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CNB Weekly Economic Commentary: Nov 2Date: Nov 02, 09
To: Everyone
From: Gregory S. MacKay, Senior Vice President & Chief Economist
Date: 10/30/09
Roughly one year after Congress passed a massive, hotly debated economic stimulus package; the results are starting to come in. The advance (first of three) estimate of Gross Domestic Product (GDP) in the United States indicated economic growth of 3.5% in the third quarter of 2009. This was the first increase since the second quarter of 2008, the largest increase since the third quarter of 2007, and only the seventh quarterly increase of 3.5% or more since 2000. The results were simply stunningly good... and easily linked to the stimulus money. Two of the numbers that jump off the page: residential investment in the third quarter rose 23.4% versus a decline of 23.3% in the second quarter, and durable goods (lead by autos) were up 23.2% versus declining 5.6% in the second quarter. Overall, consumer spending rose 3.4% in the third quarter after falling .9% in the second. Personal income data showed the return of the consumer, even in a trying economy. While disposable personal income actually fell $20.4 billion in the third quarter after increasing $138.2 billion in the second quarter, personal spending rose $148.2 billion after increasing only $8.2 billion in the second quarter. Of course the difference came out of savings, but consumers still saved a healthy 3.3% of their third quarter disposable income. But income and spending data as well as confidence data for September both point to a consumer who is still a bit cautious. Some discussion continues in Congress about more stimulus.
Two big questions still remain; Will the recovery continue? How will we pay for the bill? Other statistics from the latest GDP release suggest a more broad based recovery is almost upon us. Non-durable goods (food, personal items, etc.) spending rose 2% in the third quarter after falling 1.9% in the second, suggesting there is a better spending pattern developing. On the business side, things are simply less bad. Commercial investment fell 2.5% after dropping 9.6%, while equipment and software spending rose 1.1% after declining 4.9%. Federal Government spending slowed, but remained positive (+7.9% versus +11.4%), while state and local governments saw a drop of 1.1% in spending against a second quarter increase of 3.9%. Both export and import numbers swung to the positive. All these data indicate a slow recovery will continue. As to the payment - personal taxes increased $4.8 billion in the third quarter after a decline of $119.1 billion in the second quarter. That's a big movement, and we think the business sector will be providing sharply higher taxes based on better earnings soon. It's going to take a while, but this recovery will be self-funded.
Recent housing data again point to the bargain prices available, without consideration for the current or proposed tax incentives. New home sales for September were reported to be down 3.6% from August levels. We are more interested in prices and supply. Median and average prices of new homes are little different today than they were four years ago. But in September 2005, there were 493,000 units available for sale versus 251,000 units today. We'll keep saying it, there's a shortage of new homes developing out there.
The S&P/Case-Shiller Home Price Index tells a similar story for existing homes. While prices in the nation's twenty largest markets fell 11.3% in August, that decline was an improvement over the declines in excess of 20% earlier in 2009. According to the Case-Shiller Index, prices are now at autumn 2003 levels - bargain levels that are more than 30% below the highs of early 2006. While there is plenty of supply, prices are drawing customers back.
Employment data remains lukewarm. Initial unemployment claims remain in the 525,000-530,000 level, about 100,000 better than earlier in the year. Individuals with continuing claims now number about 5.8 million, also lower than any time since mid-March. Slow improvement in these numbers is expected as we move into 2010.
Equity prices appear to be creating a trading range as they await further third quarter economic and earnings releases. At the opening, for the week and year:
Treasuries and municipals are trading at levels close to last week. Their prices suggest an equilibrium has been reached when considering supply and demand issues as well as inflation expectations.
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