"No warning can save people determined to grow suddently rich" - Lord Overstone

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A Mixed Picture


There was a lot of economic data released this week that continued the string of strong economic data. On Monday, third quarter GDP was revised upward by 0.2% to 3.9%. Personal consumption was revised up to 5.1% from 4.6%. This was the largest increase in consumption since the fourth quarter 2001. Personal consumption was driven by a 17.2% increase in durable goods. Personal consumption accounted for over 3.5% of the 3.9% increase in GDP.

The increase in personal consumption during the third quarter appears to have held up during October. Personal income grew 0.6% in October, which was the fastest month-over-month increase since May. On a year-over-year basis personal income advanced 5.2%. Personal income has increased better than 4% for the past year. Of course, personal spending increased faster than income. Spending increased 0.7% from September, higher than the 0.4% economists expected.

The ISM manufacturing report showed that supply managers remained optimistic last month. The headline number increased one point to 57.8, 0.8 points higher than forecasted. New orders increased the most, gaining 3.2 points to 61.5, while prices fell 4.5 points to 74.0, which is still very high. Employment ticked back up, increasing 2.8 points to 57.6.

The results from the latest Business Roundtable survey showed that CEOs continue to be an optimistic bunch. Eighty-five percent expect sales will increase during the first half of 2005 with only two percent reported that they will decline. Moreover, 50% expect capital spending to increase versus only 7% that expect to spend less. Employment will continue to expand according to the survey. Forty percent of CEOs plan on hiring more workers, compared to 20% that plan to cut workers. We have discussed the soaring cost of medical care several times, and CEOs share this concern as well. This was the second year in a row that health care was reported as the greatest cost pressure. it was the most cited cause for rising cost pressure with 43% citing it. While it was still the most cited issue, the number of CEO claiming it was their greatest declined from 58% last year. Concern over rising energy and materials prices increased from last year. Nineteen percent of CEO cited energy (7% last year) and 11% listed materials (not listed last year) as their greatest pressure.

The Federal Reserve released the latest Beige Book on Wednesday. Most districts reported that economic expansion continued from mid-October to mid-November. While most districts reported increased retail sales, but sales were mixed in Boston and Dallas and "sluggish or lower" in Chicago, New York, Richmond and St. Louis. A few districts mentioned that sales of luxury items are stronger than lower-priced merchandise citing lower-income households are getting pinched by higher energy prices. Auto sales were weak throughout most districts. Manufacturing activity increased in nine districts with Cleveland, Richmond and San Francisco reporting that activity was unchanged or slowed from the previous report. Similar to the Business Roundtable survey, several districts reported increases in hiring and capital spending. Residential real estate was described as "robust...although some signs of cooling were noted by the Atlanta, Chicago, Cleveland, Dallas, Kansas City, Richmond and San Francisco Districts." Most districts reported that manufacturers were able to pass along price increases to customers, but retailers were "less successful."

There were a few indications that the economy may be weakening. On Monday, Wal-Mart announced that it was lowering its November sales forecasts because of "weaker" than expected over Thanksgiving weekend. Other signs that that holiday sprit was not controlled by the Grinch, MasterCard reported that the number of transactions increased 9.3% for the two days following Thanksgiving and Visa reported a 6.1% increase. Several analysts view Wal-Mart's recent weakness due to lower-income shoppers being squeezed by higher energy costs. Most retailers will report November sales Thursday morning. A recent Reality Check column from Market News International reported that several retailers noticed that activity was a little slower during the Thanksgiving weekend, but it was stronger during the beginning of the month. One noted that after the election, "retail sales really kicked into fifth gear."

U.S. vehicle sales in November came in at a 16.4 million unit rate, just below estimates of 16.5 million units. This was the lowest selling rate since it reached 15.4 million in June and tied the second lowest rate this year, January was also 16.4 million. Ford and GM reported that sales fell from the year ago period by 7.3% and 13% respectively. These results, which were lower than expected, forced the two domestic automakers to announce production cuts. Ford will slash first quarter production by 7.7% and GM will cut production by 7.1% . Analysts are starting to think it will be cheaper for the automakers to production rather than maintaining the high level of incentives. Average incentives declined in November mostly due to the introduction of new models that typically carry lower incentives.

Consumer Confidence unexpectedly fell in November according to the Conference Board. The 2.3 point drop to 90.5 was 5.5 points lower than economists expected. The decline was due to consumers view in expectations, confidence in the current situation actually rose. Interestingly, the weakness in expectations was mostly in the number of consumers that plan to make a major purchase within the next six months. The percent of consumers that plan on buying a car within the next six months fell dramatically to 4.2%. This was down from 7.6% last month and is the lowest the Conference Board has ever recorded since the survey started in 1964. In fact, all three measures of anticipated purchasing fell. Perhaps most worrisome was the decline in the number that plan on buying a house. Only 2.4% plan on buying a house, down from 3.6% last month and ties an over twenty-year low that was also reached in June 1994.

While most of the economic data shows that the economy continues to expand, cracks are starting to appear. While it is likely that consumers will be able to continue the high pace of spending, higher interest rates will start to have an effect. Its possible that the recent increase in interest rates was a factor in the decline in the plans to buy component of the Conference Board's Consumer Confidence survey.

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