The government released a flurry of economic data ahead of the Thanksgiving holiday. The economy is rapidly regaining momentum after a slump over the summer due to the Delta wave. A surge in COVID cases in November coupled with lagging vaccinations and boosters suggest growth could hit a speed bump again in December and January.
Real GDP for the third quarter was revised up by 0.1% to a 2.1% pace, but remained less than a third of the pace we saw in the second quarter. Data for October look much better, with initial numbers coming in strong and hot; inflation is accelerating along with overall economic activity.
Spending and Inflation Surge
Data on the current quarter are more encouraging. Personal disposable incomes fell 0.3% in October after adjusting for inflation; that marks the third inflation-adjusted monthly contraction in a row. Disposable incomes fell in September when expansions and supplements to unemployment expired; they fell in August in response to higher inflation. A pickup in employment and wages should help mitigate losses in November but higher inflation will remain a problem through year end.
Consumer spending rose 0.7% in October, after adjusting for inflation, more than twice the pace of September. A sharp increase in spending on services added to strong spending on goods. Halloween is the second largest retail holiday of the year; many consumers started shopping early for the holiday season, while travel and spending on medical care delayed by the Delta wave picked up. Many consumers started to shop early for the holiday season given wait times on shipments and fear of empty store shelves. Retailers have dramatically scaled back discounts for the upcoming holiday season: Be prepared for sticker shock.
We should see even stronger gains in the services sector in November as people scramble to congregate after being asked to sideline their plans last year. Travel over the Thanksgiving holiday is expected to near prepandemic levels. The largest concern is what happens in December and January when COVID case loads are once again expected to surge. Treatments for COVID are improving but vaccines and boosters remain our best line of defense; on that front, we are still lagging.
The personal consumption expenditures (PCE) deflator rose 0.6% and increased 5% from a year ago. That marks the fastest pace in the overall PCE index since November 1990. Core PCE, which excludes food and energy, rose 0.4% in October and was up 4.1% compared to last year, also the strongest pace since November 1990.
The saving rate dropped to 7.3%, the lowest level since December 2019, before the onset of the crisis. Consumers amassed an estimated $2.5 trillion in excess savings during the pandemic, mostly in wealthy households. A big wild card is how much of those gains will be spent as we attempt to recover from the pandemic. Consumers are expected to tap their credit cards and home equity lines of credit as we emerged from the crisis, which will push the saving rate well below precrisis levels in 2022. Much of the excess savings we accumulated is held by the wealthiest of households, who spend their incomes but tend to invest their savings.
Speculators Dominate Housing
New home sales increased just 0.4% in October after September data was revised lower. New home sales are recorded at the contract signing, which reflects upcoming activity in the market. Home prices remain at historic highs, with the bulk of sales occurring at the $400,000 or more level. As more supply flows into the market, prices remain elevated due to increased construction costs, even though many materials prices have come off their historic highs in the last few months.
Builders continue to face supply chain disruptions and labor shortages as they work through backlogs of projects. Over a third of new homes sold have not even begun construction. Compared to a year ago, new home sales are down 23% as all regions are experiencing a slowdown in sales. As supply chain disruptions are resolved into next year, builders will be able to resume many paused projects.
Existing home sales, which make up the bulk of the housing market but are a lagging indicator of activity, beat expectations in October and rose 0.8% to the highest pace in nine months. All cash investors, which include speculators, surged dramatically during the month, while first-time buying remained weak relative to a year ago. Existing home sales are down 5.8% from a year ago in October, which marked the peak of the 2020 boom. Inventories sit at only 1.25 million homes, or 2.4 months supply at the current pace; that is significantly below the market-clearing supply. Prices continued to surge at a double digit rate.
What is traditionally a slow home buying season has become a busy time for realtors as many would-be buyers are locking in low mortgage rates. Mortgage applications to purchase a home surged 4.7% in mid-November as buyers anticipate rising rates next year. The Federal Reserve is expected to increase the pace of tapering its asset purchases by the end of the year. Additionally, we could see three rate hikes in 2022, as the economy recovers at a continued pace from the Delta disruptions. Mortgage rate increases will subdue the frenzied activity we have seen in the past year and will provide some reprieve from record-high prices and bidding wars. Home price growth is expected to slow in 2022, but prices will not decline.
Investment and Inventories Rise
Durable goods orders fell 0.5% in October, after falling 0.4% in September. Orders excluding the volatile transportation sector, which includes aircraft, rose 0.5%. A jump in orders for motor vehicles and parts offset continued weakness in aircraft orders. Vehicle plants came back on line during the month as backlogs in orders for computer chips began to uncoil.
Core capital goods orders, which strip out the volatile defense and private aircraft orders, rose 0.6% after surging an upwardly revised 1.3% in September. Gains were heavily concentrated in the vehicle sector and related industries. Orders for communications equipment also soared, while electronic equipment and appliances posted solid gains. Nearly every category of investment has been affected by chip shortages and supply chain problems, which were exacerbated by the Delta wave over the summer.
Core shipments rose a more tepid 0.3% in October but off of a stronger September base. Investment and inventories look like they both are picking up in the fourth quarter after a lull in the third quarter. We still have a long way to go to replenish inventories after a sharp drop in inventories during the first half of 2021.
Trade Deficit Narrows
The trade deficit in goods unexpectedly narrowed from $97 billion in September to $83 billion in October. The improvement was driven by a double digit surge in unexpected surge in exports, which was broad based. Vehicle exports alone surged more than 14% from the previous months as production ramped back up. We also saw a surge in energy exports. Natural gas is getting better prices abroad than in the U.S., which is exacerbating the surge in domestic energy prices.
Jobless Claims at Pandemic Lows
Initial unemployment claims plunged to 199,000 in the week ending November 20, the lowest level since November 1969. The four week moving average was 252,250, down 21,000 from the previous week’s revised average. The previous week’s data, which included the survey week for the unemployment report suggests that employment improved dramatically in November. The only downside with the strike at John Deere, which included 10,000 manufacturing workers and was resolved the week after the survey for the employment report was taken.
Our current forecast now shows growth surging back above the 6% threshold in the fourth quarter. The rebound in exports and improvement in trade is playing a very large role in that strength. The economy will end the year with a bang and a lot of heat, even if we do suffer another setback due to the surge in COVID cases. The bulk of that weakness is likely to show up in December and January; it will hit the first quarter more than the fourth quarter due to the timing of the spread of infections unless we can dramatically increase both initial vaccinations and boosters. Vaccines remain our best defense against hospitalizations and the toll in life and the burnout we are seeing in our health care system.
Measuring current economic conditions to help plot and adjust course
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