US Perspectives: Data Syncing Up on the Upside

Consumer, manufacturing, and business spending data remained surprisingly robust last week.

Robert Johnson, CFA 29.12.2010
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Both economic and corporate news remained surprisingly robust last week. Personal consumption data, the key driver of GDP growth, was powerful based on positive retail sales statistics, which I have been reporting on for some time.


Strong weekly data from the International Council of Shopping Centers bolstered my confidence in a strong retailing and consumption environment for December and beyond. Year-over-year growth jumped to well over 4% on a same-store basis for the last full week of the holiday season.


While incomes didn't quite match the stellar consumption numbers, I am optimistic that income data will accelerate in the months ahead. As we move into a new year, corporate managers will be tapping expanded budgets as they strive for more growth to justify current stock prices.


Manufacturing data, in the form of the durable goods order report, also managed a nice rebound from disappointing October results. Even the real estate sector scored a surprising trifecta with both new and existing home sales up over 5%, while official government data showed home prices increasing again. While the level of all these numbers is still shockingly low, they shouldn't be a further drag on the economy as they have been for some time.


Business spending, especially on software, continues move ahead at a brisk pace as Adobe reported surprisingly positive results following up on strong news out of Accenture and Oracle during the previous week.


The only real fly in the ointment last week was that oil closed above $90 per barrel, potentially crowding out other consumer spending in the months ahead.


November Consumer Spending Jumps 0.3%, 3.6% Annualized

The Personal Spending and Income report showed a sharp acceleration in consumer spending and a smaller increase in incomes as the savings rate decreased to 5.3% from 5.4%. Adjusted for inflation, spending grew 0.3% in November while incomes grew at a 0.2% rate. Taking a longer view, over the last 12 months consumption was up by 2.8% and incomes were up about 2.4%. That gap is not large enough to warrant much worry, especially since I believe November employment and incomes were understated (based on inconsistent data on retail hiring in November). It is also very typical for consumption to grow faster than incomes at this stage of a recovery as overly cautious consumers come out of their bunker mentality and spend some of their savings.


Also, last week's release of the financial obligations ratio by the Federal Reserve indicated that consumers had to lay out less of their cash for debt servicing and other fixed payments such as rent, freeing more cash for consumption without necessarily digging into savings. That ratio of financial obligations to income is now below the average of the last 30 years and is back to levels last seen in the mid-1990s.



Dividend and Interest Income Grows, Unemployment Benefits Slow

For 2010, the lion's share of the growth in consumer income was from wages and profits from small businesses; meanwhile, decreasing dividend and income receipts, falling unemployment benefits, and higher tax collections have detracted from income growth. The good news is that plunging interest and dividend income statistics finally reversed themselves in November and provided an important fillip to growth this month.. Based on the large number of dividend increase announcements I've seen lately, I believe the dividend number may still be a little understated.


Meanwhile, wages and small business income continued their upward trajectory in November. However, falling unemployment payments are likely to weigh on the income data for some time as more beneficiaries hit their 99-week limit. There were also substantial revisions to prior months' income and spending data, which showed slower late summer growth and dramatically accelerating growth in October. Income growth did drop back a bit in November, though I suspect consumption will grow at close to November's rate in December, bringing full fourth-quarter consumption growth to close to 4% on an annualized basis.


Better Consumer Income Growth Lies Ahead

I anticipate that income growth will accelerate in December and that incomes for the entire fourth quarter are likely to accelerate to a 3% annualized inflation-adjusted growth rate, still just a little shy of what I need to get to my 3.5%-4.0% GDP growth rate in 2011 and less than the 4% consumption growth I expect in the December quarter. I am hopeful that new hiring budgets, the lifting of salary freezes, and the reinstatement of 401(k) matches could provide a meaningful boost to incomes and that small business profits will continue to accelerate.


Dividend and interest income should cease to be a major anchor to income in 2011 because of increased savings, higher dividend payouts, and modestly higher interest rates. Shrinking unemployment benefits and higher tax rates will offset some of the more positive income news in 2011. My biggest worry is that higher inflation, primarily in the form of higher energy and food prices in early 2011, could offset some of the growth in non-inflation-adjusted income data. Overall, I am optimistic for now, but I'll be keeping a very close eye on inflation as we move into the new year.


Indeed, Durable Goods Orders Look Durable

News on the manufacturing front brightened in November as durable goods orders, excluding aircraft and other transportation equipment, grew an impressive 2.4%. Transportation equipment orders were down 11.9%, pulling the headline new order figure down to a decline of 1.3%. Orders for aircraft are always highly volatile and not very indicative of short-term economic activity. In fact, Boeing announced yet another increase in the production rate of 777 aircraft last week.


The orders data also provide an inside look into business spending. Nondefense capital goods orders, excluding aircraft, rose 2.6% in November with shipments rising as well. These data points looked less than robust in the previous month, October, triggering fears that businesses were cutting back again and that this important source of GDP growth would be in for a big stumble. This month's capital goods data suggest that, while perhaps not a big addition to consumer-driven GDP growth, business spending certainly won't be detrimental to robust December-quarter expansion either. Regional purchasing managers' data suggest that December's numbers are likely to be better than November's.


Software and Related Services on a Tear

Elsewhere in the world of business-related spending, Adobe reported strong sales and earnings growth in the most recent quarter, on the heels of good news from Oracle previously. On the business services side, Accenture, a massive consulting and business services firm, also reported strong bookings and billings in their most recent quarter. The good news about improvement at service-related companies is that improved orders lead more quickly to increased employment than in most other sectors of the economy.


Construction Spending--the Bottom Is Near

The Architectural Billing Index, a great leading indicator for commercial construction products, jumped to 52 in December, its best reading since 2007. Readings over 50 mean that more firms are seeing growth in billings than those seeing shrinkage. Because plans need to be drawn up well before construction can begin, this index tends to lead actual construction statistics by 9-12 months.


This is the second time in the last three months that the index has been in growth mode. If the typical pattern holds, I would suspect that nonresidential construction will show year-over-year growth sometime late in the summer or early in the fall of 2011. Given that construction spending has continued to decline during the recovery, a return to even modest growth could have a meaningful effect on GDP growth in 2011.


Even the Housing Market Looks Better, But Still Highly Depressed

While I don't put a lot of stock in holiday-laden, slow housing sales months, I was glad to see existing home sales for November improve 5.6% to 4.66 million units as presaged by a highly positive pending home sales report from earlier in the month. Just as importantly, inventories fell (as they often do this time of year) to 3.71 million units from 3.86 million units. A combination of rising sales and falling inventories drove the months of supply down to 9.5 months. Perhaps rising mortgage rates finally got potential buyers off the fence.


In a bit of negative news, the National Association of Realtors mentioned earlier this month that tight lending standards and stingy appraisals were still holding back the market. The NAR indicated that as many as 10% of all deals were still falling apart before closing because of homes appraising for less than the agreed-upon price. While a lot of news services are carping about a 20% decline from housing credit inflated data from a year ago, I think it's more interesting to note that sales are now up over 20% from their bottom in July 2010, just after the credit expired, and have been up in three of the last four months.


New home sales, a much smaller category than existing home sales, also managed a 5.5% increase for November but still remain at a highly depressed level. With a little growth in December, new home construction shouldn't be a drag on fourth-quarter results.


Slim Pickings on the Economic Front This Week

The data flow takes a holiday this week; there are no major data releases scheduled for the week of Dec. 27. On the minor release front, we get the Case Shiller Home Price Index on Tuesday, which is likely to show a very small, manageable decline in home prices based on improving data from the federal government data released last week. While prices aren't racing ahead, they definitely stabilized in 2010, and I don't expect much movement either way in the first half of 2011. The Chicago purchasing managers report, due on Friday, should show some improvement over November based on what I hear from individual companies and other regional reports from earlier in the month. The Chicago report is usually the best of the regional reports at predicting the national report, which is due the following Monday, Jan. 3, 2011.


This is an edited version. The article originated from Robert Johnson’s column at

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Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis with Morningstar.

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