect is a frequent feature in Fed comments pertaining to the outlook of the economy.

DEC 11/23/2011 Chart 1

DEC 11/23/2011 Chart 2

Personal saving as a percentage of disposable income inched up to 3.5% in October vs. 3.3% in the prior month. Inflation data point to a moderation of inflation (see Chart 3). The personal consumption expenditure price index slipped 0.1% in October, putting the year-to-year increase at 2.6%, down from 2.94% in September. The core personal consumption price index, which excludes food and energy, rose 0.07% in October versus a nearly steady reading in September. The year-to-year increase in October is 1.65%, close to the 1.64% gain registered in September. These numbers suggest that inflation data are not signaling a worrisome trend.

DEC 11/23/2011 Chart 3

Orders of durable goods fell 0.7% in October following a 1.5% drop in September. In addition to the 19.8% decline in orders of defense equipment, aircraft order fell 16.8% in October. Aircraft orders are large volatile component which tends to influence the headline number. The back-to-back monthly declines of aircraft orders suggest that a reversal is likely in the near term. The increase in orders of autos (+6.2%) in October after posting declines in each of the prior two months is noteworthy. Shipments of durable goods increased 1.3% in October but that of non-defense capital goods excluding aircraft dropped 1.1%. Shipment of non-defense capital goods excluding aircraft is the proxy for equipment and software spending in the GDP report. The weakness of this shipments component points to a moderation in the strength of equipment and software spending in the fourth quarter, at best, after a strong performance in third quarter (+15.6%).

DEC 11/23/2011 Chart 4

DEC 11/23/2011 Table 1

Initial jobless claims rose 2,000 to 393,000 during the week ended November 19. The four week moving average at 394,250 is worth mentioning because it is the lowest since April 2011 and compares with levels seen in 2008(see Chart 4). Continuing claims, which initial jobless claims by one week, increased 68,000 to 3.69 million.


DEC 11/23/2011 Chart 5

Pulling together these economic reports, the main message is that economic data continue to send mixed signals. The October data of consumer spending and shipments of non-defense capital goods excluding aircraft suggest that the composition of real GDP of the fourth quarter is likely to show moderate consumer spending but soft equipment and software spending. The jobless claims report points to small improvements in the labor market.

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.