Vital Signs: Will Consumers Keep Spending?

On tap: November personal income, consumer spending and housing starts, December consumer sentiment, and regional factory activity reports

When the going gets tough, U.S. consumers apparently go shopping. Falling home prices, tighter credit standards, slower hiring, and gloomier consumer sentiment didn't do much to keep people from hitting the malls in November.

The November figures on consumer spending due Dec. 21 should look pretty upbeat, all things considered. Already, November retail sales figures were up 1.2%. And even if you take out the 6.8% surge in gas station receipts from higher fuel prices, the rise was a better-than-expected 0.6%.

That could indicate some upside risk to the consensus view of a 0.4% gain in total consumer spending. In light of the latest numbers, some economists believe inflation adjusted spending for the quarter could grow at an annualized clip of 2%. That would certainly be good news for the economy.

But there are reasons to believe the November spending figures could be overstating the resilience of consumers. An early Thanksgiving meant more holiday related sales in November. Also, particularly deep discounting to kick off the season may have pulled forward some holiday shopping. That may be why December weekly chain store sales figures have been tepid so far.

If consumers are to keep up the apparent spending spree, income growth must hold up. So far, wages, dividends, and rents and other streams of income have kept rising. But there are a couple reasons to be wary. In October, wages and salaries rose just 0.1%. What's more, the Bureau of Economic Analysis revised down the total amount of personal income in the third and second quarters.

A disappointing November tally would certainly stoke concerns about consumers' wherewithal to keep spending. And although consumer sentiment reports have recently been poor leading indicators of spending, the recent drops have been quite sharp and current levels are at relatively low levels.

In other parts of the economy, home builders likely broke ground on fewer projects in November, and December regional factory activity readings will likely be weaker. While the figures don't have any direct bearing on consumer spending, if businesses are having a tougher time, it doesn't bode well for hiring, income gains and, ultimately, consumer spending.

Here's the economic calendar, from Action Economics.

Economic Reports
Report Date Time For Median Estimate Last Period
Empire State Index Monday, Dec. 17 8:30 a.m. December 20.0 27.4
Current Account (billions) Monday, Dec. 17 8:30 a.m. Q3 -$182.0 -$190.8
Housing Starts (millions, annual rate) Tuesday, Dec. 18 8:30 a.m. November 1.195 1.229
Gross Domestic Product (final) Thursday, Dec. 20 8:30 a.m. Q3 5.0% 4.9%
Leading Indicators Thursday, Dec. 20 10:00 a.m. November -0.1% -0.5%
Philadelphia Fed Index Thursday, Dec. 20 12:00 p.m. December 7.0 8.2
Personal Income Friday, Dec. 21 8:30 a.m. November 0.4% 0.2%
Personal Consumption Expenditures Friday, Dec. 21 8:30 a.m. November 0.5% 0.2%
University of Michigan Consumer Sentiment Index (final) Friday, Dec. 21 10:00 a.m. December 74.5 74.5


The New York Federal Reserve Bank's December Empire State Manufacturing Survey probably slipped a little more. In November, the general business conditions index slipped to 27.4, from 28.8 in October. The latest reading is still well above the average reading of 15 for the general business conditions index which goes back to mid 2001. The shipments and new orders indexes were also still at pretty high levels. However, the employment reading plunged to 10.6, from 20.5 in October. Overall, the survey showed current conditions remained pretty bright.

However, manufacturers in the region expressed less optimism about the coming six months. The future general business conditions reading slumped to 30.5, from 50.6 in November, the weakest reading since September of 2001. Expected growth for shipments, orders, hiring, and capital spending were also more subdued. The message from this and other regional reports is that a slowdown in factory activity is on the horizon.

CURRENT ACCOUNT - Monday, Dec. 17, 8:30 a.m. EST

The current account deficit -- a cash flow statement of U.S. international business, including trade in goods and services, net investment income, and foreign transfers -- was probably smaller than the first quarter gap. In the third-quarter, the deficit probably narrowed on a smaller trade deficit. Exports have been growing at a solid pace, while import growth has slowed noticeably.

In the second quarter, the current account deficit was $190.8 billion, after a $197.1 billion gap in the first quarter. The 2007 current account deficit is on track to be smaller than 2006, the first yearly improvement since 2001.

HOME BUILDERS SURVEY - Monday, Dec. 17, 1:00 p.m. EST

The National Association of Home Builders and Wells Fargo bank will release the December Housing Market Index (HMI). The index measures housing market conditions by surveying builders' on current sales, buyer traffic through model homes, and expectations for sales during the next six months. The index has dropped by more than half since February. The November level held fast at 19, from 20 in September, and 33 in November of 2006.

The index tracking current single-family home stayed at 18, from 20 in September. Expectations for the coming six months ticked down to 25, from 26 in October and September, respectively. However, more respondents saw an uptick in the number of people visiting model homes, although the November level of 17 is was just slightly above the record October low of 15. Overall, HMI supports other figures which show no end in sight for the housing recession.


Tuesday, Dec. 18, 10 a.m. EST - The Federal Reserve Board of Governors will meet in an open meeting on the proposed amendments to the Truth in Lending statutes to address unfair and deceptive practices in mortgage lending in Washington, D.C.

ICSC-UBS STORE SALES - Tuesday, Dec. 18, 7:45 a.m. EST

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will present sales results for the week ended Dec. 15. In the week ended Dec. 8, sales improved 0.2%, after dropping by 2% in the preiod following the Black Friday weekend. For the week that included the post-Thanksgiving holiday, sales edged down 0.1%.

The small rise in spending couldn't keep the yearly pace of sales from slowing. For the week ended Dec. 8, the yearly gain was just 2.3%, after growing 3.1% the week before.

NEW RESIDENTIAL CONSTRUCTION - Tuesday, Dec. 18, 8:30 a.m. EST

Builders are continuing to catch up with shrinking demand. According to economists queried by Action Economics, the number of housing starts in November probably fell to an annual pace of 1.2 million, from 1.23 million in October. The October total was boosted by a large increase in the number of new multifamily starts. Single-family housing starts fell off another 7.3% to an annual pace of 884,000. That's the lowest monthly level since late 1991.

Despite the drastic cutback in new home construction, builders are far from out of the woods yet. The supply of unsold single-family homes for sale is large enough to cover more than eight months of sales at the improved October pace. And the median number of months it is taking builders to sell a home is near six months vs. just 3.7 months a year ago. That points to even further cutbacks in new construction by builders, as well as further concessions on prices or additional amenities to work down current inventories.

The decline in residential construction is expected to be a big drag on fourth-quarter economic growth yet again. Over the past six quarters, the average decline has been nearly a percentage point of real gross domestic product.

JOHNSON REDBOOK INDEX - Tuesday, Dec. 18, 8:55 a.m. EST

This weekly measure of retail activity will report on sales through the first two fiscal weeks of November, ending Dec. 15. In the first week, sales were down 0.5%. In November, receipts were up 0.3%. The latest weekly sales data are pointing to a lukewarm holiday shopping season.


Wednesday, Dec. 19, 1 p.m. EST - Federal Reserve Bank of Richmond President Jeffrey Lacker speaks at the Charlotte Chamber of Commerce's Annual Economic Outlook Conference in Charlotte, N.C.

MORTGAGE APPLICATIONS - Wednesday, Dec. 19, 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 Dec. 14. In the latest period, applications kept to rising on low interest rates. However, a reversal may be in store as the average interest rate for a 30-year fixed-rate mortgage bounced back to 6.07%, from 5.82% for the week of Nov. 30.

The purchase index grew another 1.7% in the week ended Dec. 7 to a level of 472, from 464.3 for the period ended Nov. 30. Meanwhile, the refi index climbed 4.3%, to 2879.8, from 2761.3.

The weekly increases also pushed up the four-week moving averages as well. The refi index hit 2483.5, the highest level since mid 2005, from 2342.5 during the week ended Nov. 30. The moving average for the purchase index grew to 440.9, from 431 in the prior period.

JOBLESS CLAIMS - Thursday, Dec. 20, 8:30 a.m. EST

The number of initial jobless claims retreated to 333,000 for the week ended Dec. 8. In the week ended Dec. 1 claims stood at 340,000, after a reading of 353,000 in the prior period. The current level is still a little elevated compared to earlier this year, but the downward trend is a positive sign.

The four-week moving average also receded. The level for the week of Dec. 8 was 338,750, from 340,750 for the week ended Dec. 1. Continuing jobless claims, which run a week behind the initial claims figures, ticked up. The latest level was 2.64 million, from 2.6 million in the week ended Dec. 24.

GROSS DOMESTIC PRODUCT - Thursday, Dec. 20, 8:30 a.m. EST

The final pass at third-quarter real gross domestic product is likely to show a minor upward revision to growth. Already, the preliminary report bumped growth up to an annual pace of 4.9%, from the originally reported 3.9%. A larger increase in inventories than first reported accounted for most of the upward revision. At the same time, exports growth was stronger and import growth slower than the October numbers showed. On the down side, consumer spending was revised down a little.

While the third-quarter result is impressive, it is not a very meaningful indicator for the future. During the third quarter, the economy appeared to lose some steam and the move up in inventory growth can be viewed as a negative for the current period. With inventories larger than previously reported and economic activity weaker, businesses are not going to fill up their warehouses any further and could trim back on purchases or production. So the larger third-quarter result could translate into an even weaker fourth-quarter. Indeed, economists have been gradually trimming their estimates for this quarter, now expecting growth of about 1%.

LEADING INDICATORS - Thursday, Dec. 20, 10 a.m. EST

The Conference Board's composite index of leading economic indicators should keep falling. The October index fell 0.5% for the month and 0.5% from a year ago. That came after a small 0.1% dip in September, after a 0.9% plunge in August. A big fall in new housing permits, rise in the number of unemployment claims, and drop in consumer expectations led the October index reading down.

A downdraft in the S&P 500 stock index will certainly weigh on the November reading. Further increases in unemployment claims, a wider spread between short term and long term interest rates, and further deterioration in consumer sentiment will also pull down the upcoming reading.

Right now, the index is headed for it first annual decline since 2001, when the economy fell into a shallow recession. Prior to that, the index last declined in 1990, which occurred during another period of economic recession.

PHILADELPHIA FED SURVEY - Thursday, Dec. 20, 12 p.m. EST

The Philadelphia Federal Reserve Bank's factory activity index will probably follow other regional surveys down. Manufacturers in the Philly Fed's region reported slightly better business conditions in November with a reading of 8.2 compared to 6.8 in October. The last report also showed a slight increase in orders growth and a rise in shipments, after reflecting a decline in October with a reading of -4.7. However, fewer respondents hired workers even with the slight improvement in activity.

The slowdown in hiring was likely linked to deteriorating expectations. The index tracking expectations for general business activity plummeted to an eleven month low of 11.6, from 41.5 in October. It was the steepest one month drop since 1973. Readings for new orders, shipments, employment, and capital outlays all fell quite a bit as well.


Personal income probably grew by a decent amount in November. The consensus view among economists is that wages, dividends, and other forms of income grew 0.4%, after a 0.2% rise in September. Wages and salaries increased a mere 0.1% in October, with the yearly growth rate cooling off to 5.2%. That's still a healthy pace, but it's the lowest since August of 2006.

Economists will be looking at the November figures to see if this is a one month blip or if the weaker pace of hiring this year is now crimping income gains. Already, the Bureau of Economic Analysis revised down the overall amount of personal income in the second and third quarters by a combined $84.5 billion dollars.

Economists don't expect the softer income numbers to hamper November consumer spending. Already, the November retail sales report was stronger than expected. The overall consumer spending tally for the month was probably helped by a good Black Friday and post-Thanksgiving weekend.

Right now, consumer spending after adjusting for inflation is looking better than many economists anticipated earlier this quarter. However, weekly retail chain store sales for the current month look tepid, which could mean a disappointing end to the holiday shopping season and year.

The Personal Consumption Expenditures (PCE) price indexes, which are the preferred inflation gauges of the Federal Reserve, also come out in this report. Even though the Federal Reserve acknowledged after its Dec. 11 monetary policy meeting that "economic growth is slowing" it still cautioned that "elevated energy and commodity prices, among other factors, may put upward pressure on inflation."

In October, prices rose 0.3% on higher gasoline prices. Outside of food and energy, the PCE index climbed 0.2%. Increased energy costs pushed the yearly pace of inflation up to 2.9% in October and it should go even higher in November. Core inflation was up 1.9% for a second straight month, after cooling off to 1.8% in September, the smallest rise since early 2004.

CONSUMER SENTIMENT INDEX - Friday, Dec. 21, 10 a.m. EST

The University of Michigan and Reuters issues the final December reading of consumer sentiment a little early due to the holiday season. The index is expected to hold steady at the preliminary December level of 74.5.

In November, the index dropped to 76.1, from 80.9 the month before, and 83.4 in September. Using the initial December result, the headline index has fallen off 22.4 points since January, the biggest drop over such a period of time since 2001.

Breaking down the numbers, the current economic conditions index ticked up to 92.1 in early December, from the final November reading of 91.5, and an October level of 97.6. The expectations reading fell off to 63.2, from 66.2 the month before and 70.1 in October. Respondents are also feeling more pessimistic about their personal finances and the economic outlook in the next 12 months.

The index tracking respondents' views on buying durable goods, such as appliances and furniture, came off its 15-year low but remains at an historically low level.

Earnings Calendar
Day Companies
Monday Adobe Systems
Tuesday Best Buy, Darden Restaurants, Goldman Sachs
Wednesday General Mills, Nike, Oracle, Paychex
Thursday Bear Stearns, Circuit City, ConAgra Foods, Discover Financial Services, FedEx, Jabil Circuit
Friday Walgreen
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