Farmers & Merchants Bank

Macro-Environment

The second estimate of U.S. Gross Domestic Product (GDP) for the third quarter was released this past week. For the quarter, GDP growth was revised upward to 5.2% versus the first estimate of 4.9%. According to the Bureau of Economic Analysis, the change “primarily reflected upward revisions to nonresidential fixed investment and state and local government spending that were partly offset by a downward revision to consumer spending.” Consumer spending has, to a large degree, sustained economic growth within the U.S.

The Institute for Supply Management (ISM) has released its manufacturing and services survey results. For November, manufacturing exhibited a reading of 46.7, modestly below consensus and unchanged from October. According to ISM, “the manufacturing sector contracted in November for the 13th consecutive month”. New orders rose modestly during the month but remained in contraction. Production declined while its Prices Index rose 4.8% over October’s print. One may consider these two in conjunction relative to inflation as manufacturers can absorb higher wages if production (read efficiency) increases.

Services, the largest of the two sectors covered by ISM, rose in November to 52.7 from October’s 51.8, which extended this sector’s expansion to 11 consecutive months. Inventories appear to have expanded for the seventh consecutive month, while the Backlog of Orders contracted to 49.1 versus October’s 50.9.

Outside the U.S., the big news was Moody’s downgrade of China’s credit rating to A1 from Aa3. The agency stated that “broad downside risks to China’s fiscal, economic and institutional strength” will emanate due to the downgrade. This is the result of anticipated government fiscal and monetary measures to sustain local governments and state-sponsored firms, in addition to supporting China’s impaired real estate industry. Moody’s subsequently cut its outlook for eight major Chinese banks to negative from stable. The iShares China exchange-traded fund (ETF) fell 3.5% over the last week.

Tomorrow brings a slate of economic reports, including unemployment and payrolls for November and the University of Michigan's preliminary consumer sentiment report for December.