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CNB Weekly Economic Commentary: Oct 1(1)

October 1, 2012

To: Everyone
From: Gregory S. MacKay, Senior Vice President & Chief Economist
Date: 09/28/12

The final revision to second quarter Gross Domestic Product (GDP) was released indicating slower growth than earlier estimates. GDP advanced at an annual rate of 1.3% in the second quarter of 2012, after increasing 2.0% in the first quarter. While still positive, the growth in several types of spending slowed. Consumers actually spent less on motor vehicles, furniture, and clothing in the second quarter compared to the first, as energy costs shot upward. Consumer housing and utility cost increases (energy fueled) were offset by declines in health care and restaurant and travel spending. It wasn’t a bad quarter for consumer spending, and I wonder how much of the slowdown can be attributed to the onslaught of negative campaign ads. I can’t seem to find many ads that don’t tell me how bad things are out there.

When consumers sneeze, businesses catch a cold… or something like that. Business spending also increased in the second quarter, but like consumer spending, at a considerably slower pace. In fact, business spending in the fourth quarter of 2011 rose at 3.72% annualized, while the second quarter of 2012 saw an increase of only .09%. Business spending on structures has slowed to a “no growth” scenario, and spending on some types of equipment actually turned negative. Another factor in the slower growth of business spending remains inventory consolidation. Businesses simply aren’t growing inventories at all. While the summer drought can be blamed for shrinking farm inventories, non-farm inventories have been shrinking at an annualized pace in excess of $50 billion for the last three quarters.

But it wasn’t all bad news. Government spending (federal, state, and local) actually fell about $1 billion in the second quarter, and the export/import imbalance declined slightly. Returning to my old teaching method, I’d give the economy a C- for the second quarter. Looking forward, the “fiscal cliff” and the employment situation are both potentially serious drags on the economy. The Fed gave the economy something less than a C-, and is throwing some more money into the system (QE3), looking to pick up the pace of job growth by virtually guaranteeing cheap money into 2015. Have you (or your kids or grandkids) refinanced or bought a house yet… mortgage rates haven’t been this low since serious record keeping began in 1950.

The lower mortgage rates are working. There has been an upturn in both building permits and new housing starts, and home builders are more upbeat than any time in the past six years. Existing home sales are much stronger. The Standard and Poor/Case-Schiller home price index had its biggest one month gain in a couple of years, as housing prices nationwide are stabilizing and recovering. New home sales slipped a bit in August (-.3%), but were 27.7% above August 2011 levels. The median price of $256,900 was 17% better than one year ago, and the average price of $295,300 was 14% better than a year ago. New inventory is now at its lowest level since the recession began. Simply put, both new and existing homes, while far from pre-recession highs, are now adding to the recovery… like the old Sam and Dave tune “Hold On, I’m coming”, housing is back.

With business spending easing, some writers look for consumers to carry a bigger part of the load. In August, disposable personal income adjusted for inflation fell by .3%, while personal spending rose .1%. Hence, personal savings as a percentage of disposable income fell to 3.7%. While a 3.7% savings rate isn’t terrible, it has declined for three consecutive months, and shows some of the stress on consumers, as savings starts to fund some consumption. So the answer remains the same: we need job growth to spread the spending around, and ongoing tax relief to keep disposable income rising.

Stock prices finally ran out of steam at the end of the quarter, with most indices backing down from 2012 highs made in early September. The blame this week is a combination of our tepid second quarter GDP growth and more rumblings from Europe. At 3:40 p.m., for the week and year:

Dow Industrials 13414 -1.2% +9.8%
NASDAQ 3445 -2.0% +19.6%
S&P 500 1438 -1.5% +14.3%

 Treasury bond prices rose and yields dropped as some investors headed away from stocks this week. Municipal buyers also chased issues, driving prices up.

  US Treasuries
Municipal Bonds
  9/28/12 9/21/12 9/28/12 9/21/12
2 Year .23% .26% .29% .29%
5 Year .62% .67% .62% .70%
10 Year 1.63% 1.76% 1.72% 1.78%