Core US PCE Deflator Slowed to a 2.2% Year-Over-Year Rate in November

In real terms, personal consumption increased by 0.5% in November, mirroring October’s upwardly revised gain and pointing to another of solid quarter for consumption growth. In October/November, real consumer spending increased at a 3.7% annual rate over the third quarter average indicating that the U.S. consumer continues to hold up well in the face of a weak housing market, supported by employment gains and healthy wage and stock price growth.

The personal savings rate as a percentage of disposable personal income dipped to -1% in November from -0.7% in October and September. 

In a separate report, durable goods orders were reported to show a modest rebound in November, rising 1.9% following the sharp 8.2% plunge in October. After a soft showing in October, orders for transportation equipment (+9.4%), computers (+27%) and defense capital goods (+34.2%) rebounded solidly. Orders for nondefense capital goods ex aircraft, or core orders, which are a proxy for investment in machinery and equipment, fell 1.4%, marking the second consecutive monthly decline.   

After holding at 2.4%, the fastest pace of increase since September 2002, for three months running, the core deflator edged down in November, which is likely to provide some comfort to the Fed. However, we expect another leg up in core inflation in early 2007 backed by the lagged impact of increases in unit labour costs and core producer prices. On the growth front, today’s data present a mixed bag with real consumer spending proving to be resilient while the durable goods report points to slower investment spending. On net, today’s reports point to the U.S. economy continuing to expand at a moderate pace in the fourth quarter and core inflation pressures moderating slightly. Policy-makers will continue to focus on inflation but are unlikely to adjust rates until the core inflation measures are on a convincing downtrend, which we don’t expect to happen until the second quarter of 2007.    

University of Michigan consumer sentiment index eased slightly 91.7 in December from November
The final read on consumer confidence from the University of Michigan showed the index eased to 91.7 from 92.1 in November but was higher than the 90.2 print in early December. Even though the index drifted lower for the second consecutive month, it held in the higher end of this year’s range. The current conditions index rose to 108.1 from 106.0 while the expectations index dipped to 81.3 from 83.2 in November. The expectations index improved relative to the early December report. Near-term inflation expectations continued to slide, with the 1-year forecast at 2.9% from 3% in November and 3.1% in October while the 5-year outlook held at 3%.

The confidence figures point to the consumer rounding out 2006 on reasonably firm footing. This morning’s consumption and income data showed that in real terms, consumer spending was decent in October and November and increased at a 3.7% annual rate over the third quarter average. This indicates that the U.S. consumer continues to hold up well in the face of a weak housing market, supported by employment gains and healthy wage gains and stock prices. 

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

To subscribe or visit go to:  http://www.riskcenter.com