The Consumer Blinked First

The data flow this week was thankfully light. But even during the holiday season, less can be more.

Speaking of the holiday season, various unofficial reports seemed to indicate that it might have been a bit brighter than many had anticipated, according to one widely watched metric. Although not very scientific, a few photographs from my Morningstar colleagues showed nearly empty toy shelves at a couple of major retailers just two days before Christmas. Consumer confidence, as reported by the Conference Board, looked better, too, confirming the University of Michigan Survey from last week.

I've been carping on the fact that greater confidence among the 90% of the population with a job would jump-start consumer spending and, by extension, overall economic performance. I am not sure that either of the major confidence indexes truly captures that mood, but it is good to see them trending in the right direction for a couple of months in a row.

On the manufacturing front, the regional purchasing managers' report for Chicago was quite positive and exceeded expectations. This should bode well for the widely watched nationwide purchasing managers' survey due next week. The non-seasonally adjusted employment component of the Chicago survey was also bullish and should bode well for the employment report due on Jan. 8.

Meanwhile, on the real estate front, the Case-Shiller price indexes showed some improvement on a seasonally adjusted basis for October and were flat without that adjustment. I had feared that these numbers would get a little sloppy either this month or next. Since this week's flow of indicators was so light, I published another piece this week that highlighted the normal cycles that occur coming out of most recessions.

Holiday Sales Brighter Than Some Anticipated
The most widely quoted number for holiday sales was a report on Monday from a division of MasterCard indicating that retail sales from Nov. 1 through Christmas Eve increased 3.6%. At first glance, the number looked a little better than the average growth forecast, which called for flat sales, more or less. However, this number included the relatively small online sales segment, which posted headier 5% growth. Vigorous online sales were a distinguishing feature of this year's holiday shopping season. Weekly same-store sales data for the last week of the holiday season was also quite robust, approaching 3% according to the International Council of Shopping Centers.

As I said last week, I am not a huge fan of a lot of these statistics because they're not compiled in the same way as the official retail sales from the government. Those figures, by the way, are scheduled to be released on Jan. 14, and are subject to two months of additional revisions.

Manufacturing in the Midwest Picks Up Steam
The Chicago Business Survey usually comes out the day immediately before the national survey, so I generally don't get a chance to ever comment on this series. However thanks to the dynamics of our Gregorian calendar, the Chicago numbers were out this week, even though the national report won't come until next week. The Chicago index hit a new high for this recovery: 58.7 overall, up from a revised 55.5 last month. It was the third month in a row of improvement after a dip in September.

Just as importantly, new orders and actual production subcomponents also tentatively showed improvement. Even employment, which has been a major source of weakness in these types of indexes, looked better this month. However, I should caution that this is just one region, and the sub-components of the indexes I reference are subject to additional seasonal adjustment factors that were not available at press time.

Initial Unemployment Claims Improvement Kicks into Gear in the Fourth Quarter
Again, my usual caveat: I am always wary of reading too much into holiday period numbers. That said, initial unemployment claims plunged another 22,000 this week to 432,000. Even the less volatile four-week moving average of claims declined to 460,250. The improvement in this important leading indicator has picked up steam during the fourth quarter after showing what I characterized as glacial improvement during the second and third quarters. Although we started from higher levels, the total improvement in initial claims this recovery has been dramatically better than either of the last two recoveries (1990 and 2001).

Looking at the percentage metric, it took more than two years to show as much improvement in this key metric during the previous two recessions as we have seen in just the last nine months during the current recovery. This overall improvement should bode well for the monthly employment report that will be released on Jan. 8. Maybe this won't be a jobless recovery after all.

Housing Price Increases Pause Due to Seasonality
The Case-Shiller Price Index numbers for October were released on Monday and were a bit better than I anticipated. U.S. home prices were basically flat before adjusting for normal seasonality. This comes after several months of relatively robust improvement. On a year-over-year basis, prices were down about 7.3%. From 2006's peak levels, prices are down about 29%. I still suspect that prices will be a little weak during the winter months, but I believe prices will get a boost from improved employment news and higher consumer incomes this spring. A little weakness in this index isn't enough to induce excessive hand-wringing. However, large declines over a period of several months would prompt me to revisit my overall economic forecast.

Key Manufacturing Data and Employment Report Bookend a Busy Week
Next week begins with a flurry of December data. First out of the gate is the purchasing managers' survey, which is due on Monday. After staging a dramatic rise during the first half, this metric has stabilized at readings over 50. A dramatic blast off the bottom, followed by bobbing and weaving once the ratio crosses 50, is a pretty typical pattern. Last month the number fell off a bit, to 53.6. For November and December, I had feared that a slowing in the improvement of auto production might cause these numbers to give back some ground. However, early results out of the New York and Chicago regional surveys seem to point to an improvement in the nationwide ISM purchasing managers' survey.

The other really big number for the week is the employment report, which is due on Friday. General expectations are for job losses of about 10,000 workers for December. However, I think good initial unemployment claims numbers and employment data embedded in some of the purchasing managers' reports could mean that we actually see a small increase in jobs for December. I will also be closely analyzing hours worked as well as the temporary employment data, as they may offer more insight than just the raw jobs number.

Still, a positive jobs number would provide a huge psychological lift, even if it doesn't mean much economically. Even with better jobs data, I suspect the unemployment rate could creep back up for another month or two, as disgruntled job seekers re-enter the workforce.

Also on tap for next week are auto sales, which I expect to do better than the 10.9 million unit consensus figure. This figure is above the low of about 9 million units, but still dramatically below the long-term average of 16 million units on a seasonally adjusted annual rate basis. We'll also get new data about existing home sales, but these numbers aren't terribly illuminating given the distorting effects of the holidays and normal seasonality.

Keep an Eye on Interest Rates, Long-Term Bonds Get Whacked
Next week I'll be keeping a careful watch on interest rates. They spiked again this week. The yield on the 10-year bond bounced back to 3.85%, flirting with its high for the year. This will put some pressure on mortgage rates, and could dampen housing sales. Still, rates would have to move considerably higher to have much of an impact, in my opinion, because housing affordability is dramatically above long-term averages. The real question over the next two weeks centers on whether the spike was due to year-end factors, numerous Fed auctions, low holiday-induced trading volumes, or whether rates will settle back in the New Year as traders return to work.

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