This time of year, we take an opportunity to try to scare ourselves or others under the guise of Halloween. This past weekend I observed a group of walking skeletons preparing to run in Charlotte and several children made up as M&Ms. In keeping with the theme, each was in search of treats and was prepared to trick if unsuccessful.
Our economic bag has a collection of treats, comparatively, and potential tricks, possibly too gentle a term. Housing appears to be on the mend or at least coming off its bottom. Housing starts jumped by 15 percent month-to-month in September, stronger than expected and at its highest level in four years. The National Association of Home Builders Index moved up to its best reading since June 2006. Building permits were up 11.6 percent with single family permits at their highest level since July 2008. Inventories have shrunk to below six-month supply for the first time since March 2006. Even though existing home sales slipped in September, the average price year over year increased 11.3 percent, the biggest increase since September 2005.
Retail sales came in at a stronger than expected 1.1 percent increase from August. The previous two months’ sales figures were also revised higher. Part of the increase was due to higher gasoline sales, but increases were also reported in furniture, apparel, autos and electronic (iPhone 5?) sales. The time period corresponds with the crucial, to retailers, back to school sales. The strength of sales numbers should provide a positive contribution to third quarter GDP. Historically there has been an 80-90 percent correlation between back to school sales and Christmas sales. The strength of third quarter retail sales is a positive omen for fourth quarter retail sales.
Consumer confidence is also on the increase, as reported by the University of Michigan’s Consumer Sentiment Index for October, moving to a five-year high. Consumers may be feeling better as a result of a wealth effect, with rising stock markets, increases in house prices and values and, thanks to declining debt service costs, an increase in consumers’ free cash flow.
Unemployment continues to decrease, albeit modestly. The headline unemployment rate declined to 7.8 percent for September. Initial jobless claims continue to trend lower, with weekly variations, to post crisis lows. The Institute for Supply Management’s manufacturing index had been indicating contraction in the manufacturing sector for most of the summer, before moving into expansion territory in September. The ISM’s nonmanufacturing activity index soared to its highest reading of the year, further evidence consumer spending is in much better shape than manufacturing activity.
Not everything in our bag of goodies is treats. There are a few lumps of coal, oops, wrong holiday. As mentioned above, manufacturing has been under pressure of late. The headline consumer price index inched higher in September, but still too early to set off the inflation goblin.
Although the European debt problems have left the headlines of late, the progress is slow and the potential for a misstep leaves the area vulnerable to further crisis.
Early indications of a trough in the engineered Chinese economic slowdown are insufficient to convince investors that China has avoided an economic hard landing. China also has its own version of elections in several months. World oil prices have moderated some of late, but some risk premium remains due to sanctions on Iranian exports and diplomatic attempts are made to diffuse military resolution of their nuclear program.
If the ghosts and monsters are not enough to provoke fright, we have our own election in a few weeks. At stake are the nature and direction of the “fiscal cliff” and sequestration, in the near term, and tax policy and entitlement spending over the longer term. If you follow the ads, flyers, speeches and proxies for the candidates, there is plenty to frighten the average voter. It is probably time to dig into the bag of goodies and consume enough sugar to keep me awake until after the election.
David Helscher is a senior vice president and trust officer with Clinton National Bank.