Economic Highlights for the Week Ending November 3, 2006

Monday, October 30th
Personal income rose 0.5% in September, better than expected, led by a healthy 0.5% gain in wages and salaries. Personal consumption increased just 0.1% last month but gained 5.5% year-over-year which is in line with longer term averages. A closely watched inflation gauge contained in this data series the core PCE deflator gained 0.2% on the month and 2.4% on the year, which is higher than the 1-2% range the Fed would like to see.
Tuesday, October 31st
Consumer confidence fell a half a point to 105.4% in October from a revised reading of 105.9% in September. The weaker than expected reading was due to lower ratings of current conditions and the job market. Consumer expectations gained modestly. Confidence levels are expected to remain range bound in the near term with downside risk associated with slower job growth and housing market declines.
More weak economic readings today increased rate cut expectations for March of next year. While fed funds futures traders expect no change in rates through the FOMC meeting in late January, odds of a rate cut in the fed funds target to 5.0% at the March meeting are currently being priced in at 73%.
Wednesday, November 1st
The ISM manufacturing index fell to 51.2% in October from 52.9% in September. Manufacturing activity has slowed considerably over the past six months or so. New orders and production fell which does not bode well for future activity. Prices dropped off during the month alleviating inflation concerns. It looks as though the Fed's forecasts of slowing economic conditions containing inflation are on the mark and will open up the possibility of a rate cut sooner rather than later.
Motor vehicle sales fell 2.8% in October to an annual rate of 16.2 million, roughly in line with expectations. The pace of vehicle sales remains anemic. Production schedules will be cut again in Q4 as automakers contend with rising inventories and weak earnings. Weak auto sales and production are likely to detract from Q4 GDP growth.
Construction spending fell 0.3% in September, lower than expected. The decline was led by a 1.1% drop in residential construction. Total construction expenditures are 2.9% higher than a year ago while residential construction is down 6.9% during the same period.
The MBA mortgage applications index fell 3.0% to 570.8% for the week that ended October 27. The purchase index was down 1.8% on the week while refinancing applications declined 4.5%. After falling sharply between mid 2005 and mid 2006, application activity appears to have stabilized in the last three months, suggesting the sharp downturn in housing activity could subside in the months ahead.
The pending home sales index fell 1.1% in September after increasing 4.7% in August. The index tracks signed sales contracts and is considered a leading indicator of existing home sales. Despite recent volatility, the index has improved in the last two months due to lower rates and softer home prices. Improved fundamentals will continue to support home turnover at current levels in the coming months.
Thursday, November 2nd
Productivity was flat in the third quarter compared to expectations for a 1.2% gain. Over the past year, productivity has increased just 1.3% decelerating sharply in recent quarters. Unit labor costs increased 3.8% on the quarter, higher than expected but downshifted from 5.4% growth in the second quarter.
Friday, November 3rd
Payrolls increased by just 92k in October, missing estimates for a 130k gain. However, upward revisions in the previous two months resulted in a net increase of 139k additional jobs. Even with the revisions, job growth is trending lower in the past year. Hourly earning rose 0.4% on the month, higher than expected. The yearly gain of 3.9% in hourly earnings is also on the high side. The unemployment rate dropped to 4.4% of the workforce which indicates fairly tight labor market conditions.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 11986.04 12090.26 -104.22 or -0.86%
NASDAQ 2330.79 2350.62 -19.83 or -0.84%

WEEK IN ADVANCE
Rate cuts are off the table based on data showing underlying economic strength with increasing inflationary pressures. The financial markets will likely adopt a 'wait and see' mode in the coming

Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco