Economic Highlights for the week ended February 29, 2008

Economic Week In Review: A Barrage Of Baleful News

Vanguard 2/29 - After the first two months of 2008, you could forgive economists for wanting to turn the calendar back a year or so. This week saw the release of a batch of disappointing reports—from an uptick in inflation pressure to a plunge in consumer confidence to yet another round of dismal numbers for the housing market. The S&P 500 Index fell 1.7% to 1,331 (for a year-to-date total return of –9.0%). The yield of the 10-year U.S. Treasury note fell 26 basis points to 3.53%.

GDP: 2007 Ended With A Whimper

Vanguard 2/29 - Updated figures for fourth-quarter 2007 gross domestic product (GDP) failed to produce the upward revision policymakers and analysts had hoped for. Growth in the total output of U.S. goods and services slowed to a feeble 0.6% (annualized), down from a robust 4.9% in the third quarter. The Commerce Department's estimate of real GDP growth for all of 2007 was 2.2%—the weakest showing since 2002, when the economy was recovering from a recession.

Bear Stearns 2/28 - Economic growth was very weak in the fourth quarter.

Producer Price Index: A Renewed Upward Climb

Vanguard 2/29 - On the inflation front, producer prices for finished goods were up a seasonally adjusted 1.0% in January, after dipping in December. The increase in the Producer Price Index was due largely to a hike in energy costs: Gasoline prices rose 2.9%, and prices for home heating oil, natural gas, diesel fuel, and kerosene were also up. With volatile food and energy products factored out, the core Producer Price Index rose by a brisk 0.4%. Over the past year, prices for finished goods were up a dispiriting 7.4%.

Bear Stearns Economist: Additional Inflation Comment

Bear Stearns 2/27 - The January inflation data for the U.S. (and for many other places around the globe) have been little short of horrific.  Moreover, the rise in U.S. inflation has not been limited to food and energy prices, as core import prices, core producer prices, and the core CPI all exceeded expectations.  The rise in inflation has not gone unnoticed by bond-market participants as five-year TIPS inflation breakevens have risen 43 bps from a low of 1.9% a month ago to 2.3% at the present time.  In fairness, we did not expect to see this degree of deterioration in the January inflation data and we have yet to see whether these inflation rates will be sustained, however we have flagged rising inflation as one of the most important macroeconomic themes that should shape investment strategies in 2008 and beyond.  When the inflation data offer comparisons such as the increase in the finished goods PPI over the last 12 months, at 7.4%, is the highest since October 1981, one cannot dismiss the possibility that the inflation chickens from several years of Fed monetary accommodation are beginning to come home to roost.

Income Boosted By Special Factors, Real PCE Flat In January

Bear Stearns 2/29 - Personal income was higher than expected, rising 0.3% in January, with wage and salary income up 0.5%.  However, income was boosted by a number of special factors.  Consumer spending was also above expectations in January, rising 0.4% in the month.  However, the gain was all in prices as real PCE was unchanged in January.
Core PCE prices were in line with expectations, rising 0.3% in January.  However, the year-over-year core PCE inflation rate remained unchanged at 2.2%.  Overall PCE prices rose 0.4% in January, which boosted the year-over-year inflation rate to 3.7% from 3.6%.
Although core PCE inflation remained unchanged on a year-over-year basis, shorter-term trends show these prices trending clearly higher—core PCE prices have risen 2.8% at an annual rate over the last six months and by 3.0% over the last three months on the same basis (and overall PCE inflation is very elevated, up 5.4% at an annual rate over the last three months).  Rising prices are eating into consumers’ disposable income and real consumer spending has started 1Q2008 on a weak note.

Very Weak Consumer Confidence In February

Vanguard 2/29 - Not surprisingly, consumers had less confidence in the nation's economy in February, with the Conference Board's index of consumer confidence plunging to its lowest level since March 2003. The index fell to 75 from a downwardly revised 87.3 in January. Consumers voiced pessimism about both current economic conditions and expectations for the future.

Bear Stearns 2/26 - Consumers' assessment of labor market conditions deteriorated sharply in February.  The percentage of consumers judging jobs as being "plentiful" fell to 20.6% in February from 23.8% in January, while those viewing jobs as being "hard to get" rose to 23.8% from 20.6%.

The decline in consumer confidence, including the drop in consumers' assessment of the labor market, has a recession-like feel to it. 

Housing: Another Dreary Month

Vanguard 2/29 - The beleaguered housing market continued to suffer in January, with sales falling for both new and existing homes. The silver lining: The declines in both categories were smaller than expected. The National Association of Realtors reported a 0.4% decline in existing-home sales, to a seasonally adjusted 4.9 million units, down more than 23% from January 2007. The median price for an existing home was $201,100, down from $210,900 in January 2007. The Census Bureau reported a 2.8% drop in new-home sales, to a seasonally adjusted 588,000 units, down almost 34% from January 2007. The median price for a new home was $216,000, down from $254,400 in January 2007.

Bear Stearns 2/27 - The median price of a new home has declined 15.1% over the last year and sales continue to fall (in fact, the pace of decline has picked up—over the last three months, new home sales have fallen 56.7% at an annual rate versus a 12-month decline of 33.9%).

Bear Stearns 2/25 - Single-family existing home sales rose 0.5% in January, while multi-family sales fell 6.5%. The relative stability in existing home sales in January is something of a surprise given the weakness in pending home sales, which pointed to a sharp decline in sales. 

Durable Goods Orders: A Drop In Demand

Vanguard 2/29 - Orders for manufactured durable goods dropped a steeper-than-expected 5.3% in January, following December's 4.4% advance (both seasonally adjusted). Analysts cited a sharp decline in aircraft orders (both civilian and defense), along with weakness in the metals, electronics, and machine sectors. Inventories and unfilled orders expanded to their highest levels since the early 1990s, suggesting further weakness in demand.

Bear Stearns 2/27 - This is a weak durable goods orders report for January which erases the more constructive picture painted by the December data. 

Unemployment Claims: elevated jobless claims

Bear Stearns 2/28 - Initial jobless claims were higher than expected, rising 19,000 to 373,000 in the week ending February 23rd.  The four-week average of claims fell 1,250 to 360,500.
The rise in initial claims in early 2008 points to a pickup in layoffs and rising continuing claims suggests that it is becoming more difficult for people who have lost their job to find new employment. When jobless claims began to rise earlier in the year, we said that a reading of 375,000 on claims would put us on recession watch, especially if combined with an ISM manufacturing index significantly below 50.  Jobless claims appear to be headed toward this territory and the chances that the economy has already fallen into recession continues to rise toward 50%.  With the Fed operating in a risk management mode against weaker growth, we continue to expect aggressive rate cuts and reaffirm our forecast of a 50-basis-point rate cut on March 18th. 

Bear Stearns 2/27 - Fed Chairman Bernanke delivered the first leg of his semiannual testimony on monetary policy to the House Financial Services Committee today.
On the economy, Bernanke continued to stress the weakness in the economy and downside risks to growth forecasts.  Bernanke said, "The economic situation has become distinctly less favorable since the time of our July report."  Going forward, "The housing market is expected to continue to weigh on economic activity in coming quarters."  In addition, Bernanke noted that "The risks to this outlook remain to the downside.  The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further."

On the financial markets, Bernanke noted "financial markets continue to be under considerable stress."  He went on to say, "a broader retrenchment in the willingness of investors to bear risk, difficulties in valuing complex or illiquid financial products, uncertainties about the exposures of major financial institutions to credit losses, and concerns about the weaker outlook for economic growth, have also roiled the financial markets in recent months."
Although Bernanke spent more time discussing inflation than he has in recent speeches, inflation concerns clearly remain secondary to the Fed.  Bernanke said "Consumer price inflation has increased since our previous report, in substantial part because of the steep run-up in the price of oil.  Last year, food prices also increased significantly, and the dollar depreciated."  Also, "Core price inflation--that is, inflation excluding food and energy prices--also firmed toward the end of the year.  The higher recent readings likely reflected some pass-through of energy costs to the prices of core consumer goods and services as well as the effect of the depreciation of the dollar on import prices."  More recently, “the further increases in the prices of energy and other commodities in recent weeks, together with the latest data on consumer prices, suggest slightly greater upside risks to the projections of both overall and core inflation than we saw last month.  Should high rates of overall inflation persist, the possibility also exists that inflation expectations could become less well anchored.  Any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and could reduce the flexibility of the FOMC to counter shortfalls in growth in the future.  Accordingly, in the months ahead, the Federal Reserve will continue to monitor closely inflation and inflation expectations.”

On monetary policy, Bernanke said “A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives of maximum employment and price stability in an environment of downside risks to growth, stressed financial conditions, and inflation pressures.  In particular, the FOMC will need to judge whether the policy actions taken thus far are having their intended effects.  Monetary policy works with a lag.  Therefore, our policy stance must be determined in light of the medium-term forecast for real activity and inflation as well as the risks to that forecast.  Although the FOMC participants' economic projections envision an improving economic picture, it is important to recognize that downside risks to growth remain.”