Putin Has Just Put An End to the Wolfowitz Doctrine
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World View & Market Commentary.
Forest first; Trees second.
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Veteran's Day did blur mortgage application data with the subsequent week showing a strong rebound that puts the purchase index back on trend. The volume of purchase applications rose 8.2 percent in the November 18 week, back on an upward path but still, at about minus five percent, below the year-ago level. Refinance volume wasn't able to rebound, down 4.0 percent in the latest week though applications for government loans did rise with the government share of activity, at 12.3 percent, the highest of the year. Rates were steady in the week, averaging 4.23 percent for conforming balances ($417,500 or less) and 4.59 percent for jumbo loans ($417,500 or more). Next data on the housing sector will be Monday with new home sales.
Initial jobless claims are below 400,000 for a third straight week in what is a hopeful sign that the jobs market is improving. Claims in the November 19 week came in at 393,000 vs a revised 391,000 in the prior week and 393,000 before that. The four-week average of 394,250, down four weeks in a row, is below 400,000 for a second week in a row.
Continuing claims in data for the November 12 week rose 68,000 to 3.691 million with the four-week average down slightly to 3.672 million. Changes in continuing claims are hard to read given that declines are a mix of benefit expiration and hiring. The unemployment rate for insured workers is unchanged at 2.9 percent for a fifth straight week.
The Labor Department describes today's report as straight forward and without special factors. But the ongoing financial trouble in Europe is a major special factor that continues to unfold, raising the risk that weakened European demand may begin to drag on US growth and in turn job growth.
Durables orders in October were pulled down by a drop in civilian aircraft orders. Otherwise, durables orders were moderately positive net. New factory orders for durables fell 0.7 percent, following a decline of 1.5 percent the prior month (previous estimate, down 0.6 percent). The October decline was less negative than the consensus forecast for a 1.0 percent fall. Excluding transportation, durables advanced 0.7 percent after a 0.6 percent rebound in September. The October increase topped the consensus forecast for no change in durables excluding transportation.
Weakness in October was led transportation which fell 4.8 percent after dropping 7.6 percent in September. Within transportation, weakness was in nondefense aircraft which declined 16.4 percent after a 26.8 percent fall in September. These are essentially swings in orders for Boeing aircraft. Defense aircraft rebounded 10.2 percent, following a 34.8 percent drop in September. Motor vehicles rebounded 6.2 percent after a 2.4 percent dip the month before.
Outside of transportation, orders were mixed but net positive. Increases were seen in primary metals, up 3.0 percent; machinery, up 1.6 percent; and "other" durables, up 1.2 percent. On the downside were fabricated metals, down 0.3 percent; computers & electronics, down 0.1 percent; and electrical equipment, down 5.2 percent.
Turning to private investment numbers, nondefense capital goods orders excluding aircraft declined 1.8 percent, but followed increases of 0.9 percent in both August and September. Shipments for this series decreased 1.1 percent in October, following a 3.1 percent boost in August and a 1.0 percent dip in September. While volatile, nondefense capital spending appears to remain on a mild uptrend.
Despite monthly volatility, forward momentum continues for the manufacturing sector. Given the fact that Boeing recently announced sizeable new orders and that auto sales remain healthy, the underlying trend for manufacturing looks moderately healthy and should help the recovery gain strength, albeit gradually.
Personal income and spending posted additional gains in October. Inflation was tame. Personal income in October advanced 0.4 percent, following a 0.1 percent increase in September. The October rise came in higher than the market median projection for 0.3 percent. The wages & salaries component posted an even stronger 0.5 percent boost after rebounding 0.4percent the month before.
The pace of consumer spending eased in October but followed a strong gain the prior month. Personal consumption expenditures rose 0.1 percent in October, following a 0.7 percent surge in September. Market expectations were for a 0.3 percent gain. By components, personal spending was led by durables, up 0.8 percent after a 2.9 percent jump in September . On a drop in gasoline prices, nondurables decreased 0.2 percent, following a 1.0 percent jump the month before. Services rose 0.1 percent after a 0.2 percent gain in September.
Headline inflation turned negative while the core rate was soft. The headline PCE price index declined 0.1percent, following a 0.2 percent increase in September. The market expectation was for no change. The core rate firmed modestly to a 0.1 percent rise in October from no change the month before. Analysts had called for a 0.1 percent rise.
Year-on-year, headline prices are up 2.7 percent, compared to 2.9 percent in September. The core is up 1.7 percent on a year-ago basis versus 1.6 percent the month before.
The October personal income report is moderately strong, taking into account that the easing in spending came off a strong September. Within income, the robust gain in the wage & salaries component is particularly encouraging. While unemployment remains high, for consumers that are employed, the fundamentals for spending continue to improve.
The economy got a moderate downgrade for the third quarter but the downgrade largely came from where there is the least damage to forward momentum. The Commerce Department's second estimate for third quarter GDP growth was bumped down to an increase of 2.0 percent annualized, compared to the initial estimate of 2.5 percent and to second quarter growth of 1.3 percent. Analysts had forecast a revision to 2.4 percent annualized.
The downward revision primarily was due to a downward revision to inventory investment-from plus $5.4 billion initially to minus $8.5 billion. This revision is the equivalent of a 0.43 percentage point lower contribution to GDP growth.
Minor downward revisions also were made to personal consumption, nonresidential fixed investment, residential investment, and government purchases. Net exports were revised up to minus $400.7 billion from minus $409.4 billion.
The net effects of revisions to inventories and other components (notably net exports) leave demand numbers still relatively healthy. Final sales of domestic product were unrevised from the initial estimate of 3.6 percent. Final sales to domestic purchasers were down to 3.0 percent from the original estimate of 3.2 percent annualized.
Economy-wide inflation was unrevised at 2.5 percent and compares to the second quarter rise of 2.5 percent. The market median forecast was for 2.5 percent.
Turning to current quarter strengths and weakness (as opposed to component revisions), the economy was still gaining modest momentum. The acceleration in real GDP in the third quarter primarily reflected accelerations in PCE and in nonresidential fixed investment, a smaller decrease in state and local government spending, a deceleration in imports, and an acceleration in exports that were partly offset by a larger decrease in private inventory investment.
On the news, equity futures dipped modestly. Nonetheless, the key points today are that there is no significant change in underlying demand in the third quarter and recent monthly data indicate further strengthening.
Corporate profits in the third quarter grew to $1.507 trillion annualized-up from $1.470 trillion in the fourth quarter (previously $1.470) trillion). Profits in the third quarter rose an annualized 10.3 percent, following a 4.3 percent gain the quarter before (previously 4.3 percent). Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits on a year-on-year basis advanced 6.5 percent, compared to up 0.3 percent in the second quarter.
“Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product...if we should judge the United States of America by that - counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.
Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans.”
― Robert F. Kennedy