Comerica Economic Weekly

U.S. data from the third week of September was mixed, indicative of an economy pulled in several directions at once. In particular, consumer spending, representing more than two-thirds of U.S. gross domestic product, remains disjointed. Improving credit availability is fueling a rebound in home and auto sales. However, August real disposable income (after taxes and inflation) was down 0.3 percent and August real consumer spending was nearly flat, rising just 0.1 percent after inflation. This suggests that consumers are able to satisfy pent up demand for big purchases, where credit is available, but are still feeling the strain of weak job creation and weak real wage gains, which may be limiting everyday purchases. If the trend in flat-to-declining real disposable income were to persist, eventually it would be a serious drag on big-ticket consumer spending, as credit availability would eventually contract as credit defaults increase. Here, we have to be concerned about both current weak labor market conditions and the Fiscal Cliff. The Fiscal Cliff would be a double hit to real disposable income, substantially increasing taxes while hurting job growth due to reduced federal spending. If the rebound in big-ticket, credit-fueled purchases is to continue, it will eventually need to be supported by ongoing real disposable income growth. That will require congressional action to reduce, eliminate or kick the Fiscal Cliff can down the road. New orders for durable goods are on a rollercoaster ride, shaped by commercial aircraft orders. In August, new orders for commercial aircraft were down over one hundred percent (made possible by the seasonal adjustment factors). Core durable goods orders (nondefense capital goods excluding aircraft) actually increased by 1.1 percent, so overall manufacturing conditions remain in the range of weakening-to-stable, not rapidly deteriorating.  Initial claims for unemployment insurance fell by a substantial 26,000 for the week ending September 22, good news for overall labor market conditions. Real gross domestic product growth was revised down in the third estimate, now down to just a soggy 1.3 percent annualized rate.  The July Case-Shiller house price index was up for all 20 key cities. Surprisingly, amid the economic,  U.S. political, and geopolitical turmoil, consumer confidence improved substantially in September.  That is not a magic bullet, but it does suggest that endogenous factors allow the U.S. economy to grow through the remainder of 2012.

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