November 30, 2006
WAITING FOR A BLINK
Consumers elevated spending last month, the Bureau of Economic Analysis reported this morning. But a closer look at the numbers suggests that there's still reason to fear for 2007's economic performance.
Let's start with October's rise in personal consumption expenditures (PCE). Yes, it inched up by 0.2% over September, but the performance was at the low end for monthly reports this year. In fact, revised data show that the initial report of September's PCE 0.1% advance has evaporated, turning into a 0.2% decline. The month before, August, offered the slimmest of increases at just 0.1%. Perhaps the most distressing news in the revised data is that nondurable goods spending dropped for the second month in a row in October. Nor does it boost one's optimism to learn that initial claims for unemployment benefits jumped to a 14-month high of 357,000 last week, the Labor Department advised today.
Stepping back and looking at the trend, as per our chart below, it's clear that Joe Sixpack is rethinking his former appetite for spending. Yes, the pause may be temporary. In fact, we're sure it's temporary. Alas, we just don't know when Joe will return to form. And neither does anybody else. At this stage in the economic cycle, when worries over continued real estate fallout and other items lurks, a slowdown in consumer spending in the months ahead could take a toll on investor sentiment.
What's clear now, today, this minute is that there's reason to wonder about the near term. This, ladies and gentlemen, is what's known as a transition. To wit: if an economic transition arrives, does it make an impact?
Apparently not, at least from the stock market's perspective. Measured by the S&P 500, the theme is onward and upward. Yes, there was a distracting correction last Friday that spilled over to Monday. But since Tuesday, the bulls have returned and are intent on pushing on to new highs. Momentum may not always be enlightened, but it's a force that isn't easily dismissed either.
The bond market, meanwhile, is quietly placing bets that the pause has legs. Momentum, in other words, is alive and kicking in fixed-income trading. Bulls are keeping the yield on the benchmark 10-year Treasury at just above 4.5%, the lowest since February.
Sooner or later, either stocks or bonds will blink, and we think we know which one. But we're not sure. Diversification has never looked more comforting.
Posted by jp at November 30, 2006 10:32 AM
Here are a few numbers to consider re: your comment about gasoline. Based on data from the Bureau of Economic Analysis (http://bea.gov/bea/newsrel/gdpnewsrelease.htm), nondurable goods spending in the third quarter represented about 21% of total personal consumption expenditures (current $ at seasonally adjusted levels). Meanwhile, gasoline and energy purchases were just 13% of total nondurable goods spending. It's the other 87% of nondurable goods spending that I'm worried about.
Posted by: Jim Picerno at December 1, 2006 11:10 AM
So in October, the price of gasoline fell and we therefore spent fewer dollars at gas stations. That is NOT a sign of weakness!
If you had simply looked at inflation-adjusted consumer spending, as most analysts do, you would have seen that spending rose at a healthy 5 % annual rate in October. Real consumer spending increased at a solid 2.9 % annual rate in the third quarter.
If you want to worry, fine, but if you want to convince others, you need to focus on something other than recent consumer behavior.
Posted by: lowsmoke at December 1, 2006 9:12 AM
I think we can pretty much dispel with the whole concept of a rational market that reflects all available, publicly held information. Unless there is a whole lotta information that isn't public, like goldman running the treasury petty cash till.
Time to reclaim all those Nobel prizes in Finance. I haven't had this much fun since eyeballs were the currency of the "market".
Posted by: zinc at December 1, 2006 7:37 AM
The dollar is already under pressure. Stocks will go first. If the FED can't ease because it will put the USD at risk then that is bad news for Stocks. We are up here at near record levels and it's a very, very long way down.
Posted by: Paris ib at November 30, 2006 11:30 AM