A Solid Yearend for the U.S. Economy
All of the Dec. 28 U.S. reports have contributed positively to the economic outlook as we close out 2006, and have delivered a few hard body blows to the hard-landing camp. The bond market will remain fixated on downside risk as we enter the new year, but today's reports put topspin on the outlooks for factories, housing, the consumer, and the labor market.
For the Chicago purchasing managers index (PMI), the index rebounded in December as we expected, to a 52.4 reading. This translates to an even higher ISM-adjusted figure of 52.7, compared to the solid 58.1 ISM-adjusted level implied by the robust November Empire State report, but more lean 51.8 ISM-adjusted Philly Fed reading. We will keep our ISM index forecast at 50.0, and our ISM Non-Manufacturing index forecast at 56.
The mix leaves an average December ISM-adjusted reading for these major surveys at the same 53 figure of November, following five consecutive months with an average within one tick of 55. This is right in line with the long-expected downsizing in the bloated readings from these measures over the last three years to more sustainable oscillations around the 50-55 range. The commodity price correction in September-October indeed showed that factories finally "caught up" in their efforts to rebuild inventories, and are now digesting a downsizing in the pace of inventory accumulation.
The existing home sales rise in November, up 0.6% to a 6.280 million pace from 6.240 million in October, joins a collection of other recent encouraging housing data to signal a potential bottom in the U.S. real estate market correction that should eventually translate to a bottom for residential construction as well. Other reports for the month thus far have revealed a 6.7% bounce in housing starts, a 3.4% jump in new home sales, and a 6.5% gain in the MBA purchase index in November that has now been followed by another 6% advance in December. We will continue to assume a 0.4% drop in construction spending in November.
The median price data, which are not seasonally adjusted, are so far solid for the typically lean fourth-quarter period, though they didn't reveal the surprising upside pops seen in the price figures from the last two new home sales reports. The $218,000 figure for November should hold through January, before starting a seasonal bounce in February and March. These figures should be watched closely for evidence that the real estate market is indeed stabilizing, which would signal an end to the falling residential construction figures by around the middle of next year.
The U.S. December consumer confidence surge, to 109.0 from a revised 105.3 in November, bucked the trend of corrections in most other confidence measures from lofty readings since September. The figures appear to be tracking the same confidence strain as seen with the weekly ABC/Washington Post figures, which have risen to the zero area in late November and early December for the first time since the September 11 terrorist attacks.
Room to Grow
Today's numbers are at odds with minor corrections in other measures. The Michigan sentiment index moderated slightly in December, to 91.7 from 92.1 in November, while the RBC-IPSOS index fell to 86.9 from the particularly robust 92.4 November reading, and the IBD/TIPP index corrected to 53.5 from 55.7.
The U.S. initial jobless claims data have been lean thus far in December, but continuing claims are climbing through the month, and we're trimming our December nonfarm payroll estimate to 115,000, with an uptick now expected in the unemployment rate to 4.6%.
Given a pattern of upward revisions that has recently re-emerged in payrolls, our estimate leaves "room to grow" toward the 149,000 average monthly gain in 2006. Note that the December BLS survey week reading of 316,000, and the December average thus far of 314,000, are both lean relative to recent months, and these numbers still signal a tight labor market. Yet continuing claims should be monitored as we enter the new year.
In total, today's upside surprises can be seen as normal oscillations around a soft-landing trajectory for the economy. The reports are notably at odds with a hard-landing scenario, which requires much lower trajectories for factory output, real estate activity, consumer confidence, and labor market growth than today's data imply.