Vital Signs: Housing, Consumer and Business Spending

On deck: revised GDP, consumer sentiment, new and existing home sales, personal income and spending, and durable goods orders

After the fireworks from the Federal Reserve last week, the upcoming week would pale in comparison, even if it were not a holiday-shortened week with only a smattering of key economic reports. The Fed’s decision to cut its target rate to a range of zero to 0.25% and keep it there for a long time will reverberate in the markets for months to come. Investors now have a clear and resounding commitment from the Fed that it will do whatever it takes to restore proper credit market functioning and kick-start economic growth.

The Fed’s all-out assault on weak demand and tight credit will be lead by its purchases of “large quantities” of securities--mortgage-backed, asset-backed, and perhaps even longer-term Treasuries. Buying mortgage-related securities from Fannie Mae (FNM) and Freddie Mac (FRE) will further lower mortgage rates in an effort to lift home demand and halt the dramatic fall in house prices. Those purchases will also put a floor under the value of many mortgage-backed securities now weighing down bank balance sheets, which will lift the value of bank assets and help restart lending.

The Fed hopes buying other securities backed by credit card debt, auto loans, and small business loans will work the same magic. These purchases should also be effective in resuscitating the securitization process, which will open up the secondary market for primary loans, another key to greater lending activity.

As the economic reports in coming weeks will show, however, these actions will take time to show in actual business activity. For now, the economy is sliding into recession at an accelerating pace, with many economists now expecting fourth-quarter GDP to drop about 6%. Reports this week will cover three key areas: housing, consumer spending, and capital spending.

On Tuesday, look for data on November sales of both new and existing homes. Existing home demand continues to be supported by sales of distressed properties in foreclosure in a few boom-bust states. New home demand also continues to fall, and despite plunging housing starts, inventories remain high relative to sales.

On Wednesday, data on November personal income and spending will offer an idea of how much consumers are pulling back in the fourth quarter. November retail sales held up surprisingly well, most likely reflecting the windfall to the buying power of incomes from the plunge in gas prices. And finally, the durable goods report will be most important for what it says about business orders for capital equipment. Business outlays are also weakening considerably this quarter, and this report will indicate by how much.

Economic reports in the coming months are certain to remain downbeat, but the Fed's dramatic action on Dec. 16 offers the best hope yet that policymakers can stem the damage. The Fed’s latest moves are aimed at short-circuiting the adverse feedback loop between tighter credit conditions and a weakening economy. Economists know that breaking that corrosive interaction is the key to recovery.

Here’s the weekly economic calendar, from Action Economics:

Top Economic Reports
Reports Date Time For Median Estimate Last Period
GDP (Final) Tuesday, Dec. 23 8:30 a.m. Q III -0.5% -0.5%
GDP Price Index (Final) Tuesday, Dec. 23 8:30 a.m. Q III 4.2% 4.2%
Consumer Sentiment Index (Final) Tuesday, Dec. 23 9:55 a.m. December 57.3 59.1
New Home Sales (Millions) Tuesday, Dec. 23 10:00 a.m. November 0.425 0.430
Existing Home Sales (Millions) Tuesday, Dec. 23 10:00 a.m. November 4.900 4.980
Durable Goods Orders Wednesday, Dec. 24 8:30 a.m. November -1.7% -6.9%
Personal Income Wednesday, Dec. 24 8:30 a.m. November -0.2% 0.3%
Personal Consumption Expenditures Wednesday, Dec. 24 8:30 a.m. November -0.6% -1.0%
Other Economic Reports and Events
Reports/ Events Date Time For
EARNINGS: Walgreen (WAG) Monday, Dec. 22  
Richmond Fed Survey Tuesday, Dec. 23 10:00 a.m.
ICSC-UBS Store Sales Tuesday, Dec. 23 7:45 a.m. Dec. 14-20
Johnson Redbook Weekly Store Sales Tuesday, Dec. 23 8:55 a.m. Dec. 14-20
EARNINGS: Micron Technology (MU) Tuesday, Dec. 23  
Mortgage Applications Wednesday, Dec. 24 7:00 a.m. Dec. 14-20
Initial Unemployment Claims Wednesday, Dec. 24 8:30 a.m. Dec. 14-20
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