Economic comments, week ending Nov. 25

Nov 27, 2011
Economic releases continued to support the expansion scenario in the U.S., but not in Europe.  Even though the U.S. recovery has been within the expansion range, the capital markets reacted to the increased likelihood that a recession in Europe could lead to a global contraction.  The failure of the Congressional Super Committee to meet its deadline added fuel to the fire.  Investors demanded more return for the increased risk.  Equity markets were forced lower.  Credit spreads widened.  U.S. bond markets rallied on a flight to safety, but European bond prices declined.  Oil and metal prices declined.


This past Thanksgiving week, we Americans could have been thankful for our health, family, and friends, but not our government.  The Super Committee of Congress failed to agree on spending cuts by the Nov. 23 deadline.  The impact will be felt for years.  In spite of positive economic reports, the S&P 500 posted the worst Thanksgiving-week loss since 1932!
The failure provided confirmation that the two parties cannot work together for the benefit of the country.  Sequestering (forced spending cuts in security and domestic spending) will not begin till Jan. 1, 2013.  A number of programs will expire at the end of this year, but the Bush tax cuts will expire at the end of 2012 and the 3.8 percent investment tax on high income will take effect.  The best that we can hope is that the winner of the 2012 presidential election will have maximum political capital to address the issues facing our nation.

Economic Releases

Shown below are four main data series that the National Bureau of Economic Research uses to "date" the U.S. economy.  Each chart of monthly data (indexed to 100 at the start of the expansion) compares this expansion (green line) to an average (solid gray line) and best (dotted) and worst (dotted) of the 10 post-World War II expansions.  With respect to real retail sales, this expansion has been about average.  With respect to industrial production, the expansion has been just below average.  The real income and employment data were near the weakest of all the expansions.
In all four charts the steepness of the decline from 12 months prior to the expansion illustrates the severity of the contraction prior to expansion.  The data in the charts confirmed that we have been within the norms of expansion, but the softness in real income and employment may have caused many, including the Occupy movements, to question the equity and robustness of the expansion.



Other Economic Releases


U.S. third quarter GDP was revised a half point lower to 2.0 percent (Q/Q change at SAAR) due to a change in the inventory investment; while the revision was worse than expected, the lower inventory build up could open the way for future growth.


The GDP price index was unchanged at +2.5 percent.   October Existing Home Sales increased 1.4 percent to 4.97 million, a 13.5 percent increase from a year ago. This increase showed the impact of lower home prices had on the U.S. housing market.  October New Orders for Durable Goods fell -0.7 percent, a little better than expectations; ex-transportation, Orders rose +0.7 percent.


In October, Personal Income rose +0.4 percent, but Consumer Spending rose only +0.1 percent after a strong September increase; the Core PCE price change of +0.1 percent showed that inflation remained well contained. For the third straight week, Initial Jobless Claims posted a sub-400,000 number; New Claims rose 2,000 to 393,000, lowering the four-week average to 394,250. The mid-November University of Michigan Consumer Sentiment Index ticked down to 64.1.


Canada's Retail Sales increased 1.0 percent in September, almost twice expectations.


Flash reports for the November Purchasing Managers Surveys for both Manufacturing and Services slipped further into the contraction zone.  Germany's GDP rose +0.5 percent Q/Q in the third quarter (note that the rates are not annualized as they are in the U.S.).  Germany's Ifo Survey was slightly higher for Economic Sentiment and Business Expectations, but unchanged for Current Conditions.  France's Business Climate Indicator dropped two points to 95, well below the long-run average of 100.  UK's third  quarter GDP remained at +0.5 percent Q/Q.


Equities Markets

Equity markets declined across the globe.  The S&P posted the worst Thanksgiving week since 1932!

Bond Markets

The U.S. bond market rallied in a flight to safety, but the European markets felt the weight of the debt crisis in their region.  Yields on US TIPS returned to positive territory.  Investment grade CDS spreads increased.


Currencies & Commodities

The US dollar rallied in a flight to safety. Natural Gas prices rose, but Oil and Metals prices declined.

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