US Economic Update

Existing home sales increased 0.6% in November to a 6.28 million unit pace after advancing an unrevised 0.5% in October, suggesting that recent price declines may be working to stimulate sales activity. The market was expecting a 0.8% drop in existing homes. Themonths of supply of homesat current selling rates dropped to 7.3 months from the 7.4 months seen in October, which suggests that builders are making some progress in clearing excess inventories.  The median price dropped 3.1% on a year-over-year basis in November.    

Yesterdays report follows Wednesday’s new home sales release which showed both a larger-than-expected increase in sales and a drop in months’ supply.  Together both reports are undoubtedly good news on the housing market front and with interest rates trending lower further improvements in sales may occur going forward.

The Chicago Purchasing Managers index increased to 52.4 in December from 49.9, above the market forecast calling for essentially no change.  Increases in the production and new orders sub-components remained in sub-50 territory for the second straight month.  The prices paid sub-component was unchanged at 60.2 but remained well below 2006’s high of 89 reached in June.

Given their good correlation, yesterday's Chicago PMI report presents some upside risk to next week’s ISM release, with the market expecting that the index slightly increased to 50.0 from 49.5.The November report showed that the ISM came in at sub 50 territory for the first time since April 2003.

The Conference Board consumer confidence index, also released yesterday, increased to 109 in December contrary to the market forecast for a decline.  November’s reading was upwardly revised to 105.3 from 102.9. The details of the report showed that consumers were more optimistic about their present circumstances with the index rising to 129.9 from 125.4. The outlook for the future was also more optimistic with the expectations index increasing to 95.1 from 91.9.  Yesterday’s report is contrary to the University of Michigan index, which dropped slightly in December.  The increase in the index is consistent with RBC Economics’ view that, although consumer spending will likely slow going forward, it is unlikely to experience a significant downturn.

Initial jobless claims inch upwards
Jobless claims rose to 317,000 in the week ended December 23 from an upwardly revised 316,000 in the previous week.  The market was expecting an increase to 320,000.  The smaller-than-expected increase in claims may prove dollar-positive and bond-negative on the margin.

Claims inched up in the week ending December 23; however,the less volatile and more reliable four-week moving average dropped to 315,750 from a slightly upwardly revised 326,000 in the previous week, pointing to continued labour market tightness. 

With the unemployment rate sitting near a 5-1/2 half year low and wage and income growth continuing at a good pace, labour market conditions suggest that the consumer will be buffered against the downturn in the housing market. 

No more Canadian releases this year; pace picks up in first week of the New Year

There are no major Canadian economic data releases scheduled for the remaining days of 2006 and the first two open-market days of 2007. However, the first week of 2007 ends with a bang. Markets will get a close look at the state of pipeline inflation pressures with the publication of the industrial product and raw materials price indexes and Thursday, January 4. Readings on the health of the domestic economy will come in the form of the jobs report and Canada’s purchasing managers index on Friday, January 5. 

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.

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