Economic Highlights for the week ended February 22, 2008

Economic Week In Review: Consumer Prices Continue Upward March

Vanguard 2/22 - The week's economic news was generally downbeat, as a key measure of inflation at the consumer level rose faster than expected and a closely watched barometer of future economic activity posted its fourth consecutive monthly decline in January. On the positive side, the number of groundbreakings for new homes rose slightly in January and the number of initial claims for unemployment insurance was at its lowest level in four weeks. For the week, the S&P 500 Index rose 0.2% to 1,353 (for a year-to-date total return of –7.8%). The yield of the 10-year U.S. Treasury note rose 3 basis points to 3.79%.

Consumer Price Index - January

Vanguard 2/22 - The Consumer Price Index (CPI) rose a seasonally adjusted 0.4% in January, according to the Labor Department's monthly reading of prices at the consumer level. Although prices increased in several underlying categories—especially food, apparel, transportation, and hotel costs—energy was the most significant contributor to the gain. Excluding volatile food and energy prices, the "core" CPI rose 0.3% from December, the largest increase since June 2006 and the biggest year-over-year jump since February 2007. Versus their year-ago levels, the overall CPI and core CPI were up 4.3% and 2.5%, respectively.
Bear Stearns 2/20 - The increase in the core CPI was a "high" 0.3% since, on an unrounded basis, core CPI prices rose 0.31%. 
This high core inflation reading puts the market on watch for the possibility that inflation pressures are spreading out beyond the energy and food complex, and these data will need to be closely watched in the months ahead. 

Housing Starts Bounced Back A Bit In January

Vanguard 2/22 - The Commerce Department reported that the pace of new-home construction grew modestly in January, as the annualized rate of housing starts rose 0.8% to a seasonally adjusted 1.01 million units. Although single-family home construction dropped 5.2%, multi-unit construction rose 17.6%. Building activity grew in the Northeast and Midwest, but contracted in the South and West. In a sign that the housing market's weakness is likely to continue, the number of building permits issued fell 3.0% to a seasonally adjusted 1.08 million, the lowest level since November 1991.
Bear Stearns 2/20 - Housing remains very weak—the decline in building permits in January and the drop in single-family housing starts (for the tenth consecutive month) suggests less stability in the sector than the overall housing starts data imply.

Economic Indicators Posted Another Decline

Vanguard 2/22 - The Conference Board's index of leading economic indicators, which serves as a proxy for future economic performance, fell 0.1% in January. It marked the fourth consecutive monthly decline in the index and the fifth in the past six months. Six of the index's ten components fell in January. Stock prices were the largest detractor, while an increase in the real money supply was the biggest positive. The index is now at its lowest level in more than two years, and has fallen 2% over the last six months.

Initial Claims for Unemployment – week ended Feb. 16

Bear Stearns 2/21 - Initial jobless claims declined to 349,000 from an upwardly revised 358,000 (originally reported at 348,000) in the week ending February 16 (the week that corresponds with the February employment survey period).  Nonetheless, the four-week average of claims rose to 360,500 from 349,750 in the prior week and compares with 328,250 for the employment survey period in January.
Although initial jobless claims declined modestly in the latest week, the four-week average of claims continues to rise and at 360,500 is consistent with only sluggish growth in payrolls.  If this number rises further it will be consistent with potential recessionary levels.

Philly Fed Dropped Further In February

Bear Stearns 2/21 - The Philadelphia Fed index was significantly weaker than expected, falling to -24.0 in February from -20.9 in January.  The details of the report corroborate the weakness in the headline index.  The six-month outlook index declined to -16.9 in February from 5.2 in January (the last time the six-month outlook index was negative was in January 2001).  Manufacturing conditions in the Philadelphia region remain extremely weak and the sharp contraction in activity suggested by the headline index, was corroborated by the subindexes in the report. 

Fed Minutes: Expects Weaker Growth And Higher Inflation In 2008

Bear Stearns 2/20 - The Fed published updated forecasts for growth, unemployment, and inflation with the release of its January 29th/30th FOMC meeting minutes today.  The Fed lowered its central tendency forecast for real GDP growth in 2008 to 1.3% to 2.0% from its October forecast of 1.8% to 2.5%.  In addition, the Fed raised its forecast for the unemployment rate in 2008 to 5.2% to 5.3% from their previous forecast of 4.8% to 4.9%.  The Fed also raised its central tendency forecast for core PCE inflation to 2.0% to 2.2% (was 1.7% to 1.9%).  The Fed expects that overall inflation will slow substantially this year.
The minutes noted that “participants generally viewed financial markets as still vulnerable to additional economic and credit weakness. Some noted the especially worrisome possibility of an adverse feedback loop, that is, a situation in which a tightening of credit conditions could depress investment and consumer spending, which, in turn, could feed back to a further tightening of credit conditions.”
On policy, the minutes noted “most members believed that a further significant easing in policy was warranted at this meeting to address the considerable worsening of the economic outlook.”  In addition, “a relatively low real federal funds rate now appeared appropriate for a time to counter the factors that were restraining economic growth, including the slide in housing activity and prices, the tightening of credit availability, and the drop in equity prices.” Moreover, “the Committee agreed that downside risks to growth would remain even after this action.”  However, “some noted that, when prospects for growth had improved, a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate.”
This more downbeat forecast for growth and unemployment in 2008 (versus the Fed’s October forecast) was made prior to the release of the weak January employment report in early February. We continue to expect another 50-basis-point easing in the funds rate on March 18th (the further pickup in core inflation reported today may be troubling to the Fed and, if repeated in the months ahead, may make the FOMC wary of aggressive moves beyond March).

Economic Week Ahead: Feb. 25 – Feb. 29

Bear Stearns 2/24 – Although the main focus on the economic calendar this week is likely to be Fed Chairman Bernanke’s semiannual testimony on the economy and monetary policy (Wednesday and Thursday).
Vanguard 2/22 - Investors will get a comprehensive look at the state of home sales next week, with separate reports detailing existing-home sales (Monday) and new-home sales (Wednesday). Other data on tap include glimpses at producer prices and consumer confidence (Tuesday), as well as new orders for durable goods (Wednesday) and the nation's real gross domestic product (Thursday). Friday's report on personal income rounds out the week.