The U.S. Economy:
U.S. durable goods fell in October, but the headlines were brighter. Durable goods orders fell 0.5% in October, following a 0.4% decrease in September. The October decline mainly was due to a drop in aviation orders. Excluding transportation, new orders increased by 0.5%. Year-to-date have increased 22.1% and easily exceed the pre-pandemic level. Core orders advanced 0.6% in October. Shipments were up1.5%, following a 0.5% advance in September. Unfilled orders increased 0.2%, after increasing 0.7% in September. Inventories were up 0.76%, following a 1.0% increase in September. With low inventories, and supported by a strong consumer, demand for durable goods has soared. Manufacturers are still contending with input shortages and sharply higher prices for commodities and increased costs and delays in transportation. The supply chain problems are projected to ease in 2022, but the pace of improvement is a big question.
The nominal goods deficit narrowed more than expected in October, an early indication that trade may be a weight on fourth-quarter GDP growth. The goods deficit narrowed from $97 billion in September to $82.9 billion in October. Nominal goods exports jumped 10.7%. There were double-digit increases in exports of foods, feed/beverages, industrial supplies, and automotive vehicles. Nominal goods imports only rose 0.5%. The U.S. 3onomy has expanded at a healthy pace and its stimulus efforts have favored the domestic economy versus the slower global pace. These forces have favored imports. However, as the global economy accelerates, export growth will speed up. Global trade volumes have increased sharply during the post-pandemic period. There are still supply chain problems and higher costs associated with the recovery. COVID is still affecting many key supply-chain manufacturing and transportation hubs across the globe. The supply chain problems are likely to ease in 2022 but the pace of recovery is still a large question.
Sales of previously owned homes increased for a second consecutive month, as the prospects of higher interest rates on the horizon, helped fuel demand. Existing home sales rose 0.8% in October, bucking expectations of a decline. Sales hit a seasonally adjusted annual pace of 6.34 million. In other housing news, sales of new homes climbed 0.4% to a seasonally adjusted pace of 745,000. The market has been constrained by limited supply. There are now 6.3 months available at the current sales pace, up from 6.1 in September. The average house price in October jumped to a record $477,800, up 21% from a year earlier. Demand should increase slightly in the fourth quarter, but the high prices are pushing many buyers out of the market. The rise in inventories should cool pricing. Consumers are seeing higher mortgage rates in the future and will accelerate purchases ahead of that event.
Personal income rose by a stronger-than-expected 0.5% in October. Wage and salary income saw a sturdy 0.8%, accounting for the bulk of the October increase. Interest and dividends income played a supporting role. Government transfers proved to be a significant headwind to income growth, as the unemployment insurance payouts fell by more than 50% from September to October. Real personal spending rose 0.7% in October, after a gain of 0.3% in September. Service spending rose 0.5%. Goods spending rose 1%, as vehicle spending contributed for the first time since April. Price increases remain elevated, as the PCE deflator rose 0.6% in October. Excluding food and energy, the PCE deflator increased 0.4% and is up 4.1% from a year earlier. The bulk of the increase in prices is still thought to be transitory and should ease next year.
Important Data Releases This Week
- The November ISM manufacturing index will be released on Wednesday, December 1 at 10:00 AM. The manufacturing index dropped to 60.8 in November from 61.1 in September, still at a blistering pace for manufacturing. The components of the index reveal how supply chains problems are affecting manufacturing. Not surprisingly, the biggest sib-index advances were prices paid and supplier deliveries. There are few signs of any near-term improvements. The number of ships waiting to load on the West Coast is still elevated and shipping costs from Asia to the West Coast are still six times pandemic levels. Demand remains strong and we see the index rebounding to 61.2 for December.
- The October construction spending report will be released on Wednesday, December at 10:00 AM. Construction spending declined 0.5% in September as building material availability and labor market shortages continue to plague the industry. Residential construction has slowed recently but is still up 19% year-over-year. Non-residential construction looks poised for improvement. Dodge Data and Analytics reported a 29% jump in non-residential permits for October. We project construction spending to jump 0.6% in October.
- The November payrolls report will be released on Friday, December 3 at 8:30 AM. Total nonfarm payrolls increased by 532K in October, a gain well above expectations. The net revisions of the previous two months were also positive. Stronger employment growth is likely in the card as COVID cases retreated in November. Higher wages may be also drawing in people, although the labor participation rate was unchanged. We expect payrolls to increase by 600K for November.
- The November ISM services report will be released on Friday, December 3 at 10:00 AM. The ISM services report came in at 66.7. The service economy is returning and has some of the same supply chain problems as the manufacturing sector. Some of the index’s upward movement is caused by the ever-lengthening supply delivery index. We expect the index to remain elevated, at 66, but that is a small retreat.
- The October factory orders report will be released on Friday, December 3 at 8:30 AM. Already released durable goods orders fell 0.5% in October, drug down by aviation weakness. Other parts of manufacturing are doing well, including an increase in the auto sector. We expect a 0.2% advance for October.