01 Dec 2006 Slowing Economy
The government revised its estimate of how fast theUSeconomy grew in the third quarter from 1.6% to 2.2%. Stocks did very well mid week as investors were cheered by faster growth in the economy which drives corporate profits higher. Bonds on the other hand slid on the news as stronger economies can mean higher inflation.
But more specific reports paint a different picture. The economy is slowing rather quickly. U.S. construction spending took its biggest tumble in five years during October as the housing slump reduced home-building activity. Separately, the nation’s manufacturing sector contracted in November for the first time in more than three years, according to the Institute for Supply Management.
As reported by the Wall Street Journal, total construction spending decreased 1.0% to a seasonally adjusted annual rate of $1.178 trillion, the Commerce Department said Friday. Spending fell 0.8% in September, revised from a previously reported 0.3% decline. Experts had expected a 0.3% drop in October. The 1.0% decline was the biggest since a 1.0% decrease in September 2001.
On Tuesday the government announced that durable-goods orders dropped 8.3% after increasing by 8.7% during September. It is hoped that spending by corporations for capital goods will keep the economy buoyed while the consumer slows along with the deteriorating housing market, but that was not the case in October. Orders for non-defense capital goods excluding aircraft fell 5.1% after climbing 3.2% in September.
Existing-home sales actually grew .5% in October, but the national median for home prices fell for the largest year-over-year decline on the books and a record third consecutive drop, the National Association of Realtors said. Also, the Conference Board reported that consumer confidence dropped from 105.4 in September to 102.9 in November on fears concerning the nation’s economic health.
Fed Chair Ben Bernanke and Treasury Secretary Henry Paulson said this week that the economy is healthy and a strong dollar will help keep it that way. As the dollar declines, American goods become more attractive to foreign buyers, potentially boosting exports and reducing our huge trade gap. The trick is to keep the dollar from declining too fast. Fortunately, it is in no one’s interest, except perhaps al Qaeda, for that to happen.
Stock averages are down for the week on news of the slowing economy. The Dow is down 1% while the broader S&P 500 is down .50%. The tech heavy NASDAQ is down 2.1%. Our models have done better due to their diversification. They range from up a little on the most conservative to down less than the broad averages for the most aggressive. Foreign stocks and US bonds fared better than domestic stocks this week. On a longer term view, however, which is where we focus, stocks continue to look attractive given their exceptional value relative to bonds and other asset classes.