From: Gregory S. MacKay, Senior Vice President & Chief Economist
We continue to see a level of expansion in this economic cycle that is described by the now threadbare “modest” or “moderate” moniker. With the exception of the 2001 recession (dot.com exuberance), many recoveries have seen 5%+ quarters of overall growth with strong consumer spending. This expansion has only had one quarter of 4%+ GDP growth, and recent quarters of lackluster consumer spending growth are not helping business spending. While most business indicators remain positive, we do wonder when the expansion will accelerate. Monetary policy remains wide open, but the latest numbers continue to show business and consumer numbers that could use improvement.
The latest Industrial Production numbers indicate pretty good one year growth (+3.2%). However, this indicator has only recovered to 2007 levels. September was a great month for consumer goods, business equipment, and construction spending. However, all consumer goods production actually fell in the third quarter, even though auto production rose.
The same sense of “something is lacking” comes from September’s durable goods orders. For the month, orders rose a healthy 3.7%, but without a huge increase in aircraft orders, there was actually a .1% decline in September orders. Another view is that all capital goods orders without defense or aircraft are up a tidy 8% in the past year, but down 8.4% in the third quarter of this year. We’ll get a look at third quarter GDP next week, but these business numbers suggest that matching the second quarter 2.5% GDP gain will be tough.
The consumer side of spending looks very similar. September retail sales are up 3.2% (a moderate number) since last year, but were down .1% in September. Motor vehicle sales nosedived 2.2%, department and miscellaneous store spending fell, and clothing purchases dropped. There was a slowdown in building materials and furniture sales which might be attributed to the rise in mortgage rates. The September winners were grocery stores and restaurants, which seemed to soak up the money coming from declining gasoline prices. Add in the decline of the University of Michigan’s Consumer Confidence Survey (worst number this year), and it looks like consumer spending in the third quarter will be hard pressed to match the modest 1.8% growth rate of the second quarter.
But it’s not all gloomy out there. The S&P/Case Shiller Home Price Index for August showed a 12.8% year-over-year rate of growth in both the 10 and 20 city index. This is the best percentage gain since February 2006, and nationally, prices are now back around mid-2004 levels. That means that fewer mortgages are under water and home equity values are rising. We’re not going to suggest a bubble is developing in housing, but any one year double digit gain should be watched. For the record, national housing prices have now risen 1.3% annually over the past 10 years, are down .01% in the past five years, and are up 3.5% for the past three years.
Inflation numbers are also considered to be good news. The Producer Price Index fell in September (.1%) for the first time in five months as food costs fell. Core P.P.I. increased only 1.2% over the past twelve months, indicating neither inflation nor deflation. The Consumer Price Index rose .2% in September, and is up 1.2% in the past year, and is also considered benign at this time.
This week’s meeting of the Federal Open Market Committee (FOMC) had no surprises. The statement highlighted the usual: an elevated unemployment rate, a slowing housing recovery, ongoing fiscal policy that is restraining economic growth, and lower than anticipated inflation, which isn’t expected to cause long term problems. It stated again its intent to continue to purchase government debt and hold short term borrowing costs down “to support continued progress towards maximum employment and price stability”. Simply put – no change. The Fed will continue to pour money into the system, hoping that all types of bank lending will accelerate, and business and consumer spending will increase. That’s the plan.
Stock prices remained near recent highs, even though the FOMC statement took a little wind out of their sails. At 2:55 p.m., for the week and year:
Treasury yields have settled into their comfortable trading ranges. Municipal prices shot up sharply this week due to a lack of supply.