Monday, February 1, 2010

The Commerce Department reported earlier this morning that consumer spending rose 0.2% in December, a less-than- expected pace as savings jumped to a six-month high. The tightening of the American purse strings developed even as incomes rose 0.4% last month. For the whole of 2009, spending fell 0.4%, the largest drop since 1938.



Boosting consumer spending is critical to putting the economy on a sustainable path to recovery. Until the national jobless rate is driven below 10% -- it will probably be easier to convince a 7th grade boy to walk up to a 7th grade girl talking with her friends and ask her to dance - than it will be to induce American households to ramp up spending. Granted, there are a few that will jump out there and begin spending as if money grows on trees - but like the majority of 7th grade boys - the rest of the American households will be content to wait a couple more years before they even consider anything so foolish. If this dramatized scenario proves more accurate than not, the sustainability of the economic recovery remains in jeopardy - and that is a condition that will tend to limit the upward pressure on mortgage interest rates.



As expected, the private Institute of Supply Management report on activity levels in the manufacturing sector rose sharply in January. The overall index climbed to 58.4 from December's 54.9. Any reading over 50 is deemed to be an indication of growth in the sector. Measures of orders, production and employment all increased as well. Drilling deeper into the detail of this report it becomes abundantly apparent that a significant part of the surge in the hustle-and-bustle on factory floors last month was more a result of inventory rebuilding following the huge draw-downs of the stock on the shelves of businesses during the depths of the recession last year -- than it was a function of a sharp increase in final demand.



Mortgage investors will keep a close eye on this data series in the months to come - but they are currently willing to discount a large part of the big headline number this time around as a "one-off" event.



Look for volatility in the mortgage market to increase as the week progresses and we get closer to Friday morning's release of the January nonfarm payroll report. Mortgage investors will likely approach this big jobs report from a "better-safe-than-sorry" perspective. A growing number of analysts are suggesting the headline jobs report will show the economy added more than 20,000 jobs than it lost last month. While such a number will be a definite positive for the prospects of further economic recovery - it will almost certainly serve to put additional upward pressure on mortgage interest rates as capital sources see an opportunity to demand a higher yield for their available investment dollars.