Real GDP grew only 2.0% in the third quarter of 2006, compared to 2.6% in the second quarter of 2006. The increase in real GDP in the third quarter primarily reflected improved personal consumption expenditures for durable goods, exports, equipment and software, non-residential structures, and state and local government spending, which were partially offset by a decline in residential fixed investment. In addition, imports, which are a subtraction in the calculation of GDP, increased.
According to the Bureau of Labor Statistics, the consumer price index (CPI) rose 2.2% for the first eleven months of 2006, compared to 3.4% for all of 2005. While the index for energy increased 17.1% in 2005, it declined by 1.6% in the first eleven months of 2006. Excluding food and energy, the core rate of inflation advanced 2.6% in the first eleven months of 2006 after rising 2.2% for all of 2005.
The Institute for Supply Management reported that the activity in the manufacturing sector increased in December after a one month decline, while the overall economy grew for the 62 nd consecutive month. The Purchasing Managers' Index ("PMI") for December registered 51.4%, up from 49.5% in November. A reading above 50.0% generally indicates that the manufacturing economy is expanding. The past relationship between the PMI and the overall economy indicates that the average PMI for January through December (53.9%) corresponds to a 4.1% increase in real GDP on an annualized basis. In addition, if the PMI for December (51.4%) is annualized, this corresponds to a 3.2% increase in real GDP, annually.
While the Conference Board's Consumer Confidence Index remained nearly unchanged in November, it improved in December. The Index now stands at 109.0 (1985=100), up from 105.3 in November. "Despite the latest improvement in the Index, there is little to suggest that the pace of economic activity in the final quarter of 2006 is anything but moderately better than its uninspiring performance earlier this year," says Lynn Franco, Director of The Conference Board Consumer Research Center. "Given the see-saw pattern in recent months, it is too soon to tell if this boost in confidence is a genuine signal that better times are ahead."
According to the Bureau of Economic Analysis, the savings rate as a percentage of disposable personal income was -1.0 in November, compared to -0.7 in October. A negative savings rate implies that personal outlays exceeded disposable personal income for that particular month.
The unemployment rate was little changed in November at 4.5%; the jobless rate was 5.0% a year earlier. In November, professional and business services and education and health services experienced the strongest job growth, while other industries, such as government and retail trade, had modest increases. Meanwhile, goods producing services, such as construction and manufacturing, lost jobs.
The U.S. Department of Housing and Urban Development reported 1.51 million building permits for privately-owned housing starts in November, which is down 3.0% from October 2006 and down 31.3% from November 2005. Meanwhile, 1.59 million privately-owned housing starts were reported in November, which is down 6.7% from October 2006 and down 25.5% from November 2005.
According to the National Association of Realtors (NAR), existing-home sales rose 0.6% in November to a seasonally adjusted rate of 6.28 million units, which is 10.7% below the 7.03 million-unit level in November 2005. Housing inventory levels eased 1.0% in November to 3.8 million existing homes, representing a 7.3 month supply at the current sales pace. According to NAR, a six month supply of homes is needed to have a rough equilibrium between buyers and sellers. "Mortgage interest rates are the lowest they've been since January, and it's the first time since August of 2005 that interest rates are lower than a year earlier," says Pat Vredevoogd Combs, NAR President. "This is increasing buying power at the same time that sellers are showing a willingness to negotiate price and terms. Combined with a plentiful supply of homes on the market, there's a window for buyers now with conditions that we haven't seen prior to the beginning of the housing boom in 2001."
After raising the federal funds rate seventeen straight times from June 2004 to June 2006, the Federal Open Market Committee ("FOMC") decided to keep the federal funds target at 5.25% during its last four meetings, acknowledging that the economy has weakened partially due to "a substantial cooling of the housing market". The federal funds rate is the rate banks charge one another for overnight loans. Interest rate future contracts price the federal funds rate at roughly 5.25% in January 2007. As such, we believe the market expects that the FOMC will leave rates unchanged at their next meeting.
Economic Outlook 
According to the Bureau of Labor Statistics, the consumer price index (CPI) rose 2.2% for the first eleven months of 2006, compared to 3.4% for all of 2005. While the index for energy increased 17.1% in 2005, it declined by 1.6% in the first eleven months of 2006. Excluding food and energy, the core rate of inflation advanced 2.6% in the first eleven months of 2006 after rising 2.2% for all of 2005. 
The Institute for Supply Management reported that the activity in the manufacturing sector increased in December after a one month decline, while the overall economy grew for the 62 nd consecutive month. The Purchasing Managers' Index ("PMI") for December registered 51.4%, up from 49.5% in November. A reading above 50.0% generally indicates that the manufacturing economy is expanding. The past relationship between the PMI and the overall economy indicates that the average PMI for January through December (53.9%) corresponds to a 4.1% increase in real GDP on an annualized basis. In addition, if the PMI for December (51.4%) is annualized, this corresponds to a 3.2% increase in real GDP, annually. 
While the Conference Board's Consumer Confidence Index remained nearly unchanged in November, it improved in December. The Index now stands at 109.0 (1985=100), up from 105.3 in November. "Despite the latest improvement in the Index, there is little to suggest that the pace of economic activity in the final quarter of 2006 is anything but moderately better than its uninspiring performance earlier this year," says Lynn Franco, Director of The Conference Board Consumer Research Center. "Given the see-saw pattern in recent months, it is too soon to tell if this boost in confidence is a genuine signal that better times are ahead."
According to the Bureau of Economic Analysis, the savings rate as a percentage of disposable personal income was -1.0 in November, compared to -0.7 in October. A negative savings rate implies that personal outlays exceeded disposable personal income for that particular month. 
The unemployment rate was little changed in November at 4.5%; the jobless rate was 5.0% a year earlier. In November, professional and business services and education and health services experienced the strongest job growth, while other industries, such as government and retail trade, had modest increases. Meanwhile, goods producing services, such as construction and manufacturing, lost jobs. 
According to the National Association of Realtors (NAR), existing-home sales rose 0.6% in November to a seasonally adjusted rate of 6.28 million units, which is 10.7% below the 7.03 million-unit level in November 2005. Housing inventory levels eased 1.0% in November to 3.8 million existing homes, representing a 7.3 month supply at the current sales pace. According to NAR, a six month supply of homes is needed to have a rough equilibrium between buyers and sellers. "Mortgage interest rates are the lowest they've been since January, and it's the first time since August of 2005 that interest rates are lower than a year earlier," says Pat Vredevoogd Combs, NAR President. "This is increasing buying power at the same time that sellers are showing a willingness to negotiate price and terms. Combined with a plentiful supply of homes on the market, there's a window for buyers now with conditions that we haven't seen prior to the beginning of the housing boom in 2001." 
After raising the federal funds rate seventeen straight times from June 2004 to June 2006, the Federal Open Market Committee ("FOMC") decided to keep the federal funds target at 5.25% during its last four meetings, acknowledging that the economy has weakened partially due to "a substantial cooling of the housing market". The federal funds rate is the rate banks charge one another for overnight loans. Interest rate future contracts price the federal funds rate at roughly 5.25% in January 2007. As such, we believe the market expects that the FOMC will leave rates unchanged at their next meeting.