Strength of Consumer Spending is Driver of Q3 GDP Growth
Real consumer spending increased 0.9% in August after a 0.2% gain during the prior month. The ‘Cash for Clunkers’ program was the major reason for the sharp increase in consumer spending. A large part of this gain will be reversed in September as the program expired in August. Taking into consideration the likely drop of consumer spending in September and the July-August estimates, consumer spending is now projected to have risen 3.3%. The boost from consumer spending should translate into a 3.2% gain in real GDP in the third quarter after a 0.7% decline in the second quarter.
Personal saving as a percent of disposable income dropped to 3.0% in August from 4.0% in July. For the year, the saving rate should come in around 4.0%, which would be the largest annual average of the saving rate since 1998.
In August, the personal consumption expenditure price index fell 0.6% on a year-to-year basis in August after a 0.9% decline in July. The core personal consumption expenditure price index which excludes food and energy moved up 1.3% in August. These inflation numbers suggest that inflation is a non-issue for several more months.
ISM Manufacturing Survey – Two Steps Forward, One Step Backward
The composite index of the ISM manufacturing survey fell slightly to 52.6 in September from 52.9 in August. Does it imply that the recovery will be reversed? No. The process of economic growth will be marked by both setbacks and advances in economic data. Readings of the indexes above 50 denote an expansion of activity. The important point is that the composite index is holding in the region denoting a growing factory sector for two straight months. Indexes tracking new orders, production and imports grew at a slower pace compared with August. The employment and inventories indexes point to a slower pace of decline in September vs. August.
The Tally of Continuing Claims Shows a Mild Moderation
Initial jobless claims increased 15,000 to 551,000 during the week ended September 26. Continuing claims, which lag initial claims by one week, fell 70,000 to 6.09 million and the insured unemployment rate held steady at 4.6%. The sum of total continuing claims inclusive of those under the special programs (Emergency Unemployment Compensation Program and Extended Benefits) fell slightly to 9,878,250 during the week ended September 12 from 9,878,770 in the prior week.
Residential Construction Outlays Advanced in August
Total construction spending increased 0.8% in August. This reflects gains in residential construction outlays (+4.7%) and declines in non-residential construction spending (-0.1) and public construction spending (-1.1%). The July-August average of residential construction expenditures is marginally higher than the second quarter average, which is indicative of a flat reading of residential investment expenditures in the third quarter. Residential investment expenditure, a component of GDP, has dropped for 14 straight quarters (see chart 7).
In related housing market news, the Pending Home Sales Index (PHSI) of the National Association of Realtors increased 6.4% % in August, marking the seventh monthly gain of the index. This bodes positively for home sales in September/October 2009.
