August Leading Indicators, September UI Claims, Regional Fed Surveys

A Bifurcated Economy: U.S. Households Versus the World

  • The Leading Economic Index for August decreased by 0.1 percent as manufacturing indicators cooled.
  • Initial Claims for Unemployment Insurance declined by 3,000 for the week ending September 15.
  • Both the New York and Philadelphia Feds’ regional Manufacturing Surveys were negative in September.

The U.S. economy appears to be going in two directions at once. The household sector is showing remarkable strength, buying houses, cars and iPhones. However, manufacturing and a broad swath of the service sector is retrenching as global risk factors seem to increase daily and we march steadily toward the Fiscal Cliff. Job growth is tepid and wage gains are not keeping up with inflation, so real wage and salary income is not driving household spending. Increasing credit availability and low interest rates in the presence of pent-up demand is the combination that is fueling the household sector. Just like a fire combining oxygen and fuel in the presence of heat, consumer spending can burn out quickly, or it can be a sustained reaction. The Federal Reserve has launched QE3, in part to sustain the household sector by trying to keep mortgage rates low and juice up the stock market. This adds fuel to consumer spending. However, the long-burning fuel is real income growth and that fuel supply is threatened by weak job growth, flat salaries, and the large tax increases of the upcoming Fiscal Cliff. Unless Congress acts to eliminate or significantly reduce or delay the impact of the Fiscal Cliff it will overwhelm the stimulatory effects of QE3 early next year. It will be more like a flood than a cliff, extinguishing the fire of consumer spending. 

The Conference Board’s Leading Economic index for August declined by 0.1 percent as manufacturing indicators cooled.  The Leading Index has now declined in three out of the last five months.  Pulling the index down in September were new orders for manufacturing, consumer expectations, average weekly manufacturing hours and initial claims for unemployment insurance. The Coincidence Index, which gauges current conditions, increased by a scant 0.1 percent in August. The mixed results for August wave a cautionary yellow flag, consistent with an ongoing weak-to-moderate expansion plagued by downside risk factors.  Initial claims for unemployment insurance declined by 3,000 for the week ending September 15, reversing only some of the upwardly revised 18,000 claim increase from the week before. According to the Department of Labor, Hurricane Isaac is at least partially responsible for the large increase in claims in early September. Released on Monday, the New York Fed’s Empire State Manufacturing Survey showed worsening manufacturing conditions there in September. Today the Philadelphia Fed released their Business Outlook Survey, which was slightly negative for September after a sharp decline in August.

Market Reaction: Equity markets are down. Treasury yields are also down. NYMEX crude oil is up to $91.99/barrel. The dollar is down against the yen and up versus the euro.

Click here for a PDF version of the Comerica Economic Alert: Leading Indicators 092012.

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