Economic Highlights for the week ended March 28, 2008

Economic Week In Review: A Glimmer of Good News Amid the Grim

Vanguard 3/28 - Economic news this week was generally disappointing, with consumer confidence plummeting, near-flat consumer spending, and manufacturing orders for big-ticket durable goods declining. Surprisingly, things were better than expected for the beleaguered housing industry: Existing-home sales grew strongly and new-home sales slid less than feared. For the week, the S&P 500 Index declined –1.1% to 1,315 (for a year-to-date total return of –10.0%). The yield of the 10-year U.S. Treasury note rose 12 basis points to 3.45%.

Existing Home Sales Rose 2.9% In February

Vanguard 3/28 - Sales of existing homes rose 2.9% in February—after six straight month-to-month declines—but were 24% lower than a year earlier. Among factors that analysts cited as contributing to the uptick in sales were the continuing drop in home prices and lower mortgage rates for certain homebuyers during the month.

Bear Stearns 3/24 - Total existing home sales rose 2.9% to 5.03 million units from 4.89 million units in January.  Single-family existing home sales rose 2.8% in February, while multi-family sales increased 3.7%.

Total median existing home prices fell 8.2% from year-ago levels (single-family median home prices are down 8.7% on the same basis).  The number of existing homes on the market fell 3.0% in February, putting the months' supply of homes at 9.6 months, down from 10.2 months in January (single-family months' supply fell to 9.2 months from 10.0 months).
While the rise in home sales is encouraging, it is too soon to say that this sector is bottoming out (especially given the continued weakening in transaction prices).

New Home Sales – February

Vanguard 3/28 - Sales of new homes declined 1.8% in February, less than the 4.3% drop that many analysts had expected. Compared with a year earlier, sales were almost 30% lower. On a more encouraging note, the total inventory of unsold new homes continued to decline, although from still-elevated levels.

Bear Stearns 3/26 - February's level of new home sales is the lowest in 13 years.

The supply of new homes fell 2.1% to 471,000 (the eleventh consecutive monthly decline in new home supply) to the lowest level since July 2005.  However, the supply of homes in relation to sales held steady at 9.8 months in February (the highest since October 1981).

This report shows no signs of stabilization in the new home sales market as sales have fallen for four straight months and the three-month rate of decline in home sales is little different from the 12-month change.  Inventories of unsold homes in relation to sales are at levels not seen since the 1981-82 recession.

A Very Stagflationary Consumer Confidence Report

Vanguard 3/28 - Consumer confidence deteriorated sharply in March according to The Conference Board, whose gauge of consumer confidence fell to 64.5, sharply below the expectations of many analysts and the lowest reading since the start of the Iraq war five years ago. According to Joe Davis, a principal and economist with Vanguard, "The considerable headwinds presently facing the U.S. economy, including rising energy costs, the housing crisis, and the weakening job market, are finally crystallizing in flagging consumer confidence."

Bear Stearns 3/25 - Consumers' assessment of labor market conditions deteriorated sharply again in March.  The percentage of consumers judging jobs as being "plentiful" fell to 18.8% in March from 21.5% in February, while those viewing jobs as being "hard to get" rose to 25.1% from 23.4%. 

Consumers' assessment of the economy continued to move in the direction of our recession and inflation themes.  The one-year inflation expectations index is higher than at any time since the 1990-91 recession (with the exception of the post-Katrina energy-related spike).

Durable Goods Orders – February

Vanguard 3/28 - Demand for durable manufactured goods fell 1.7%, upending the consensus expectation of analysts that called for an 0.8% increase. The across-the-board February decline came on the heels of a 4.7% drop in January orders. "Core" capital goods, a closely followed category that excludes aircraft and defense products and is considered a more reliable indicator of business investment, also declined for the second straight month.

Bear Stearns 3/26 - Over the last three months, total durable goods orders have fallen at an 8.3% annualized rate versus an increase of 2.2% over the last year. Durable goods inventories rose 0.5% in February, while shipments declined 2.8%.

This weaker than expected report points to declining capital spending in the first quarter, falling orders, and a significant pickup in inventories in relation to sales. 

Weekly Initial Claims for Unemployment – March 22

Bear Stearns 3/27 - Initial jobless claims were in line with expectations, falling 9,000 to 366,000 in the week ending March 22nd.  The four-week average of claims rose 1,750 to 358,000.

Through the week-to-week volatility, the trend in initial jobless claims is higher, as is the trend in continuing claims.  Both these series point to a weakening labor market.

Final Q4 GDP: Slow-growth GDP estimate stayed the same; profits declined

Vanguard 3/28 - The government's final number for 2007 fourth-quarter gross domestic product (GDP), which was unchanged from the two preliminary estimates, showed an anemic 0.6% growth rate (annualized). By contrast, in the prior quarter the economy grew at a 4.9% annual pace. For 2007 as a whole, the economy grew 2.2%, its weakest growth since 2002. Reflecting higher energy costs, consumer inflation (based on the personal consumption expenditures [PCE] price index) increased 3.9%, up from 1.8% a quarter earlier. Fourth-quarter after-tax profits fell 3.3% to $1.11 trillion.

Bear Stearns 3/27 - No surprises in this weak fourth-quarter GDP report.  The new information showed weaker than expected profits and a contraction in the income estimate of GDP, which is consistent with our view that the economy fell into recession in December.

Sluggish Consumer Spending In Q1

Vanguard 3/28 - Personal spending by consumers rose 0.1% in February. After adjusting for inflation, the "real" PCE was flat and has changed little since November. The spending slowdown occurred even though real personal income has been growing modestly in recent months, as consumers have been increasing their savings rates.

Bear Stearns 3/28 - Personal income was stronger than expected, rising 0.5% in February.  Both wage and salary income and real disposable income rose 0.3% in the month.

Core PCE prices rose 0.1% in February and January's initially-reported 0.3% increase was downwardly revised to 0.2%.  Thus, year-over-year core PCE inflation held steady at a downwardly revised 2.0% (was 2.2%).  The Fed might find some small comfort in the downward revision to core PCE inflation.

The Economic Week Ahead: March 31 To April 4

Vanguard 3/28 - More clues about the depth of the economic slowdown will be unveiled next week. We get the Chicago PMI report on Monday. Construction spending and the Institute for Supply Management (ISM) manufacturing index are scheduled for release on Tuesday, and factory orders take the spotlight on Wednesday. ISM's non-manufacturing index is scheduled for Thursday, followed by a report on the employment situation, which includes nonfarm payrolls and the unemployment rate, on Friday.