Reports: Consumer Cheer, Factory Humbug

Data released Dec. 22 indicate consumers are in a positive pre-Christmas mood, but the manufacturing sector is less merry

A report on personal income and spending in November revealed a robust fourth-quarter growth path for both real (adjusted for inflation) income and consumption that is good news for U.S. gross domestic product growth. And a closely followed report on consumer sentiment tracked similar releases at historically high levels in December. However, shortfalls in the durable goods report for November took some of the shine off the income data.

Here is Action Economics' rundown of the Dec. 22 releases:

Personal Income

November personal income increased 0.3% (vs. economists' median forecast of a 0.4% gain), while consumption rose 0.5% (median 0.5%). Back data for personal income were revised higher for the third quarter, leaving a stronger trajectory through November. Durable consumption rose 1.2%, nondurables increased 0.7%, and services rose 0.4%.

The personal consumption expenditure price index and the core index were both unchanged, which left the year-over-year figures at respective gains of 1.9% and 2.2%.

The nominal figures grew largely in line with expectations in recent months, but following upward third-quarter revisions that raised the trajectories overall. And price shortfalls translated to overshoots of the real figures. In particular, real consumption posted hefty 0.5% gains in both October and November, leaving a likely 4.5% surge for real consumption spending in the fourth quarter.

And better yet, because of the combination of rapid growth in gift cards and record bonus payments scheduled for the new year, we expect that late December and January sales will be robust as well. As it stands, we peg real consumption growth in the first quarter at 3.7%. The two-quarter combo of big sales gains will rapidly clear the shelves, hence fueling the speed of inventory adjustment in the fourth quarter.

The savings rate surge in September and October to a "high" of –0.7% in both months (from a recent –1.6% trough in July) is indeed proving to be temporary, as we expected, as consumers are now spending the lagged "real" income gains from falling gasoline prices. The savings rate fell to –1.0% in November, and we expect this measure to continue to trend down to –1.4% in January, when the gift card effect kicks in, while early bonus payments fail to be captured in the early personal income reports, even though they will fuel spending.

Durable Goods Orders

Durable goods orders rebounded 1.9% in November after an 8.2% decline in October, helped by a 7.5% uptick in computer orders and a 9.4% increase in transportation orders, both of which posted hefty declines in October. Excluding transportation, orders were down 1.1%. Nondefense capital goods orders excluding aircraft were down another 1.4%. Shipments rose a small 0.1%, while nondefense capital goods shipments excluding aircraft were up a solid 2.1%. Inventories were up 0.3%. That left the inventory-to-shipment ratio at 1.41, up from 1.40.

The durables bounce in November fell modestly short of our estimate, but not by enough to alter our 2.0% forecast for fourth-quarter GDP. The nondefense capital goods figures were right in line with our projected 2% real rate of contraction for purchases of equipment and software in the fourth-quarter GDP report, following 7.7% growth in the final third-quarter GDP report.

We still expect a price-depressed 0.1% business inventory gain in November alongside a revised 0.6% business sales gain. For factory goods in November, we expect a 1.5% orders gain, with a 0.5% shipments increase.

Michigan Sentiment

U.S. consumer sentiment improved to 91.7 in the final December print of the University of Michigan index, vs. the 90.2 preliminary reading. That was better than expected. The index was at 92.1 in November and 91.5 a year ago.

The current economic conditions index was 108.1 compared to 108.2 in the preliminary (106.0 in November). The economic outlook index rose to 81.2 from the 78.6 preliminary (83.2 in November). The median one-year-ahead inflation index dipped to 2.9% from the 3.0% preliminary pace (3.0% in November).

With the Michigan release, all the major confidence measures are dancing around historically high levels. We will continue to assume that the Conference Board's consumer confidence index will moderate slightly to a still strong 102 in December from 102.9 in November.

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