Thursday, December 01, 2005

Personal Incomes/Spending Healthy, Inflation Decelerating, Construction Strong, Manufacturing Still Elevated

- Personal Income for October rose .4% versus estimates of a .5% rise and a 1.7% gain in September.
- Personal Spending for October rose .2% versus estimates of a .2% increase and a .5% gain in September.
- PCE Deflator for October rose 3.3% versus estimates of a 3.3% increase and a 3.7% gain in September.
- PCE Core for October rose 1.8% versus estimates of a 1.9% gain and a 2.0% increase in September.
- Initial Jobless Claims for last week fell to 320K versus estimates of 325K and 337K the prior week.
- Continuing Claims fell to 2767K versus estimates of 2788K and 2791K prior.
- Construction Spending for October rose .7% versus estimates of a .5% increase and a .2% gain in September.
- ISM Manufacturing for November fell to 58.1 versus estimates of 58.0 and a reading of 59.1 in October.
- ISM Prices Paid for November fell to 74.0 versus estimates of 78.0 and a reading of 84.0 in October.
BOTTOM LINE: US consumer spending rose in October even as auto sales slumped, Bloomberg reported. The 1.8% gain in the Core PCE, the Fed’s favorite inflation gauge, was the smallest increase since March 2004. This reading is now back to the lower end of the Fed’s 1.75%-2.0% annual projection at the beginning of the year. Plunging gas prices and rising incomes are boosting sentiment and providing the stimulus for a strong holiday shopping season. Incomes rose 5.3% year-over-year, which is almost twice the current rate of most inflation measures. I expect consumer incomes and spending to remain strong as falling energy prices, a healthy employment market, rising stock prices, increasing optimism and lower inflation readings more than offset a slowing housing market.

The number of Americans filing first-time claims for unemployment benefits declined last week, reflecting distortions from the Thanksgiving holiday weekend and fewer hurricane-related claims, Bloomberg said. The four-week moving-average of claims fell to 322,500 from 323,750. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, remained at 2.2%. The labor market is improving from artificially depressed levels related to the hurricanes and should continue to improve slightly over the intermediate-term.

US construction spending rose for a fourth straight month in October, led by homebuilding and commercial projects. I expect construction to continue adding to US growth as federal spending and hurricane rebuilding more than offsets a slowing housing market.

US manufacturing slowed in November after the two fastest-growing months of the year and an index of factory costs fell, Bloomberg reported. The 55.7 January through November average is equivalent to a strong 4.7% increase in GDP, according to the ISM. The new export orders component of the index rose to 59.2, the best since May 2004. This is just another indication of the health of the manufacturing sector. Manufacturing will continue to add to US growth over the intermediate-term. The decline in the Prices Paid component of the index if a big positive and another indication that inflation fears have peaked.

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