Undaunted by flat-lined incomes, shoppers forged ahead in October driving retail sales up by 0.5 percent, after a strong 1.1 percent gain in September. The income constraint means that households are willing to add debt or reduce their saving rate in order to spend more. We saw both mechanisms in play in September and may see the same when the October income and consumer credit data are published. A solid start to Q4 spending is supportive of Q4 real GDP growth. If spending stays engaged through November and December we could see 2011Q4 real GDP growth in the range of 3.0 to 3.5 percent. Inflation eased in October as the CPI dipped by 0.1 percent and the PPI for finished goods dipped by 0.3 percent. Easing consumer prices should allow for real disposable income to increase for the month, a rare event in 2011. Easing prices will also give the Federal Reserve a little more maneuvering room as it considers further monetary policy options. However, lurking in the shadows is the run-up in crude oil prices, now near $100 a barrel; roughly a third higher than the early October low of $75 a barrel. If the $100/barrel price point holds for U.S. crude, then gasoline prices could add another 10 cents per gallon from the current national average AAA price of $3.40 per gallon. Industrial production increased by 0.7 percent in October, which is good news. However, with the historical revision we now see just two monthly increases in production, in July and October, over the last five months. Manufacturing output was up by 0.5 percent in October, as motor vehicle and parts production jumped by 3.1 percent. Vehicle assemblies increased to a 9.3 million unit annual rate. Oil and gas drilling continues to show solid gains, up 1.4 percent in October. Builders are feeling a little more confident after a shaky beginning of 2011. Even though housing starts dipped by 0.3 percent in October, to an annual rate of 628,000 units, the dip was smaller than expected and will be counted as a win for the month. The permits data for October was unambiguously good. Total permits increased by a hefty 10.9 percent to hit an annual rate of 653,000 units, the highest rate since housing numbers were juiced up by the home buyers’ tax credit in March of 2010. Likewise, labor market data took another step in the right direction. Initial claims for unemployment insurance, for the week ending November 12, decreased by 5,000 to hit 388,000, continuing the recent improving trend. The Conference Board’s Leading Economic Index increased by a strong 0.9 percent in October, nailed up by the surge in building permits, and showing that domestic conditions are improving. Keep in mind that the leading index does not account for increased downside risk from the Eurozone.
Click here for the complete Comerica Economic Weekly, with forecasts for next week’s data releases and an updated November economic calendar: CMAEconWeekly111811