November ISM Manufacturing, Oct. Construction, Income and Spending

                            Hurricane Sandy and Fiscal Cliff Weigh on Manufacturing

  • The ISM Manufacturing Index for November fell to 49.5 percent, indicating slight contraction.
  • Construction Spending for October increased by 1.4 percent, boosted by residential projects.
  • Total Personal Income was unchanged in October. Real Disposable Income fell by 0.1 percent.
  • Real Personal Consumption Expenditures declined by 0.3 percent in October.

Economic data for the fourth quarter generally looks soft, with the exception of today’s construction spending report for October, which beat expectations. We estimate that real GDP growth for the current quarter will register near 1.0 percent, a significant step down from Q3’s 2.7 percent growth rate. The ISM’s Manufacturing Index for November fell below the 50 break-even line, to 49.5, indicating a slight contraction in manufacturing activity for the month. This follows two positive readings in September and October which reversed a summer slump. It is fair to say that there is little momentum in manufacturing right now, and in the broader economy, outside of housing markets. Even there Hurricane Sandy will be a dampening factor for the November data. Dragging the ISM MF index down in November were weak employment, inventories, backlog of orders and international trade. Of the 18 reporting industries, six said that they grew in November, led by petroleum and coal products, paper and furniture. Eleven industries reported contraction in November, led by apparel, wood products and primary metals. Anecdotal comments were downbeat, with references to both the Fiscal Cliff and to Hurricane Sandy.

Construction spending for October increased at a 1.4 percent annualized rate, boosted by a 3.0 percent gain in private residential construction spending. This was a strong start to fourth quarter residential investment that will likely be dampened in November due to Hurricane Sandy. On Friday the October income and spending numbers were released. Nominal personal income was unchanged for the month. After adjusting for inflation and taxes, real disposable personal income fell by 0.1 percent in October. In September real disposable income was unchanged, and in August it declined by 0.3 percent.  In July the increase was a modest 0.1 percent. So we can say that there has been essentially no increase to real disposable income since last June. Hence it should come as no surprise to see a 0.3 percent decline in real consumer spending in October that negates most of the 0.4 percent increase in September. With near stationary real disposable income, spending gains can come only from reduced saving and/or increased use of credit. The personal saving rate for October declined to 3.6 percent. Further declines in saving from this point cannot be viewed as a healthy phenomenon. This leaves credit to sustain spending. Some re-leveraging of households is appropriate and healthy; however, credit-fueled spending is vulnerable to reduced credit availability, and so is vulnerable to gyrations in U.S. and global financial markets, which is to say that the platform for U.S. consumer spending is not as firm as it would be if it was supported by stronger real wage and salary gains.

Market Reaction: U.S. equity prices are down. Treasury rates are up at the long end of the yield curve. Oil is up to $88.97/barrel. The dollar is down against the yen and the euro.

Click here for a PDF version of the Comerica Economic Alert: ISM-MF 120312.

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