Vital Signs: Higher Inflation Could Crimp Spending

On tap: October figures on personal income and spending, home sales, durable goods orders, and construction spending, plus November consumer confidence.

Economic growth and inflation are headed in opposite directions, and that's causing high anxiety for consumers and businesses. On one side, there are nascent signs that the housing recession and the credit market turmoil originating from bad subprime mortgages are crimping activity in the broader economy. Meanwhile, oil is above $95 per barrel, a gallon of gasoline costs 38% more than it did a year ago, and food prices posted the biggest yearly gain since 1991 with a 4.4% increase in October.

Upcoming figures on economic activity may reveal signs of the slowdown widely anticipated by economists. The October durable goods data is forecast to show a modest gain after a big drop in September, but where orders rise matters too. Specifically, economists will be watching the category called non-defense capital goods orders excluding aircraft as it best represents business investment.

October consumer spending figures are also forecast to rise a respectable 0.3%. However, some of that gain will come from higher gasoline prices. Inflation adjusted spending is a really important measure right now because it factors out the increased price of gas and other goods to better reflect the amount, not value, of goods and services purchased.

So far, real consumer spending has held up well, although the last two times gasoline rose above $3 per gallon purchases slowed. The response by consumers could be more significant this time given all the other issues people confront. Indeed, the buildup of all these problems is likely to manifest itself into a further decline in consumer confidence.

Higher energy, food, and other items are certainly near the top of consumers' list of worries. The Fed's preferred inflation measures, out on Nov. 30, will increase in October after rising 2.4% from a year ago in September. A bigger jump in November looks likely. That will put stress on consumer finances and spending, especially if wages growth slows along with hiring. Outside of food and energy the yearly pace should look more subdued. However, the Fed doesn't see core inflation slowing much further. And the ongoing drop in the dollar could lead to bigger price increases for a whole range of imported items.

Here's the weekly economic calendar, from Action Economics.

Economic Reports
Report Date Time For Median Estimate Last Period
Consumer Confidence Tuesday, Nov. 27 10:00 a.m. November 92.0 95.6
Durable Goods Orders Wednesday, Nov. 28 8:30 a.m. October 0.4% -1.7%
Existing Home Sales (million, annual rate) Wednesday, Nov. 28 10:00 a.m. October 5.00 5.04
Gross Domestic Product (preliminary) Thursday, Nov. 29 8:30 a.m. Q3 4.8% 3.9%
New Home Sales (million, annual rate) Thursday, Nov. 29 10:00 a.m. October 0.750 0.770
Personal Income Friday, Nov. 30 8:30 a.m. October 0.4% 0.4%
Personal Consumption Expenditures Friday, Nov. 30 8:30 a.m. October 0.3% 0.3%
Chicago PMI Friday, Nov. 30 9:45 a.m. November 50.5 49.7
Construction Spending Friday, Nov. 30 10:00 a.m. October -0.2% 0.3%


Tuesday, Nov. 27, 12:20 p.m. EST - Federal Reserve Bank of Philadelphia President Charles Plosser speaks about the impact of current financial market turmoil on the Fed's responsibilities regarding monetary policy and financial stability at the 29th Annual Economic Seminar hosted by the University of Rochester's Simon Graduate School of Business in Rochester.

1:30 p.m. EST - Federal Reserve Bank of Chicago President Charles Evans makes his first public appearance as president of the Chicago Fed when he speaks about the economy at the Futures Industry Association's Futures and Options Expo in Chicago.

S&P/CASE SHILLER HOME PRICE INDICES - Tuesday, Nov. 27, 7:45 a.m. EST

The S&P/Case Shiller Home Price Indices measures changes in home prices on a monthly basis in 20 major metropolitan areas. Price changes are tracked by using repeat sales data. When a house is resold, the latest sales price is paired up to the amount from the prior purchase.

In September, the monthly home price index for the entire group of 20 cities fell for a thirteenth straight period with a 0.7% dip. The longer running composite index of ten cities showed a 0.8% monthly decline, the biggest drop since early 1991. On a monthly basis, the cities posting the biggest drops were Miami, Tampa, Las Vegas, and San Diego.

On a yearly basis, the 20-city composite index was down 4.4% in August, from 3.9% in July. Even in cities where prices are still rising, such as Seattle, Charlotte and Portland, the pace has slowed considerably in recent months. Many private economists believe prices on a national basis have further to fall and could keep declining through much, if not all, of next year as well.

ICSC-UBS STORE SALES - Tuesday, Nov. 27, 7:45 a.m. EST

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ended Nov. 24. Sales rebounded 0.8%, after a 0.5% fall in the prior period, and a 1% gain in the week ended Nov. 3. On a yearly basis, sales slowed to a pace of 2.2%, from 2.7% in the week ended Nov. 10.

JOHNSON REDBOOK INDEX - Tuesday, Nov. 27, 8:55 a.m. EST

This weekly measure of retail activity will report on sales for the third fiscal week of November, ending Nov. 24. In the first two weeks, sales were up 0.3% compared to the same period in October. Sales for the full month of October were off 0.4%.

CONSUMER CONFIDENCE INDEX - Tuesday, Nov. 27, 10 a.m. EST

The Conference Board's November index of consumer confidence probably dropped off further as consumers face higher energy costs, falling equity prices, a weaker labor market and growing concern over the health of the economy.

The October index fell to 95.6, from 99.5 in September, and 105.6 in August. The October reading was the lowest since the Hurrican Katrina period in the summer of 2005.

The erosion in confidence is across the board as respondents feel less upbeat about current and future conditions. They also feel less positive about business conditions, the labor market, and their personal income going forward. If consumers are truly feeling less secure about the job market and their financial situation, it could negatively impact the crucial holiday season. Indeed, several retailers, such as J.C. Penney and Kohl's, have already lowered their forecasts for the quarter while the National Retail Federation is forecasting holiday sales this year will post the smallest gain since 2002.

RICHMOND FED SURVEY - Tuesday, Nov. 27, 10 a.m. EST

The Richmond Federal Reserve Bank issues its November survey of manufacturing activity. In October, the region's manufacturers turned noticeably downbeat as the seasonally adjusted composite index fell to a five-month low of -5 from a 17-month high of 14 in September. There were dramatic drops in many of the other indicators of current activity including a turn in the shipments and new orders indexes from positive to negative in October. Meanwhile, respondents reported a faster decline in their order backlogs and no change in payrolls after two straight monthly gains in August and September.

Paradoxically, manufacturers expressed more optimism for the coming six months. The shipments and new orders indexes posted big jumps, putting each index at its highest level since January. Both hiring and capital spending plans also perked up as well. Given the more cautious view that economists and the financial markets have adopted since the last report, it is likely that expectations will moderate somewhat.


Wednesday, Nov. 28, 1:30 p.m. EST- Federal Reserve Bank of Dallas President Richard Fisher speaks about the U.S. economy at a community forum hosted by Dallas Fed in Amarillo, Texas.

MORTGAGE APPLICATIONS - Wednesday, Nov. 28, 7 a.m. EST

The Mortgage Bankers Association releases its mortgage Weekly Mortgage Applications Survey of home buying and refinancing application activity for the week ending Nov. 16. Application activity appeared to perk up on lower interest rates. The purchase index hit a two-month high of 432.6, from 412.7 in the week ended Nov. 2. Meanwhile, the refi index reached a two-year high of 2315.7, from 2176.1 in the period ended Nov. 2.

The four-week moving average for the refi index climbed to 2200 in the week ended Nov. 9, from 2116.3 during the prior period. The moving average for the purchase index rose to 418.5, from 417.6.

The average interest rate for a 30-year fixed-rate mortgage is back down to levels last seen in early May. For the week of Nov. 9, the rate was 6.19%.

DURABLE GOODS ORDERS - Wednesday, Nov. 28, 8:30 a.m. EST

Right now, durable goods orders are expected to show a modest improvement in October after another sizeable drop in September. However, a spreading case of economic jitters could put more investment plans on hold and worsen what's already lining up to be a very weak fourth quarter for economic growth.

Even though much of the recent weakness in September was centered in the transportation sector, conditions elsewhere are also soft. Orders excluding transportation equipment rose 0.4% on a monthly basis in September, but were still off 1.6% from a year ago. Orders for computers and electronic products as well as for electrical equipment and appliances both shrank in September.

The housing recession is certainly to blame for some of the slowdown in activity, but there are also signs that businesses across a broad spectrum of the economy are turning more cautious. Capital goods orders minus defense equipment and civilian aircraft were up 0.6% in September, but off 3.1% from a year ago. What's more, factory output is down over the past three months while the increase in business equipment output over the same period has cooled off considerably.

EXISTING HOME SALES - Wednesday, Nov. 28, 10 a.m. EST

October existing home sales probably fell further. In September, the yearly pace of sales slowed to 5.04 million, from 5.48 million in August, and 5.75 in July. Compared to a year ago, overall sales were off 19.1%.

The weakness was centered in single-family homes, where sales are off 19.8% from a year ago, the biggest such decline since 1991. In addition, the number of homes up for sale keeps rising, although the recent gains have been concentrated in the condo market. Among single-family homes, the inventory of unsold homes fell for a second straight month in September. Nonetheless, supplies are still very elevated relative to sales, which should apply more downward pressure on prices.

BEIGE BOOK - Wednesday, Nov. 28, 28 p.m. EST

The Federal Reserve will release its compilation of regional economic activity, based on survey responses from each of its 12 districts. The Beige Book will come ahead of the monetary policy meeting on Dec. 11. The last report, released in mid-October showed businesses in some parts of the country were already starting to see softer conditions.

On Nov. 20, the Fed released its first quarterly economic forecast in the minutes. Economic projections by the Board of Governors and the presidents of the Federal Reserve Banks showed a more downbeat outlook for economic growth and expectations of a higher jobless rate in 2008 relative to the June projections.

At the same time, there was little change in the outlook for inflation outside of food and energy, and the Fed still seems focused on the potential for lower rates to stoke price pressures down the road. In terms of monetary policy, the new forecast probably does little to increase the odds of a rate cut at the Dec. 11 monetary policy meeting.


Thursday, Nov. 29, 7 p.m. EST - Federal Reserve Board Chairman Ben Bernanke will receive and award and speak at the Charlotte Chamber of Commerce's annual meeting in Charlotte, N.C.

JOBLESS CLAIMS - Thursday, Nov. 29, 8:30 a.m. EST

Jobless claims drifted down to 330,000 for the week ended Nov. 17. In the week ended Nov. 10, initial claims slipped to 341,000, after a reading of 319,000 the week of Nov. 3.

The four-week moving average held fairly steady at 329,750 for the week ended Nov. 17. Continuing jobless claims, which run a week behind the initial claims figures, edged up to 2.57 million from 2.56 million. Even at current levels, which are higher than the summer, the data do not reflect a broad pickup in firings. Instead, it appears many businesses are just reluctant to hire.

GROSS DOMESTIC PRODUCT - Thursday, Nov. 29, 8:30 a.m. EST

The second look at third-quarter real gross domestic product is likely to show a big upward revision to growth. In the advanced report, real GDP was reported to have grown at an annualized rate of 3.9% after a second-quarter increase of 3.8%.

The primary drivers of growth last quarter were solid consumer spending, increased demand for exports, and to a lesser extent growth in inventories and business purchases of equipment and software. September figures for foreign trade and inventories came out after the initial report and were more positive than penciled in by the Bureau of Economic Analysis -- meaning both of these categories should provide a boost to the third-quarter GDP number.

However, economists are largely overlooking the strong third-quarter number because many other parts of the economy were losing momentum during the July-to-September period. Consumer spending is the primary concern right now, as the average price for a gallon of gasoline hovers above $3 at the same time that home and stock prices are falling and access to credit is getting more difficult.

In addition, an upward revision to third-quarter inventories may be viewed as a negative, since businesses are more likely to draw down on those stockpiles in the fourth quarter and scale back on production or purchases. Overall, the sentiment among economy watchers is that the third-quarter may end up being the best quarter we see for a while and that growth in the final period is likely to be around 1%.

NEW RESIDENTIAL SALES - Thursday, Nov. 29, 10 a.m. EST

Sales are expected to fall, after a surprise uptick in purchases during September. The annualized pace of sales was 770,000, from 735,000 in August. Even so, sales were off 23.3% from a year ago.

One reason to discount the September gain is that the Census Dept. figures count signed contracts on new home sales. However, the figures do not reflect buyers backing out of deals. That's occurring more often now, with some home builders reporting cancellation rates above 30% and 40% of late.

With sales still forecast to fall, builders will need to rein in building activity, which will result in residential construction subtracting from economic growth once again this quarter. Further price cuts are also likely, especially by builders that are short on cash.

HOUSE PRICE INDEX - Thursday, Nov. 29, 10 a.m. EST

The House Price Index put out by the Office of Federal Housing Enterprise Oversight (OFHEO) is a quarterly reading of home price movements across the U.S. The government agency relies on data on single-family home purchases and uses only repeat-sales of homes to calculate changes in prices. The latest report will provide third quarter changes in home prices by metropolitan area, state, and for the country overall. In the second quarter, the HPI ticked up 0.1% from the prior period, the smallest quarterly rise since late 1994.

On a yearly basis, prices were up 3.19%. This index contrasts with the national quarterly S&P/Case-Shiller Home Price Index (a different series than its monthly 20-city index), which showed a yearly drop of 3.2%. The differences between the two indexes include the geographic areas used, the weighting of homes by price within the indexes, and the source data. OFHEO relies on transactions handled by Fannie Mae or Freddie Mac, which excludes homes purchased with non-conforming mortgages (loans above $417,000).

HELP-WANTED INDEX - Thursday, Nov. 29, 10 a.m. EST

The Conference Board releases it October index of help-wanted ads after ticking higher in September. The latest reading was 24, up from 23 in August, but lower than the 25 print in July and 29 a year ago. Besides the one point increase in the September index, the percentage of markets with rising want-ad volumes zoomed back up to 57%, after plunging to 16% in August, from 49% in July. Even so, help-wanted ads declined in eight of the U.S. regions during the three-month period ended in September. In total, the latest numbers point to a labor market that's still markedly softer than a year ago.

The Conference Board's tracking of October online job ads fell 2.5% on a monthly basis, with the yearly increase slowing to 8.6%, from a pace of 17.5% in September. These figures are not seasonally adjusted, making the yearly comparison the more reliable measure of activity. The number of advertised vacancies online for every 100 persons in the labor force slipped to 2.71, from 2.78 in the prior month but remained above the year ago level of 2.51.


Friday, Nov. 30, 10 a.m. EST - Federal Reserve Bank of Philadelphia President Charles Plosser gives the opening remarks at the Philly Fed's "Innovation and Regulation in Financial Markets" policy forum in Philadelphia.

12:30 p.m. EST - Federal Reserve Bank of St. Louis President William Poole discusses the economy at the Cato Institute in Washington, D.C.

1:15 p.m. EST - Federal Reserve Board Governor Randall Kroszner takes part in a panel discussion at the Federal Reserve Bank of Philadelphia" "Innovation and Regulation in Financial Markets" policy forum in Philadelphia.


Personal income in October probably grew at a healthy pace. In September, income rose 0.4% for a second straight month, putting the yearly gain at 6.8%, following gains of 6.9% and 6.8% in August and July, respectively. Wages and salaries, which accounts for about 55% of total income, has continued to post solid increases.

In September, the monthly rise was 0.3% and the increase from the same period a year ago was 7.1%. Both wages and overall income have improved in the past year. However, expectations of rising unemployment and slower economic growth will likely translate into slower income gains.

So far, however, the solid income growth has sustained consumer spending, although consumer spending is likely to moderate given elevated energy prices, falling home prices, and tighter lending standards. In September, purchases of goods and services rose 0.3%, after an increase of 0.4% in August and 0.5% in July.

On a yearly basis, spending was up 5.6% -- the best performance since March. After adjusting for inflation, spending still looked solid -- with a yearly pace of 3.2%.

The Personal Consumption Expenditures (PCE) price indexes, which are the preferred inflation gauges of the Federal Reserve, will also be watched closely. The central bank remains concerned about prices despite signs of slower economic growth. The headline reading of inflation rose 0.2% in September, but is likely to jump in October and November due to higher energy prices. Those gains will push the pearly pace of inflation above the 2.4% level in September.

Excluding food and energy, inflation has been trending lower, with prices up 1.8% from a year ago in September, compared to 2.5% in February. However, Fed officials do not believe core inflation will keep slowing next year.


The Chicago-area purchasing managers' industrial activity index is expected to drift above the 50% level in November, which indicates an increase in activity. However, the report in total painted a picture of deteriorating conditions in October.

The headline October Business Barometer reading fell to 49.7%, pointing to a contraction in output. It was the first time the reading slipped below 50% since February. The production index dropped to its lowest reading since 2002, to 46.9% in October. Orders continued to grow but the pace slowed, while the backlog of unfilled orders declined for the third month out of the last four. The upshot to the weaker activity was a third straight monthly fall in the employment index to 49.5% in October.

CONSTRUCTION SPENDING - Friday, Nov. 30, 10 a.m. EST

Spending on construction probably slipped on the weakness of housing. In September, total outlays rose 0.3% despite private residential spending tumbling 1.4%. The building boom in hotels and other types of lodging continued, with a 5.5% increase in September while government spending was up 1.9%. However, the liquidity crunch in the credit markets and the tightening of lending standards by banks are beginning to negatively affect the commercial real estate market and could soon crimp non-residential construction activity.

Earnings Calendar
Day Companies
Tuesday Analog Devices, Staples
Wednesday Aeropostale, Jo-Ann Stores
Thursday Dell, H.J. Heinz, Sears Holdings
Friday Big Lots, Tiffany & Co
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