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CNB Economic Commentary: Dec 16

December 16, 2013

To: Everyone
From: Gregory S. MacKay, Senior Vice President & Chief Economist
Date: 12/13/13

Consumers have continued to show their confidence by their spending habits. In October, all credit purchases rose 7.1% annualized ($18 billion), reversing a decline in September. Credit card purchases had been weak, but rose a very strong 6.1% in October. Consumer credit as a percentage of disposable income is approaching levels not seen since the start of the “Great Recession”. The expansion of both stock prices and home values has spurred consumers to get back into a spending mode. This will help push retail sales upward.

November retail sales were stronger, and October retail sales were revised upward. The November increase was .7%, the best increase in five months. Automotive sales continued to be strong, up 1.8%. Without auto sales, retail sales grew .4% for the month of November. An ongoing decline in gasoline costs (-1.1%) allowed expanded spending on furniture (+1.2%), electronics (+1.1%), building materials (+1.8%), non-store retailers (+2.2%), and restaurants (+1.3%). The spread of increases didn’t include clothing (-.2%) or sporting goods (+.1%). So the spread indicates some strength in holiday spending, but not enough to create a substantial boost to fourth quarter GDP. Hopefully, sales have continued to pick up through December, and fourth quarter GDP will climb into the 2.5% range.

Wholesale inflation as measured by the Producer Price Index (PPI) declined for the third straight month. The index fell .1%, as energy prices fell .4%. Without food and energy, the PPI rose a negligible .1%. Wholesale inflation for the past twelve months has been .7%. It isn’t likely to increase soon, as inflation of crude and intermediate goods is negative for the second month in a row. These inflation levels provide no incentive for a beginning of “tapering” by the Fed next week. We think the slowing of Fed bond buying won’t begin now until at least the end of January.

Stock prices eased this week as concerns about the timing of Fed tapering offset the good news of a House budget deal. At 3:55 p.m., for the week and year:

Dow Industrials 15764 -1.6% +20.3%
NASDAQ 4003 -1.5% +32.5%
S&P 500 1777 -1.6% +24.6%

 Treasury and muni yields stayed within their trading ranges.

  US Treasuries
Municipal Bonds
  12/13/13 12/6/13 12/13/13 12/6/13
2 year .34% .30% .29% .27%
5 year 1.55% 1.50% 1.14% 1.11%
10 year 2.88% 2.88% 2.80% 2.79%