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.