Economic Highlights for the week ended February 15, 2008

Vanguard 2/15 - Economic news has been gloomy lately, but this week there were some encouraging signs. Reports showed better-than-expected retail sales and a reduced U.S. trade deficit. Still, in Senate testimony, the Federal Reserve chairman described the economy as "sluggish," and he also left the door open to additional cuts in the federal funds rate. On Wednesday, President George W. Bush signed into law a $168 billion package aimed at stimulating the economy through tax rebates. For the week, the S&P 500 Index rose 1.4% to 1,350 (for a year-to-date total return of –7.8%). The yield of the 10-year U.S. Treasury note rose 12 basis points to 3.76%.

Vanguard 2/15 - Retail sales climbed 0.3% in January, recovering from a 0.4% drop in December. Analysts had expected a 0.3% decline. Gas stations had the strongest growth, with sales up 2.0%. Sales of automobiles and parts were up 0.6%. Excluding gasoline and autos, however, sales were unchanged.

Bear Stearns 2/12 - Although headline retail sales were above expectations in January, the details are weaker: (i) there were small net downward revisions to November and December that should subtract 0.2% point from consumer spending, (ii) the strength in autos is flatly contradicted by the industry data, (iii) gasoline added 0.2% point to sales, which is price related (i.e. inflation) and, (iv) the gains were very narrow with department stores, electronics, eating and drinking, and furniture all down in the month. 

Vanguard 2/15 - The U.S. trade deficit narrowed 7.0%, to $58.8 billion, in December (from $63.1 billion in November). Analysts had expected a trade deficit of $61.6 billion. Exports rose by $2.2 billion, while imports declined by the same amount. The weakness of the dollar relative to other currencies was credited with helping to cut the trade deficit. For the year, the trade deficit declined by $46.9 billion, or 6.0%.

Bear Stearns 2/14 - From a GDP accounting perspective, the narrower trade gap points to roughly a 0.4% point upward revision to fourth-quarter real GDP growth, which would put growth at about 1% versus an advance estimate of 0.6%.  U.S. export trends point to continued broad-based strength overseas at the end of 2007.

Bear Stearns 2/15 - Import prices were much higher than expected, rising 1.7% in January.  Imported petroleum prices increased 5.5% in the month.  The rise in import prices in January pushed the year-over-year change in import prices to 13.7% in January (the highest in the 26-year history of the survey) from 10.4% in December.

Nonpetroleum import prices rose 0.6% in January (raising the year-over-year inflation rate on these prices to 3.6% from 2.8%), while nonfuel import prices rose 0.7% in the month (boosting the year-over-year change in these prices to 3.3% from 2.9%).

A weaker dollar, along with higher food and energy prices, have pushed import prices up a record amount over the last 12 months.  We think the inflation theme will continue to persist through this year and the strength of import prices underscores that this is both a global and a U.S. phenomenon.

Bear Stearns 2/15 - The University of Michigan's consumer sentiment gauge fell sharply, to 69.6 in early February from 78.4 in January.  Current conditions fell to 85.4 in February from 94.4 in January, while expectations dropped to 59.4 from 68.1.

The plunge in consumer sentiment in early February has a recessionary feel about it, although more objective economic data still appear consistent with slow growth rather than outright recession.