KEY DATA: GDP: 3.9% (up from 3.5%); Year-over-Year: 2.4%; Corporate Profits: +2.1%/Consumer Confidence: down 5.4 points
IN A NUTSHELL: “The economy really is growing solidly, which makes the decline in confidence very strange.”
WHAT IT MEANS: Is the economy accelerating? It sure looks that way. The upward revision to the summer economic performance was a surprise, but it was not caused by anything that could be considered strange. Both consumer and business spending was a bit better, but the changes were not large. Similarly, government spending was cut, but also by a modest amount. The trade deficit turned out to be wider than initially thought but businesses stocked up for the holiday shopping season at a greater pace, offsetting the negative impact of trade on growth. All-in-all, the changes came in all the right places. Inflation remained in check, which was expected, but there was a downgrade to personal income growth. That is not good news for employees. Corporate profits rose at a modest rate as well.
Meanwhile, in the face of declining gasoline prices, improving economic activity, strong job gains and a lower unemployment rate, consumers suddenly turned sullen. The Conference Board’s Consumer Confidence Index dropped sharply in November after having risen solidly in October. There was an especially large decline in expectations as the labor market outlook seemed to dim. These results were quite a surprise and given all the positive economic news, are hard to explain.
Meanwhile, the slowdown in home price appreciation continued in September. The S&P/Case-Shiller national index fell slightly and the year-over-year gain came down again. It is hardly a surprise that the huge increases we had been seeing have disappeared but it is disturbing that we are not seeing some continued monthly gains.
MARKETS AND FED POLICY IMPLICATIONS: If the consumer confidence numbers had come in as expected, I would be talking about the economy being off to the races. But the sharp decline does raise some questions, though I am not sure what they are. Basically, there is every reason but one to believe that people should be feeling better about things. That reason is wages, or lack thereof. Nothing else should be standing in the way of this economy really picking up steam. But businesses have done a great job of keeping worker demands for higher wages at bay and until the pendulum swings back to employees, firms will continue limiting pay increases to their workforces. The Fed members are likely to take these reports in stride, as they really do not change anything. But investors have to start wondering what shoppers are really thinking. I believe this will be a really solid holiday season, but we need happy consumers for that to happen.