Business Gloom, Consumer Cheer
Economic reports released Dec. 27 suggest that U.S. businesses may be ringing in the New Year with growing caution, while consumers are displaying a cheerier outlook. Weakness in durable goods orders and continued deterioration in the data on first-time unemployment filings suggest that companies wariness about the economic outlook may be affecting spending, which would prove problematic for the economy in early 2008.
And yet a higher-than-expected reading on a widely followed survey of consumer confidence in December proved to be a relief. These figures, combined with other sales data, suggest that the consumer has yet to show the widely expected signs of "cracking" in response to housing and credit-market turmoil. The economy remains more at risk to restraint from business managers than consumers.
Here is Action Economics' rundown of the Dec. 27 reports:
Durable Goods Orders
Durable goods orders rebounded a small 0.1% in November after three consecutive monthly declines. October's initial 0.4% decline was not revised. On a year-over-year basis, orders were down 0.3% (from 3.1% in October). Transportation orders rose 1.9%, while excluding transportation, November orders were down 0.7%. Orders for nondefense capital goods excluding aircraft fell 0.4% after a 2.9% decline in October (-2.3% originally), while shipments for this component rebounded 0.2%. Inventories rose 0.8%, while overall shipments were flat.
The figures revealed weaker-than-expected orders-and-shipments data overall, and for equipment as well, though the inventory data were stronger than expected, which has buffered the near-term gross domestic product impact of the figures. We have lowered our fourth-quarter GDP growth estimate to 1.5% from 1.7%, and now expect the equipment and software component of GDP in the quarter to post a 3% rate of decline following growth of 6.2% in the third quarter and 4.7% in the second.
The greater risk for the economy is beyond the fourth quarter, when the restraint in both orders and shipments for equipment through November may suggest that business caution in the face of credit-market turmoil is indeed holding back demand. Yet, the weakness in the November durables figures is at odds with the bounce in the available industrial production and motor vehicle figures for the month, hence making the December and January data critical for assessing where the volatile factory and equipment sectors of the economy are headed as we enter the first quarter.
The mix of data in the report has left a November business inventory forecast of 0.5%, following the surprisingly lean 0.2% gain in October. We now expect a 0.5% November factory orders gain with a 0.5% shipments increase, and a 0.7% gain for factory inventories overall.
Initial Jobless Claims
U.S. initial jobless claims rose 1,000, to 349,000 (vs. economists' median forecast of 340,000) for the week ended Dec. 22. The gain extends the post-August uptrend in initial claims, though we are still short of the 359,000 high for the year hit in early February. Continuing claims jumped 75,000, to 2,713,000, for the week ended Dec. 15. This figure marks the highest reading since November, 2005, when continuing claims were boosted in the wake of Hurricane Katrina.
The claims figures have continued to deteriorate through December, and we have further reduced our December nonfarm payroll forecast to 70,000. We can't read too much into weekly claims data during the gap between mid-November and mid-January, but the uptrend in initial claims through the last three months leaves risk to the labor market as we enter the first quarter, as does the particularly steep uptrend in continuing claims.
Note that our December payroll forecast now lies below the 94,000 payroll gain seen in November, as well as the 94,000 average monthly gain for the last six months overall. We assume the unemployment rate will remain at 4.7% for at least one more month.
Consumer Confidence Index
The rise in the Conference Board's U.S. consumer confidence index to 88.6 in December reversed part of the outsize 8-point drop to a revised 87.8 (from 87.3) in November, hence partly closing the prior gap with the other available measures.
Today's reported December gain contradicted the small drop seen in the Michigan sentiment index to 75.5 in December from 76.1 in November, as well as the deterioration in the weekly ABC/Washington Post figure to a -21.3 average thus far in December from a -19.3 average in November.
The drop in most confidence measures over the August-to-December period is comparable to the declines seen in the aftermath of hurricanes Katrina and Rita, when a surge in energy prices of comparable size to the current one threatened the economy. Gasoline prices may be a bigger driver of current confidence declines than market turmoil, given that various surveys show little public awareness of tighter credit conditions, alongside the usual disinterest of the public in the details of financial market mechanics.
The November retail sales and personal income reports showed huge sales gains alongside a falling savings rate, which is characteristic of periods when confidence declines are a result of energy price gains that actually boost spending. As troublesome as the confidence declines over the past five months are, given market fears that credit-market turmoil will prompt a pullback in consumer spending, the data thus far show little evidence of a break in actual consumer activity.