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Tuesday, October 31, 2006

ISM & Consumer Confidence

Business activity in October expanded at the slowest pace in more than a year as the effects of a weakening housing market rippled through the U.S. economy.

The National Association of Purchasing Management-Chicago said today that its business barometer fell more than expected to 53.5, the lowest since August 2005, from 62.1 in September. A reading above 50 signals expansion.
Even though the economy is still expanding, this is shaking up those who have been predicting that the housing decline will be manageable. This number is below the bottom of the forecast range.
Consumer Confidence fell in October:
U.S. consumer confidence slipped slightly in October, weakened by consumers' less favorable view of the job market, a survey showed on Tuesday.

The Conference Board said its index of consumer sentiment edged down to 105.4 in October from an upwardly revised 105.9 in September.
The decline seemed pinned on the job market, which raises some interesting questions. Midwestern manufacturing activity was reported down 1.1%, but that is not surprising because of the auto industry problems.
While all these are negative trends (month to month declines), these numbers also still show an expanding economy. The problem with housing is that it does seem to be pulling at what had become a relatively diversified expansion.

But this is why the outright recession in the housing sector is so problematic for the economy: consumer spending has been funded by debt, and a great deal of that debt has been incurred in the form of borrowing against home equity. A slowing in the rate of building and jobs related to housing (mortgage brokers, realtors, construction & home supply) is going to correspond with reduced consumer spending. The lower gas costs don't seem to be offsetting the housing recession enough. My guess is because I don't see prices dropping in stores. Gas seems to be the only thing that is down. I think inflation has picked up in the last few months rather than declining, because everyone's hoping to get by with price increases now.

Also, the cost of employment was up 1% in the third quarter:
-U.S. employment costs rose 1.0 percent in the third quarter, the largest rise in more than two years and one that could heighten concerns at the Federal Reserve over inflation.

The increase in the Employment Cost Index, a broad gauge of what employers pay in wages and benefits, edged up from the second quarter's 0.9 percent gain and was larger than the 0.9 percent rise economists in a Reuters poll had forecast, Labor Department data showed on Tuesday.
Oh, well... I find it hard to complain that after years of real stagnation in wages, they have begun rising in the last year.

Because construction is mostly private contractors and not mega corporations it is never classified as the business colossus the industry really is. Consumer Confidence? As a trader and broker I can tell you that this is a phony. I go back to the days when everybody couldn't wait til the M-1 came out; then it was the silver-soybean ratio, and don't forget El Nino and Y2K. There is zero correlation between the phony U of M survey and anything else.
This was the Conference Board consumer confidence, not the U of M.

Good point about the construction sector; no one's adding up the tools, pick-up trucks, lifts and materials they move. Aomost everyone's missing this, but in the end the economy doesn't lie and can't be talked into compliance.
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