A December to Remember
By Michael Englund
The U.S. economy, after a brief "soft patch" in the middle of the year, finished 2004 with a bang. Recently issued reports for December have revealed robust growth in sales, income, output, and construction. In addition, both equity and debt prices advanced alongside rising consumer confidence and factory sentiment. The blockbuster month bodes well for the fourth quarter overall, and it points the way to strength in 2005's first quarter.
Because of the usual market obsession with both the U.S. employment report and the annual holiday complaints of retailers about demand shortages (or price cutting), the December data's strength appeared to almost sneak up on the financial markets. The employment report -- which mildly undershot Street estimates -- may prove the only notably unspectacular major data release for December (see BW Online, 1/7/05, "The Jobs Report: What Weakness?").
Meanwhile, holiday sales were unquestionably robust despite "discounting" complaints from retailers that extended through yearend, and the usual gripes from businesses at the wrong end of the tug of war between retail winners and losers.
The sales data probably provided the most significant signal of strength for December. The 12% surge in auto sales reflected an emerging yearend sales pattern in the vehicle data, though the magnitude of the increase reversed all the weakness in the prior two months and was much bigger than expected.
The big jump implies a sizable retail sales gain on the month, and that should hold as well for sales excluding autos in December, despite the negative effect of falling gasoline prices on service-station receipts. We estimate a hefty 1.5% retail sales gain for December, with a 0.7% gain excluding autos.
If you use the combined November-December retail sales data as your proxy for holiday sales, the U.S. saw a 7.7% year-over-year gain for the season overall, and a stunning 8.8% excluding autos.
The big increases in both the University of Michigan sentiment and consumer confidence measures on the month -- to respective 6- and 11-month highs -- probably contributed to the hefty December sales gains. Soaring stock prices, alongside rising bond prices, falling gasoline prices, and likely ongoing big gains in housing prices probably all contributed to the broad mix of positive factors fueling household optimism as well as sales.
One factor directly sparking the December spending surge: a likely commensurate surge in personal income, thanks to the enormous Microsoft (MSFT ) dividend that will likely boost the December income gain from an otherwise respectable 0.5% to the 2% area. Most of this dividend likely landed in investment portfolios and was reinvested. But if even a small portion of this distribution prompted a sales splurge, the impact could have been sizable. Certainly the household cash surge couldn't have hurt.
The good news in sales and income was also accompanied by strength in both the already available output figures and in our output forecasts for the remaining December reports. The monthly producer sentiment surveys -- such as the Philly Fed, Empire State, Chicago PMI, ISM Manufacturing, and ISM Non-Manufacturing reports -- all revealed robust levels on the month, and big gains in all but the Chicago figures, which are in the process of correcting from unsustainable strength in the prior two months.
Production of vehicles likely surged by 4.8% in December, while Boeing's (BA ) shipments ticked up to 24 planes -- the highest reading since it moved 25 planes in August. We believe the December employment figures support a solid 0.6% industrial production increase in the month that will raise capacity utilization to 79.1%.
Finally, the housing statistics for December are poised for a sizable bounce following the surprising weakness found in some sector data for November. Our assumption is that some of the November data were sharply depressed by a combination of very wet weather for two consecutive months and the large swing in most housing-related seasonal factors in November.
The weather in December reflected a return to normal mortgage activity, and construction employment posted a solid 13,000 gain. We expect big surges in housing starts, new home sales, and construction spending in December, alongside continued strength in existing home sales, completions, and median home prices.
In short, not only is the strength surprising in many of December's reports but it's surprisingly broad-based as well. Growth accelerated on top of an already-strong quarter for sales, income, output, and construction. It's clear, in our view at Action Economics, that the potential moves for all the U.S. economic data for both 2004's fourth quarter and 2005's first quarter are to the upside.
Englund is chief economist for Action Economics