Monday, November 27, 2006

Predictions of a Happy Holiday Season

According to a recent article in Businessweek there are some good reasons to be merry. With low unemployment, rising wages, low inflation, lower gas prices, and a possible bottoming out in housing, expectations are for a solid holiday shopping season.

U.S.: The Housing Grinch Won't Steal Christmas

Wallets are open, and even the outlook for home sales is improving

"....Retailers can put their fears behind them--and that's good news for the overall economy this quarter and next. Consumers are heading into the holidays buoyed by the sturdiest set of spending fundamentals in years. The labor markets are strong, with the unemployment rate at a 5 1/2--year low of 4.4%. Gasoline prices are down 26% since early August, resulting in a windfall of purchasing power for household incomes...

There is still almost no evidence of spillover effects from the housing downturn on consumer buying. That means the slump remains confined to the housing sector....

...based on the latest readings on retail sales and consumer prices through October, consumer spending in the fourth quarter is speeding up...."

The real story is despite the headline numbers retail sales have improved lately as described below.

"...RECENT GOVERNMENT REPORTS on retail sales require a careful reading. October sales dropped 0.8% from September, when they fell 0.2% from August. Those declines mainly reflected back-to-back decreases in gas station receipts of 11.1% and 6%, indicating lower pump prices, not less gasoline buying. In addition, retail sales of building materials and supplies fell for the third consecutive month. For purposes of measuring GDP growth, though, the government counts that activity as part of residential construction, not consumer spending. Overall retail sales from July to October fell at a 4% annual rate, but sales excluding gas and building materials grew at a healthy 5.1% rate. The bottom line is that consumer spending on most items began the final quarter with a head of steam, fueled largely by the additional buying power fueled by falling energy prices."

And Headline inflation is decelerating quickly

"...THAT BOOST WAS EVIDENT from the overall consumer price index in September and October. It posted monthly declines of 0.5% in each month, the largest two-month drop since 1948. The fourth-quarter CPI will actually be below the level for the previous quarter, a rare event in the past half century.

That means the same paycheck this quarter will buy more goods and services than it did last quarter. For example, the Labor Dept. reported that real weekly earnings of production workers in October increased 1.3% from September, when they rose 1% from August. Those were the biggest back-to-back gains in 24 years..."

And what about housing, is it bottoming?........

"...Consumer momentum is the chief reason retailers shouldn't fret about the housing slump spoiling their holiday party. Clearly, some of the housing-related data of late have looked alarming, especially the surprisingly large drop in October housing starts. But that decline might have been an exaggeration. The huge 26.4% plunge in new home starts in the South was one of the largest on record for that region. Several analysts say the swoon might have been due to exceptionally wet weather in that region. If so, the weakness may well reverse in November....

Several sales indicators appear to be stabilizing even as builders work through their stocks of unsold homes.......Strengthening demand is particularly noticeable in the new-home market, where sales increased in both August and September, the first two-month rise in a year and a half....

...THE MOST FAVORABLE SIGN that demand for homes will continue to firm comes from weekly mortgage applications to buy a house. Not only have applications stopped falling, their three-month average is now rising after declining steeply for more than a year. The applications statistics foreshadow data on housing sales, and sales are what drive new building....

By James C. Cooper - Businessweek

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