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CNB Weekly Economic Commentary: Dec 3

December 6, 2012

To: Everyone
From: Gregory S. MacKay, Senior Vice President & Chief Economist
Date: 11/30/12

Will someone please tell our Congressional leaders to start acting like they want this economic expansion to continue? Do they understand that the current “Congressional finger-pointing two-step” is as dated (and not as funny) as an old Abbott and Costello routine? Let’s hope they start behaving more like statesmen and less like playground bullies………. but I’m betting on a late month “kick the can” decision to pass the “fiscal cliff” buck to the new Congress……. but the current blustering on both sides of the aisle is both insulting to and counterproductive for all Americans……. we all know there has to be compromise – get to it.

This week’s numbers that continue to support my belief in this expansion begin with third quarter Gross Domestic Product (GDP). In its second (of three) releases on GDP, the Commerce Department revised third quarter growth estimates upward to 2.7% from its first estimate of 2.0%. This is the third best quarterly growth in GDP since the recession ended in mid 2009. There’s a lot of chatter about whether this growth is good or not. Let’s compare the two most recent quarterly sets of numbers:

  2nd Quarter 2012 3rd Quarter 2012
Consumer 1.07% .99%
Business .09% .86%
Government -.14% .67%
Export/Import .23% .14%
Total Growth 1.3% 2.7%

 Source: Commerce Department


As shown here, the doubling of growth is attributed to a surge in business and government spending. Business spending had both good and bad news in the third quarter. There was a huge drop in equipment and software spending and transportation equipment sales that was partially offset by a big surge in residential housing. Businesses had inventory spending turn positive for the first time since the first quarter. Consumer spending growth slowed a bit from the second to third quarter, and business is hoping for a big holiday spending pattern to work down those inventories. Government spending soared, as national defense spending rose dramatically, while state and local spending declines slowed a bit. The contribution from exports dropped almost in half, as oil price declines were offset by slowing global growth. So the fourth quarter will have to produce another consumer spending surge, and hope that replaces the sudden surge in government spending.

I’ve got mixed feelings about consumer spending in this fourth quarter. Figures released by the Commerce Department showed no personal income growth in October and a decline in personal spending. Adjusted for inflation, this first month of the fourth quarter indicated a decline in personal income of .1%, and a decline in personal spending of .3%. The silver lining is that personal savings increased .1%, but October wasn’t a good beginning for increased consumer spending. The two major polls on Consumer Confidence were split for November, with the Conference Board’s Index up slightly and the University of Michigan’s Index down a bit. Employment numbers continue to slowly improve. As reported by the Labor Department, nonfarm payroll employment was up in 77% of all U.S. metropolitan areas in the year ending October 31, and jobless rates were down in 88%. Short term job losses from Hurricane Sandy are already turning around. So consumers are seeing slow job growth, with tight wage increases. The last thing they need is a bickering Congress.

My ace-in-the-hole to the current slow growth pattern remains housing. There is no denying that the recovery is on in that industry. While new home sales in October were even with September levels, sales of existing homes rose 2.1% for the month and 10.9% for the past year. More telling is the median price of $178,600, which has risen over 11% in a year. The concern of massive home dumping by lenders hasn’t occurred, and the supply of existing homes is at a multi-year low of 2.1 million units. This should spur both building permits and housing starts once spring rolls around. Another view of a better housing market is given by the S&P/Case-Shiller Home Price Indices. Nationally, home prices as measured by these indices have risen 3.6% in the past year. Eighteen of twenty metropolitan areas have seen home price increases of .1% to 20.4%, with only Chicago and New York City having price declines. Locally, the data are similar. According to the Greater Rochester Association of Realtors, third quarter 2012 statistics show sales up 7%, median prices up 8%, and available supply down 4% from a year ago. Without a fiscal cliff stumble, the housing recovery is here to stay.

With some help from Congress on a long term solution to the fiscal cliff, we can look ahead to 2013 with moderate enthusiasm and confidence, further extending job and economic growth.

The stock markets aren’t looking ahead any further than a day at a time right now. Prices are wobbling with every press release, and are managing to hold within about 5% of recent highs. At 3:30 p.m., for the week and year:

Dow Industrials 13023 +.1% +6.6%
NASDAQ 3010 +1.4% +15.5%
S&P 500 1416 +.5% +12.6%

U.S. Treasury yields fell this week, as some rumblings from Europe sent buyers looking for safety again. Yields remain at ridiculously low levels in both Treasuries and Munis.

 

  US Treasuries
Municipal Bonds
  11/30/12 11/23/12 11/30/12 11/23/12
2 Year .25% .27% .31% .32%
5 Year .61% .69% .61% .67%
10 Year 1.61% 1.69% 1.42% 1.45%