'Tis the season to be wary

The week's economic reports were generally negative, and even the positive news included a dose of gloom. Leading economic indicators dropped again and housing starts continued to worsen. While gross domestic product (GDP) improved in the third quarter, signs suggest a decline is all but inevitable in the fourth. Personal income also rose, but consumers were still forced to tap their savings to pay for increased spending. For the week, the S&P 500 Index rose 1.2% to 1,484 (for a year-to-date total return of 4.7%). The yield of the 10-year U.S. Treasury note fell 6 basis points, to 4.18%.

Economic indicators kept falling

The Conference Board's index of leading economic indicators, a potential measure of future economic performance, dropped 0.4% in November, reaching its lowest level since mid-2005. October's 0.5% decline was unrevised, and the index has now fallen three of the last four months. Seven of the index's ten components declined in November. The index's three-month annualized rate of change climbed to –3.2% from –4.8%, but the six-month annualized rate fell to –2.3% from –1.0%. The –2.0% limit is considered the threshold of recession; this is only the second time since 2001 that level has been surpassed.

Strong GDP growth poised for slowdown

The final number for annualized third-quarter growth in the nation's total output of goods and services was unchanged from last month's 4.9% estimate. The Commerce Department's Bureau of Economic Analysis also reported growth was ahead of the second quarter's 3.8% surge. Increases in exports, consumer spending, and inventory investment contributed to the improvement. Real GDP year-over-year growth was 2.8%, which also eclipsed the second quarter's 1.9% rate. However, declining domestic profits from the second quarter to the third, the dismal housing market, and tighter credit conditions suggest that GDP growth will slow in the fourth quarter and into 2008.

Slump continued for housing starts

Housing starts in November sank for the fourth time in five months, matching the 14-year low first reached in September. New residential construction, reported by the Commerce Department, dropped 3.7% to a seasonally adjusted annual rate of 1.19 million units. The figure is also 24.2% below the revised November 2006 rate. While the National Association of Home Builders' index of builder optimism is at record-low levels, there is hope the Federal Reserve Board's quarter-point cut of short-term interest rates on December 11 will boost the industry.

Personal income climbed, savings rate fell

Personal income increased 0.4% in November, ahead of October's 0.2% rise but below the 0.5% expected gain. Salaries and wages increased 0.6%, fueling the growth. However, spending jumped 1.1%, causing the savings rate to slip to –0.5%, the lowest rate ever excluding the variations from Hurricane Katrina, as consumers paid higher prices for energy as well as goods and services. Another concern was overall inflation, which jumped 0.6%. Adjusting for inflation and taxes, real disposable income dropped 0.3%.

The economic week ahead

It's back to business after next Tuesday's Christmas holiday. Thursday's reports on consumer confidence and durable goods will provide some year-end economic insight. The U.S. housing market comes into focus with Friday's report on new-home sales.