Greg Gerber posted on November 26, 2008 16:03
NEW YORK -- Personal consumer expenditure (PCE) fell 1 percent in October, in line with market expectations and following a 0.3 percent decline in September. Personal income, however, rose 0.3 percent, beating forecasts for a 0.1 percent increase.
The PCE deflator fell 0.6 percent with the year-over-year rate falling to 3.2 percent from September's 4.1 percent. The core PCE deflator was unchanged in October relative to September with the year-over-year rate falling to 2.1 percent, slower than September's revised 2.3 percent pace.
The decline in consumer spending reflected lower purchases of both durables (-4 percent) as auto sales fell to an annualized 10.5 million units -- the slowest since early 1983 and nondurable goods (-2.5 percent) in October. The services component managed to rise 0.2 percent in the month, a touch slower than September's 0.3 percent gain. On a constant dollar basis, overall consumer spending fell 0.5 percent building on declines in the period from June to September. October's drop was led by durables (-3.8 percent) and to a lesser extent non-durables (-0.6 percent) with spending on services up marginally (+0.2 percent). The decline in spending occurred despite personal income rising 0.4 percent in the month.
In a separate report, durable goods orders slumped by 6.2 percent, more than double forecast, with orders excluding transportation equipment falling by a strong 4.4 percent. Of the major categories, only communications orders rose in October. While shipments and unfilled orders also weakened in October, inventories rose by 0.4 percent. Initial claims for the week ending November 22 were also reported this morning given tomorrow's US holiday. The report showed that claims fell by 14,000 in the latest week but still came in at a high 529,000. The four-week moving average rose to 518,000 from 507,000 in the prior week, signaling that labor market conditions continued to weaken in November.
The decline in constant dollar consumer spending in October sets the stage for another weak quarter following the strong 3.7 percent annualized decline in the third quarter - the steepest drop in activity in 28 years. While some of the weakness in the third quarter may have reflected personal spending returning to its previous trend level after being temporarily boosted by the tax rebate checks issued in second quarter, the sharp deterioration in the labor market and souring of consumer confidence suggest that this was only one of the factors that weighed on the level of spending, said Dawn Desjardins, assistant chief economist with RBC Economics Research.
"Going forward, we expect further weakness as the October data suggests that as employment declines intensified (the 4-week moving average stood at its highest level since January 1983 in mid-November implying a further weakening in labor market conditions), consumers continued to pullback and that there will be another decline in PCE recorded in the final quarter of 2008," she explained. "While the Fed funds rate is currently at a highly stimulative 1.00 percent, tight lending standards and elevated spreads are preventing this stimulus from reaching consumers and only when spreads come in and more capital is made available for consumer loans will there be a turnaround in spending activity."
US new home sales continued to slide in October
New home sales in the United States fell 5.3 percent month over month to 433,000 units on an annualized basis. The market was expecting a more muted fall of 5 percent to 441,00, said Josh Heller, an economist with RBC Economics Research. The prior month’s reading of 464,000 was revised down to 457,000. The month's supply rose to 11.1 with the prior month’s reading revised up to 10.9 from 10.4.
The 5.3 percent drop in new home sales to 433,000 marked a 40 percent drop from one year earlier. Sales of single-family homes fell to its lowest point since the beginning of 1991. Geographically, the weakness was largely focused in the Western region of the country, which saw an 18 percent fall. Though the weakness was somewhat offset by a 22.6 percent rise in the Northeast.
Median home prices continued falling in October reaching $218,000. This is the lowest they have been since mid-2004 . While the actual inventory of unsold homes on the market fell to 381,000 (following a 414,000 reading in the prior month), month’s supply rose to 11.1 from the prior month’s 10.9. Inventories will need to be substantially pared back to signal that the housing market has stabilized.
"The weakness displayed in today’s release reinforces our view that residential construction will continue to be a drag on growth in the coming quarters. It increasingly appears that the downside risks to our forecasted weakness in US economic growth are materializing," said Heller.
SOURCE: RBC Economics Research press release