November's Grim Economic Reports

Incomes and shipments are down. Consumers are pessimistic. Ask about GDP at your peril. The list goes on

By Michael Englund and Rick MacDonald

There was nothing but gloom in the slew of U.S. economic reports released Nov. 26, as the organizations responsible for their production raced to get out their data before the Thanksgiving holiday. The U.S. personal income report for October did the most damage to the outlook. Other reports revealed a big hit to October durable goods orders that exceeded already dour expectations, a major drop in the November Chicago purchasing mangers index, a moderation in weekly initial jobless claims that still leaves a notable deterioration in November, a large drop in October new-home sales, and a sizable downward revision in the University of Michigan's consumer sentiment measure for November.

Here is Action Economics' rundown of the Nov. 26 reports:

U.S. personal income

The U.S. personal income report revealed a bigger-than-assumed 0.3 percent October gain, although the increase followed sizable downward third-quarter revisions that were revealed in the third-quarter GDP report released Nov. 25. We also saw the expected 1.0 percent drop in October consumption, but a much-weaker-than-expected -0.5 percent figure in real (inflation-adjusted) terms, as personal consumption expenditure (PCE) chain prices fell "only" 0.6 percent in October. The real consumption shortfall implies a hefty 2.4 percent fourth-quarter rate of decline alongside a 7.1 percent rate of decrease for nominal spending, and a much-stronger-than-assumed 4.2 percent pop in the fourth-quarter GDP chain price measure, as falling import prices are slow to "pass through" to consumption. We now project a big 4.0 percent real GDP decline in the fourth quarter.

For income, we expect anemic growth rates of 2.0 percent for personal income and 0.6 percent for disposable income in the fourth quarter. That follows big downward revisions in the third-quarter growth data: 0.2 percent from 1.0 percent for personal income and -4.5 percent from -3.7 percent for disposable income.

The consumer pullback is gauged by an underlying surge in the savings rate, which bounced to 1.0 percent in September and 2.4 percent in October, from 0.6 percent in August.

The PCE chain price figures in the report showed smaller-than-expected declines in October of just 0.6 percent overall and a flat core (excluding food and energy) reading. The headline year-over-year gain moderated in October to 3.2 percent, from 4.1 percent in September and a recent peak of 4.5 percent in July, while the year-over-year core price measure fell to 2.1 percent in October, from 2.3 percent in September and a recent peak of 2.4 percent in both July and August.

Although the Federal Reserve is already myopically focused on its role as lender of last resort as it tries to jump start the credit markets, it certainly is good news that the headline and core inflation figures will soon lie within policymakers' 1 percent to 2 percent "comfort zone." Indeed, with some now focused on deflation risk, the abrupt downtrend in prices over the past few months may take on new urgency at the Fed as an additional reason to reduce the target Fed funds rate at the Dec. 16 FOMC meeting. We expect Ben Bernanke & Co. to reduce the Fed funds target to 0.50 percent from 1.00 percent.

Durable Goods Orders

The U.S. durable goods report revealed even larger October headline declines than feared for shipments and orders, but less so for the equipment figures, alongside a 0.4 percent October inventory gain. The headline 6.2 percent drop was double our assumption, although the risk was clearly to the downside, with a big 4.4 percent orders drop (excluding transportation) that led the downside surprise in the report. The transportation sector posted a huge 11.1 percent October orders drop that was mostly flagged in advance, given both a big decline in Boeing (BA) orders—to 14 planes from 41 in September—as well as a 3.9 percent decline in vehicle assemblies, to a lean 8.1 million units. Yet this decline was also larger than assumed.