Two new numbers out Friday morning indicate that the U.S. economy is plugging along better than you thought.
The most important legs of the economy—consumers and businesses—both showed surprising resilience in November, even as negotiations heated up over the fiscal cliff. Personal consumption spending rose 0.4 percent and incomes rose 0.6 percent, according to one report. According to another, overall orders for durable goods rose 0.7 percent while a key measure of business investment, orders for nondefense capital goods excluding aircraft, rose a surprising 2.7 percent.
Essentially, the evidence is turning against two of the biggest reasons to worry about the economy—that incomes weren’t rising enough and that business investment was drying up. The biggest dark clouds on the horizon aren’t looking so dark anymore. Together, the reports were enough to push Macroeconomic Advisers' estimate of fourth quarter gross domestic product growth up four-tenths of a percentage point, to 1.4%.
The personal income number is perhaps the single best piece of news in the day’s reports. In the last several months, Americans’ spending has risen steadily, but it hasn’t been matched by higher incomes. In other words, people were buying more stuff by saving less money, not because they were seeing bigger paychecks. Analysts had expected that pattern to keep up in November, forecasting only an 0.3 percent rise in incomes versus an 0.4 percent rise in spending. The forecasters called the spending number exactly, but income growth was higher, not lower, and the savings rate ticked up to 3.6 percent, from 3.4 percent. Higher incomes, higher spending, and higher savings is the best trifecta one could hope for.
Some of the details are even better. Because prices fell amid cheaper gasoline, inflation-adjusted incomes rose even more, a up 0.8 percent. And the rise in incomes was driven in large part by an increase in wages and salaries—which is to say, more money in the pockets of workers, not just a rise in investment income (the December numbers, for example, will probably show a weird jump in dividend income due to companies paying extra-large dividends in advance of a possible tax increase Jan.1).
On the business investment side, the durable goods numbers are a bit of a relief after business spending on equipment and software fell in the third quarter for the first time in almost two years. Many of the rumblings out of the corporate sector in the last couple of months have been reports that firms were delaying, or even cancelling, big spending projects out of fear that the fiscal cliff of possible tax hikes and spending cuts will go into effect Jan. 1 and trigger a recession.
The latest numbers don’t bear that theory out at all. After falling sharply from April through September, orders for nondefense capital goods excluding aircraft, a good proxy for business investment spending, has now logged two solid months in a row, rising 3.2 percent in October and now 2.7 percent in November. Analysts had expected the November number to be flat.
Businesses’ fears of the fiscal cliff are real; the risk of a downturn has come up in numerous earnings conference calls from some of the biggest companies. But it seems that the corporate sector had enough demand in November that they had to ramp up that spending anyway.
Put it all together, and the Friday economic reports are a nice Christmas gift for anyone hoping to see a better year in 2013. The pieces are in place, with both the consumer and business sides of the economy holding up; now it’s just up to Washington not to deliver a lump of coal.