Economic Highlights for the week ended March 28, 2008

Economic Week In Review: Second Quarter Begins With A Bounce

Vanguard 4/4 - Investors ushered in the second quarter with a stock market rally, even though financial markets remain unsettled by fears of more subprime mortgage-related writedowns. Most economic news pointed to continued weakness and recessionary concerns, as the employment situation deteriorated and construction spending and new orders for manufactured goods fell again. However, a few rays of sunshine in the form of better-than-expected numbers brought hope that April showers might yield some May flowers. For the week, the S&P 500 Index rose 4.2% to 1370 (for a year-to-date total return of –6.15%). The yield of the 10-year U.S. Treasury note rose 3 basis points to 3.48%.

Fed Watch: Bernanke Suggests Economy Could Contract In First Half Of 2008

Bear Stearns 4/2 - In testimony before the JEC, Fed Chairman Bernanke, while falling short of admitting that the economy is in recession, suggested that it is possible the economy is in recession and that economic activity could contract in the first half of the year. Bernanke also downplayed risks to inflation. We see this as leaving the door open to a further rate cut on April 30

Stagflationary Chicago PMI Report For March

Bear Stearns 3/31 - The Chicago purchasing managers' index rebounded by more than expected, to 48.2 in March from 44.5 in February.

New orders were a bright spot within the report, rising to 53.9 in March from 48.8 in February.  However, employment continued to contract with the jobs index at 44.6 in March (up from 33.5 in the prior month).  The production index rose to 50.4 in March from 46.5 in February.

Prices paid showed continued significant inflation pressures as the index rose to 83.9 in March from 79.4 in February.  This report has a stagflationary feel: activity continuing to contract, price pressures intensifying. 

ISM Manufacturing - March

Vanguard 4/4 - The Institute of Supply Management (ISM) Index of factory activity improved slightly in March to 48.6 (from 48.3 in February) but remained below 50 for the second consecutive month. (A reading below 50 in this closely watched gauge indicates that manufacturing activity is generally contracting). Weakness was evident in several components of this survey: New orders declined to 46.5, the lowest level since the last recession, and the production index fell below 50 for the first time this year. Although new export orders remained solid (at 56.5), there are concerns that overseas demand is vulnerable to spreading recessionary pressures. Fueled by rising prices for oil and other commodities, the ISM price index jumped to 83.5 (from 75.5), the highest level since Hurricane Katrina. The combination of rising prices and weak U.S. demand is squeezing manufacturers

Bear Stearns 4/1 - The new orders index suggests that manufacturing will contract further in April.  However, given the relatively well-controlled inventory levels and the unusual nature of the contractionary forces on economic activity, manufacturing may suffer less in this recession than typical recessions.

Non-Manufacturing Activity Picked Up Slightly – March

Vanguard 4/4 - The ISM Non-Manufacturing Index improved modestly to 49.6 in March. Similar to its manufacturing index counterpart, a reading below 50 indicates contraction in the services sector. Within the survey, the business activity index is considered one of the more important indicators: It rose to 52.2 from 50.8 in February but remains below 2007 levels. As in the manufacturing sector, the price index rose (for the 58th consecutive month), to 70.8 in March from 67.9 in February.  .

Construction Spending - February

Vanguard 4/4 - Total construction spending in February decreased 0.3%—less than expected and less than the drop in the previous two months. Spending in the troubled homebuilding sector slid for a record 24th consecutive month, down 0.9%, contributing to the 0.5% drop in total private construction activity. The Commerce Department also reported that construction in the considerably smaller public sector continued to buck the trend, increasing 0.4%.

Bear Stearns 4/1 - January construction spending was upwardly revised to show a drop of 1.0% from a previously reported 1.7% decline.  Over the last year, total construction spending has fallen 3.5%.

There is no sign of slowing in the decline of private residential construction spending.  In addition, private nonresidential construction has now turned south, contracting for three straight months. 

Factory Orders Decline in February

Vanguard 4/4 - The Commerce Department reported that new orders for all manufactured goods—a barometer of capital spending plans—fell 1.3% in February, more than expected and the second consecutive monthly decrease.

Orders for new durable goods (products with an expected life of more than three years) slipped 1.1% (better than the –1.7% preliminary estimate reported last week). Weakness included machinery orders (especially for construction) and demand for iron and steel. Aircraft and parts orders (civilian and defense) rose, however, after falling in January. Rounding out the orders picture, nondurable goods orders fell 1.5%. Inventories of durable goods increased to the highest level since this data series began in 1992. Combined with a drop in shipments, this drove the inventory-to-shipment ratio to a one-year high. 

Jobless Claims Rose Sharply In Late March

Vanguard 4/4 - First-time filings for unemployment during the week ended March 29 jumped more than expected to 407,000, the highest level in more than two years.

Bear Stearns 4/3 - The four-week average of claims rose 15,750 to 374,500. Continuing claims rose 97,000 to 2.937 million in the week ending March 22nd.

The rise in claims has pushed its four-week average up to the 375,000 recession DMZ level that we identified in early December.  Moreover, a jobless claims reading above 400,000, if sustained, is a very strong indicator that the economy has fallen into recession. The rise in continuing claims as a percent of the insured labor force also points to a weak labor market.

Employment Report Signals Recession

Vanguard 4/4 - Nonfarm payrolls continued to shrink in March, losing 80,000 jobs—bringing the total job loss to 232,000 for the first quarter. The worse-than-expected report from the Department of Labor was viewed as another possible recession indicator. Construction and manufacturing led the decline, losing a combined 99,000 jobs, partly offset by gains in education and health services.

Bear Stearns 4/4 – Payrolls in the prior two months were downwardly revised by a cumulative 67,000.  This is the third consecutive decline in nonfarm payrolls and the fourth straight drop in private payrolls.

The unemployment rate jumped to 5.1% in March from 4.8% in February as household employment declined 24,000 and the labor force expanded by 410,000. Labor force participation rose to 66.0% from 65.9%.

Clear and unmistakable recession signals from the labor market.  Private payrolls have declined for four consecutive months and the unemployment rate is up 0.7% points from its low of a year ago.  This magnitude of a rise in the unemployment rate has never occurred in the post-war period without the economy being in recession.

Quiet Week For Economic Releases

Bear Stearns 4/4 - The economic calendar picks up in the latter half of the week.  We get consumer credit on Monday, pending home sales data and FOMC minutes on Tuesday.  Wednesday brings wholesale inventories data.  International trade and jobless claims will be released on Thursday.  On Friday we get import prices and Michigan consumer sentiment.