Economic Highlights for the week ending January 4, 2008

Economic Week In Review: Job Market Soured in December

Vanguard 1/4 - Some of the holiday-shortened week's reports suggested that 2008 may prove challenging for the economy. On the bright side, existing-home sales rebounded a bit and factory orders surged in November. Overshadowing these positives, though, were weak employment growth in December and continued downturns in the outlooks for the manufacturing and services sectors. The S&P 500 Index finished 2007 with a total return of 3.5%. For the week, the index fell 4.5% to 1,412 and the yield of the 10-year U.S. Treasury note fell 22 basis points, to 3.85%.

Vanguard 1/4 - The minutes of the Federal Reserve Open Market Committee's December 11 meeting—at which the committee cut its target federal funds rate by 0.25 percentage point—showed that the nation's top bankers saw a slowdown in economic growth in the fourth quarter coupled with a deterioration of financial market conditions and consumer spending. The minutes also revealed committee members' concerns that economic growth would remain well below potential in 2008.

Vanguard 1/4 - Nonfarm payrolls showed their weakest growth in December since August 2003, according to the Labor Department. The economy added just 18,000 jobs, far below expectations of a 70,000 increase. The education, health care, business/professional, and leisure/hospitality industries continued to add jobs, while the construction, manufacturing, financial services, and retail sectors saw declines. For all of 2007, job growth totaled 1.3 million, far below the 2006 level of 2.3 million. The unemployment rate jumped 0.3 percentage point to 5.0%, the highest since November 2005—just after the Gulf Coast hurricanes. For 2007, unemployment averaged 4.6%, the same as in 2006.

Bear Stearns 1/4 - Revisions to prior months were negligible on balance as although October payrolls were downwardly revised to 159,000 from 170,000, November jobs were upwardly revised to 115,000 from 94,000 (net upward revision of 10,000 over the last two months).

The unemployment rate rose 0.3% percentage points to 5.0% in December from 4.7% in November.  This was the result of a 436,000 decline in household employment that was not accompanied by a drop in labor force participation (the labor force expanded by 38,000).

Although the household series is very volatile from month-to-month, the rise in the unemployment rate is very disturbing.  Over the last year, the unemployment rate has risen 0.6% points from its low and since 1949 the unemployment rate has never risen by this magnitude without the economy being in recession (this period covers ten recessions – see Bear Stearns weekly chart package with the PDF version of Market Comment).  Other economic indicators such as jobless claims and ISM for December are more consistent with sharp slowdown than with recession, but we now put ourselves on recession watch.  January's data will be very important in informing on the state of the business cycle.  If we are in recession, however, the Fed's ability to respond will be hampered by the recent elevated readings on inflation, including core PCE price inflation in November.  At this point, we would still look for a 25-basis-point cut at the January FOMC meeting rather than a larger 50-basis point cut.

About two-thirds of the decline in the index came from a sharp decline in new orders, which fell to 45.7 in December from 52.6 in November.

In contrast to regional indicators, this report suggests that manufacturing activity contracted significantly in December and overall economic growth slowed sharply. The ISM index at this level suggests slow growth rather than declining economic activity and there have been three episodes in the last 12 years where the ISM has been weaker than this but recession did not follow (1995, 1998, and 2003).

Bear Stearns 12/31 - Single-family home sales rose 0.7% in November, while multi-family sales fell 1.6%.

Although existing home sales rose slightly in November, given the evidence from other housing reports (housing starts down 3.7%, building permits down 0.7%, new home sales down 9.0%, NAHB sentiment at an all-time low), it is still too soon to talk about stabilization in the housing market.

Higher Construction Spending Defies Expectations

Vanguard 1/4 - Spending on U.S. construction projects grew a modest 0.1% in November, better than analysts' predictions. The private construction category dropped 0.7% as weakness in residential construction persisted. Compared with year-ago figures, private residential spending was 17.8% lower. Spending on private non-residential buildings—such as offices, churches, hotels, hospitals, and commercial facilities—rose 1.7% for the month. Public, or government, construction grew 2.5% in November, up 16.2% versus the year-ago level.

Bear Stearns 1/2 - October construction spending was upwardly revised to show a decline of 0.4% from a previously reported 0.8% drop.  Over the last year, total construction spending has fallen 0.1%.

Factory Orders Surged In November

Vanguard 1/4 - New orders for manufactured goods grew 1.5% in November, following October’s upwardly revised increase of 0.7%. November’s increase surpassed analysts' expectation of a 0.5% gain. Higher orders for nondurable goods continued to make the largest contribution as orders for durable goods declined just slightly, although much less than they had in the previous three months. A "core" reading of business investment in nondefense capital goods (excluding aircraft) decreased 0.1%, significantly better than October’s 3.0% drop.

Bear Stearns 1/3 - This report does not provide evidence of a stronger order picture in the manufacturing sector because the entire increase in nondurable orders was accounted for by increased orders for petroleum and coal products, which is likely price-related. 

The Economic Week Ahead: January 7 – January 11

Vanguard 1/4 - The first full business week of 2008 will offer a very light serving of economic data. On tap are figures for consumer credit (Monday) and the U.S. trade balance (Friday).