As suggested above, most of the jump in the retail sales figure came from autos, which showed more carry-through than expected after the expiration of “Cash-for-Clunkers”. Discretionary spending moved higher in October, with industries like apparel and general merchandise seeing welcome gains that suggest consumer purse-strings may be loosening somewhat.  However, as noted in the table industries related to housing continue to suffer. The revision downward in Sept retail sales (-1.5% to -2.3%) suggests that the initial 3.5% print on 3Q09 GDP will be revised downward.

We’ve now seen three months of reasonably healthy retail sales. We’re pleased to see firming consumer spending, declining consumer debt and increased savings, but the three indicators would seem to be at odds with one another. Given the consumer’s central role in the recession we’ll continue to watch these and other data points closely for signs of divergence.

The apparent stabilization in the manufacturing sector, while it has yet to create jobs, is a tick in the positive column for the US economy. October’s gain was largely due to an 1.6% increase in output of the nation’s utilities. Factory capacity utilization remains extremely low and is especially weak in the manufacturing sector, which had a utilization rate of only 67.6% in October. While a high degree of spare capacity means inflation is unlikely in the near-term, it also suggests that companies’ profit margins have not sustained the degree of pressure they have seen in prior recessions.

The month-over-month change in CPI was largely driven by auto and energy costs; according to the Bureau of Labor Statistics the increase in the indices for cars and trucks accounted for 90%+ of the core index increase.  Given the weakness in household balance sheets, that increase is unlikely to be “sticky”. The concentration of price rises in energy and autos also suggests that full-blown inflation has yet to appear. In short, there are few signs of pricing power at the retail level.

A 35% drop in apartment construction (to a record low) dragged down housing starts. Uncertainty about the $8000 first-time homebuyer tax credit probably contributed to the drop in construction. As discussed in previous missives, a low construction rate offers the silver lining of limiting growth of the housing supply, thereby underpinning prices.

The Leading Economic Indicators continued their positive trajectory for the seventh consecutive month.  We’ll surely welcome the glimmer of good news.  The heaviest weighted component, money supply (specifically M2), has exploded as the government has flooded the economy with fiscal and monetary stimulus. Unfortunately, little of that liquidity is being transmitted into the real economy, as bank lending is contracting – total loans and leases at US commercial banks fell from $7,299B to $6,717B from last October to this. It is, of course, actual lending to businesses and consumers that fuels the economy, not simply the existence of the funds on bank balance sheets.  Other LEI components, like the “new orders from manufacturers”, are suspect in their usefulness because this recession, stemming from a banking crisis and fueled by massive consumer deleveraging,  is quite different than other post-WW2 downturn.  Long story short, we think the LEI is giving a false signal of the strength of economic recovery.