A Downbeat End to November's Data

The November Chicago purchasing managers' index fell and the weekly initial jobless claims surged. But personal income held a few surprises

For U.S. data watchers, November ended mostly downbeat. The markets received discouraging signals on Nov. 30 from a survey of manufacturing conditions in the Midwest in November and a weekly indicator of first-time filings for unemployment benefits. These numbers trumped more encouraging data on personal income and spending in October.

Here is Action Economics' roundup of the Nov. 30 reports:

Chicago purchasing managers' index: The November Chicago PMI fell to 49.9 (median 54.5) from October's surprisingly weak reading of 53.5. The decline on the month left the index at the lowest level since April, 2003, when sentiment was dented by the start of the Iraq War. Weakness was led by a big drop in both shipments and employment, although every component moderated in November. Prices paid continued to drop—falling to 60.2 from 62.5.

The Chicago headline freefall to 49.9 translates to a similarly weak 51.3 reading if we use the same weighting scheme used by the ISM index from the Institute for Supply Management. This compares with the solid 59.1 ISM-adjusted level implied by the robust November Empire State report, but weak 51.0 ISM-adjusted Philly Fed reading. We knocked down our ISM index forecast for November to 51.5, and lowered our ISM Non-Manufacturing index forecast to 56.

The mix will leave an average ISM-adjusted reading for these major reports of 53.6 in November, following five consecutive months with an average within one point of 55. We continue to assume that these figures will drop back toward 53 on a sustained basis by the start of the new year. But the adjustment may be in place already, and the market will brace for downside risk from these lower levels.

Initial jobless claims: Initial claims for the week ended Nov. 25 jumped 34,000 to 357,000 (economists' median forecast was for 314,000). Most of the jump is likely due to a seasonal adjustment problem around the Thanksgiving holiday. If so, most of the gain should be reversed in the following week's report. In addition, continuing claims jumped 45,000 to 2,480,000 for the week ended Nov. 18, which was the week prior to the Thanksgiving holiday.

The November month-average for initial claims is now 327,000, compared with the averages of 311,000 in October, 314,000 in September, 317,000 in August, and 313,000 in July.

The U.S. claims surge in the most recent week leaves lofty claims readings in three of the last five weeks, and in the November BLS survey week in particular. The pattern is troublesome and raises the stakes for upcoming reports, even though the last two readings have to be discounted given typical holiday distortions to the data starting in late November and extending through the second week of January.

For now, our nonfarm payroll forecast for the November employment report has been knocked down to 120,000 from 135,000, and this estimate will remain subject to the initial jobless claims report for the week ending Dec. 2, even though that figure will also be subject to seasonal distortion.

A sharp downswing in the next week will make it easier to write off the steep gains in the last two weeks. Conversely, if claims stay high and the ensuing Friday payroll report is lean, labor market weakness will be reintroduced to the market dialogue on the Federal Reserve's interest-rate policy.

Personal income and spending: October personal income rose 0.4% (median 0.5%), while consumption increased 0.2% (median 0.1%). Back data for personal income were revised lower in the second quarter, leaving a lower path through October. Durable consumption rose 0.2%, nondurables dropped 0.6%, and services increased 0.6%.

The PCE price index, an inflation gauge closely watched by the Fed, fell 0.2%, and the core index (which excludes food and energy) rose 0.2%, which left the year-over-year figures at respective gains of 1.5% (the lowest reading since August, 2002) and 2.4%. The mix left real consumption (adjusted for inflation) rising a solid 0.4%.

The personal income report revealed upside surprises in both the nominal consumption and chain-price trajectories into October, and solid real growth that reinforces our forecast of a 3.9% real consumption growth rate in the fourth quarter.

Though the savings rate rose to -0.6% in October from its all-time low of -1.7% in July, this now looks more like a temporary pop driven by the sheer speed of declines in gasoline prices that have reduced nominal spending measures, and not a broad turn in this 14-year downtrend that economists keep assuming is at its end.

The 0.4% gain in real consumption in October, with the solid 0.7% surge for "real" nondurable goods on the month, suggest that the awaited substitute spending of the cash freed up from reduced gasoline bills is now occurring—and we expect this pattern to extend through January. Yet our 3.9% real fourth-quarter consumption forecast only requires modest nominal retail sales gains of 0.4% overall and 0.1% ex-auto.

If we get stronger November readings from a faster unwinding of the savings rate pop, the fourth-quarter consumption forecast will have to be pushed up to the 4% to 5% range.

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