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Market Sentiment At Its Lowest In 10 Months

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Stocks sold off last week…

The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

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Boomtime Again?


There was a lot of economic data already released during this shortened trading week, with almost all of it indicating the economy continues to expand at a fast pace. The biggest surprise was the revision to third quarter GDP. Third quarter GDP was revised upward by 100 basis points to 8.2%, well ahead of the 7.6% economists forecasted. This was the fastest growth since 1984. Most of the revision was the result of a lower than expected inventory drawdown, $14.1 billion v. $35.8 billion. While this increased third quarter GDP, it will likely reduce fourth quarter GDP growth as the anticipated inventory build will not likely be as high as first forecasted. The biggest positive was the large revision in fixed investment spending. Business increased their spending on capital equipment by 16.7% instead of the 14.0% increase previously reported. Unfortunately, personal consumption was revised down by 0.2% to a still healthy 6.2%. Personal consumption was bolstered by tax cuts and mortgage refinance during the third quarter. These two effects will be diminished in the fourth quarter, but the tax cuts will provide a boost next year as tax rebates will be higher this year due to the retroactive cut in marginal tax rates. In aggregate taxpayers are expected to get $227 billion back from Uncle Sam. This is 38% more than last year and works out to be an average of $2,500 per family.

Durable goods orders grew 3.3% in October, the fastest pace in over a year and confirms that the manufacturing sector has rebounded. This was on top of the 2.1 % growth last month. This was the first time that the monthly growth as been above 2% for two consecutive months since June-July of 1997. In fact, the year-over-year change was 8.2%, which is the largest increase since June 2000. Furthermore, this growth is coming from businesses starting to spend. Non-defense capital goods excluding aircraft, a proxy for business capital expenditure, has increased 13% from year ago levels. The future looks brighter as well as the book-to-bill ratio jumped to over one for the first time since last October.

Personal income increased 0.4% in October from the previous month while personal consumption was unchanged. While spending was flat overall, purchases of durable goods fell 2.3% and nondurable goods dropped 0.1%. These drops were countered by a 0.5% increase in spending on services. Over the past year personal spending has increased 5.4%

Consumers are getting more confident about the economy. Three separate surveys of consumer confidence all The University of Michigan Consumer Sentiment Survey came in at 93.7%, just 0.1% below estimates. This was the highest level since May 2002. Consumer expectations jump 5.1 points. Additionally, the ABC News survey jumped to the highest level since September 2002. Also noteworthy was that more respondents believe the economy is getting stronger (32%) than getting worse (28%). This is the first time in May 2002 that more people thought the economy was getting better. Consumer confidence according to the Conference Board jumped 10 points to 91.7 in November. This was the highest level in fourteen months according the Conference Board.

The increase in consumer confidence comes at a very important time for retailers. Retailers are hoping that the improved confidence turns into higher holiday spending. Most economists expect holiday sales to be about 5% better than last year, which would mark the best holiday season in four years. The Conference Board released the results of a survey that casts doubt into these predictions. The survey found that 34% indicated that they would spend less this year, much higher than the 21% that said they would spend more last year. Only 15% plan to spend more this year, similar to last year's 16%. The result is that the average household will spend $455 this year, down almost 6% from the $483 last year. This will be an interesting holiday season. Analysts are expecting a good season since the economy has rebounded, and investors have bid up the S&P 500 Retail Index almost 44% this year. There have been signs that consumers are starting to slow spending; including the recent personal spending report which showed spending in October was flat with September. Remember, spending in September declined 0.3%.

New home sales fell 3.5% in October, but remain at a robust level as sales are 10% above last October. The report also showed that the median home prices increased 9% from last year. It's interesting that the average home price jumped 17%, much more than the average home price. This is a sign the higher priced home are selling at a faster pace than lower priced homes. Along the same line, the LA Times published a story that said sales of million-home in California during the third quarter surged 58% from last year to a record 5,857.

The Chicago PMI reached the highest level since February 1995. The only area of weakness was in inventories, and employment. New orders jumped 14.1 points to 73.3, the highest since May 1994. Order backlogs jumped 12.3 points to 59.6, the highest in four years. The surge in commodity prices is starting to work its way into the manufacturing sector. The prices paid component rose 5.8 points to 67.3. This follows October's 9.7 point increase and stands at highest level since July 2000. Additionally, manufacturers indicated that delivery times for supplies are lengthening. The surge in both new orders and backlog indicate that the manufacturing sector will continue to grow in the near future.

There are signs that the economic growth is starting to cause new imbalances. We have discussed that the low interest rates are fueling the housing boom and consumer spending. Now that the economy is starting to expand rapidly, the normal stresses that are caused are developing. We have already seen commodity prices rise, now manufacturers are reporting increased backlogs along with longer delivery times. Transportation firms have started increasing prices in response to the higher demand. The most noteworthy example is the Baltic Dry Index. This measure of the shipping costs for commodity type goods has doubled since September. In fact, the index is double what the previous high was in 1995. These inflationary pressures are seemingly ignored it the CPI or are overwhelmed by "owners equivalent rent" but are real and are causing prices it increase on the margin. Eventually these costs should not only hit consumers wallets, but government calculations as well.

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