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Economic Watch: Three Reports Show Underlying Strength

December 23, 2015

By Evan Lockridge

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Two days before Christmas, the Commerce Department released three reports on the U.S. economy. When put together, they show a solid performance, though not as strong as it has been or some would like.

Shipments and orders of manufactured goods designed to last at least three years in the U.S. were mixed in November, according to the advance numbers, while a closely watched indictor within the sectors declined.

Durable goods shipments increased in November by 0.9% from the month before, its second gain in the past three months. It was driven higher by a 2.9% hike in shipments of transportation goods.

In contrast, new orders for durable goods were virtually unchanged in November following a 2.9% increase in October.

The key orders of nondefense capital goods excluding aircraft component, an indication of future business investment, declined 0.4%, with corresponding shipments falling 0.5% after a downwardly revised 1% decline in October.

Weaker-than-expected core capital good shipments during November as well as in the factory sales report point to less fourth business investment than analysts at RBC Economics were expecting.

“These two reports pushed our monitoring for fourth quarter gross domestic product [GDP] growth down to 1.8% from 2.1% previously,” said Paul Ferley, assistant chief economist. “Aside from quarterly volatility, the underlying economic backdrop remains solid with consumer spending [more on this below] continuing to be supported by improving labor markets, as well as still low interest rates and lower gasoline prices, with business investment likely to pick up going forward in response to rising domestic demand. Our forecast assumes that GDP growth will strengthen to a 2.8% pace in 2016 from the 2.5% increase we expect on an annual basis in 2015.”

Rise in Personal Income Boosts Personal Spending

Meantime, a separate report shows personal spending in the U.S., which measures what households spend for everything from apples to zip lines, rose 0.3% in November, following a downwardly revised flat reading in October but an upwardly revised 0.2% increase in September

November personal incomes increased 0.3% in November, following a 0.4% increase in October and 0.2% gain in September. The saving rate inched down to a still elevated 5.5% after rising to 5.6% in October from 5.2% in September.

“Good news for retailers in this morning's report as consumers loosened their purse strings heading into the key holiday shopping season,” said Lindsey Piegza, chief economist with Stifel Fixed Income. “Taking advantage of low gasoline prices, an unseasonably warm early winter, and modest income gains, consumers appear increasingly willing to ramp up purchases of goods and services near the end of the year.”

Single Family Home Starts Best in Nearly 8 Years

Nationwide housing starts rose 10.5% in November as single-family home production increased 7.6% to a seasonally adjusted annual rate of 768,000 units, its highest reading since January 2008, according to the department. Multifamily production rose 16.4% to 405,000 units.

“Single-family production this month has reached levels last seen before the Great Recession, an indicator that we are making gradual headway back to a normal housing market,” said National Association of Homebuilders Chief Economist David Crowe. “As we close out the year, we can see that the housing sector has made headway in 2015, and we expect the recovery to continue at a modest pace.”

Combined single- and multifamily starts rose in the South and West, with respective gains of 21.3% and 6.3%. The Midwest was unchanged and the Northeast fell 8.5%.

Overall permit issuance rose 11% to 1.289 million units as single-family permits increased 1.1% to 723,000, the highest level since December 2007.

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