Wild stock swings amid downbeat economic news

Real gross domestic product (GDP) advanced very strongly in the third quarter, though the week's downbeat economic reports seemed to signal tougher times on the horizon, in part because of the troubled housing market. With these concerns hanging in the air, the stock market plunged on Monday. At the end of the day, both the Dow Jones Industrial Average and the Standard & Poor's 500 Index had fallen 10% from their October records—a traditionally defined "correction." Yet the stock markets snapped back with a vengeance on Tuesday and Wednesday and ended the week on a positive note. For the week, the S&P 500 Index rose 2.8% to 1,481 (for a year-to-date total return of 6.2%). The yield of the 10-year U.S. Treasury note declined 1 basis point, to 3.95%.

Exports and inventories contributed to GDP surge

The nation's total output of goods and services soared in the third quarter, increasing by 4.9%. This was the fastest growth rate in real, or adjusted-for-inflation, GDP since the third quarter of 2003. Major factors behind the third-quarter surge were a growth in exports, aided by a declining dollar and robust overseas markets, and a buildup of inventories. Inflation, as measured by the GDP price index, or "deflator," slowed to a 0.9% increase from a 2.6% increase in the second quarter.

In a separate statement, the White House forecast a 2.7% growth rate in real GDP for 2007. Its 2008 forecast was trimmed from 3.1% to 2.7%, after recent revisions in historical productivity growth.

Federal Reserve chief noted upcoming "headwinds" for consumers

To help counter anxiety over the availability of credit, the Federal Reserve said on Monday it would provide $8 billion in loans to help banks meet their liquidity needs over the upcoming holidays. On Thursday, remarks by Fed Chairman Ben Bernanke suggested to some analysts that the Federal Open Market Committee might be inclined to cut interest rates at its next meeting on December 11. Mr. Bernanke noted that "renewed turbulence" in the financial markets has "resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors." In addition, he said, "I expect household income and spending to continue to grow, but the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead."

Fed's report on regional economies found slower growth

The Federal Reserve's regular review of economic activity in its 12 districts, known as the Beige Book, found that economic growth is slowing. Specifically, the report noted that most retailers expect "a slow holiday season"; manufacturing activity was "little change[d] on net"; homes up for sale remain a continuing "glut" that is putting downward pressure on prices and construction; and the growth of business lending, while still at high levels, may be slowing. The steady decline in the dollar has been stimulating both tourism in the United States by foreign visitors and exports of agricultural products and manufacturing goods.

Consumer confidence slipped, income growth slowed

The Conference Board's index of consumer confidence fell more sharply in November than analysts had expected, to 87.3. The November reading was the fourth-straight monthly decline and the largest month-to-month decline since Hurricane Katrina. "Consumers' apprehension about the short-term outlook is being fueled by volatility in financial markets, rising prices at the pump, and the likelihood of larger home heating bills this winter," said Lynn Franco, a research official at The Conference Board.

Americans' personal income increased 0.2% in October, the lowest monthly growth rate since April and below analysts' expectations. Personal spending also rose by 0.2%, weak growth that reflected lower spending on durable goods. The "core PCE deflator" (a gauge of consumer prices excluding food and energy) rose 1.9% compared to its year-ago level. The Federal Reserve's "comfort zone" for this inflation indicator is considered to be 1%–2%.

Housing slump continued despite gain in new home sales

Sales of existing homes declined 1.2% in October—the eighth straight monthly drop—and were 21% lower than a year earlier. By contrast, sales of new homes increased by 1.7% in October, the first increase since April, reflecting heavy discounts by builders. Compared with a year earlier, however, new-home sales were 24% lower. The supply of unsold existing homes stood at 10.8 months, and the inventory of unsold new homes was 8.5 months. Compared with a year earlier, median prices declined 5.1% for existing homes and 13.2% for new homes.

Durable-goods orders and construction spending proved disappointing

New orders for durable goods fell 0.4% in October—a surprise for analysts who had expected no change, and the third straight monthly decline. New orders for nondefense durables excluding aircraft, a measure which is viewed as a proxy for trends in capital spending by business, dropped by 2.3% in October and are 1.7% below their year-ago level.

Total spending on construction declined 0.8% in October, faster than analysts had expected. Within the private construction category, which fell by 1.4%, the drop was greatest for residential construction. Compared with a year earlier, private residential construction has tumbled 16.2%. In contrast, public, or government, construction increased 0.8% in October and is up 14.6% year-over-year.

The economic week ahead

Additional gauges of broad economic activity will be available next week. The Institute of Supply Management (ISM) Index of manufacturing activity and the ISM Non-Manufacturing Index will be published on Monday and Wednesday, respectively. Also on Wednesday, reports on factory orders, unit labor costs, and nonfarm productivity will be available. Information on consumer credit, nonfarm payrolls, and the unemployment rate will be released Friday.