Economic Highlights for the week ended April 11, 2008

Economic Week In Review: Sharp Increase In February Trade Deficit

Vanguard 4/11 - The week's rather light offering of economic data revealed that the nation's trade deficit grew significantly in February. In addition, consumers continued to use credit cards in February to finance their spending—albeit at a slower rate. Tuesday's release of the minutes from last month's Federal Open Market Committee (FOMC) meeting shed light on the extent of concerns over slowing economic growth and rising inflation. For the week, the S&P 500 Index fell 2.7% to 1,333 (for a year-to-date total return of –8.7%). The yield of the 10-year U.S. Treasury note fell 1 basis points to 3.47%.

FOMC Minutes Showed Strong Concerns

Vanguard 4/11 - According to its March 18 meeting minutes, the FOMC was clearly concerned about the seizing-up of economic growth as measured by the decrease in the nation's real gross domestic product. This factor, as well as ongoing problems in the financial markets, was top of mind when it announced a 0.75% reduction in its target for the federal funds rate. Inflation concerns, particularly the impact of higher energy prices, also played a pivotal role in the committee's rate-cutting decision. Amid the broad array of factors affecting the economy, the committee believed that lower short-term interest rates "should help buoy economic activity and ameliorate strains in (the financial) markets."

Very Weak Small Business Optimism, But Prices Significantly Higher

Bear Stearns 4/8 - The NFIB small business optimism index fell to 89.6 in March from 92.9 in February.  The percentage of small firms planning to increase employment plunged to 3% in March from 11% in February.

The net percentage of firms raising selling prices jumped to 18% in March from 13% in February, while the percentage of firms planning to raise prices increased to 29% from 22%.
Small business optimism has plunged to levels not seen since the recession in 1980, while the balance of firms both raising prices and planning to raise prices increased significantly at the end of the first quarter.

Consumers Tapped The Brakes On Borrowing

Vanguard 4/11 - The Federal Reserve reported that total consumer credit outstanding rose in February by $5.2 billion to $2.54 trillion. This gain, however, was roughly half that of January's $10.3 billion increase. The majority of February's gain came from growth in revolving credit—namely credit card debt—which rose $4.7 billion, or 5.9% at an annualized rate. Non-revolving debt—such as auto loans—grew at a tepid 0.4% annualized rate. Weak vehicle sales were the main factor in the slower growth in non-revolving debt.

Wholesale Inventory Investment Higher Than Expected

Bear Stearns 4/9 - Wholesale inventories were higher than expected, rising 1.1% in February.  January wholesale inventory investment was upwardly revised to 1.3% from 1.0%.  Over the last three months, inventories have risen at a 14.5% annualized rate versus a 7.4% increase over the last 12 months.

Although the wholesale inventory-to-sales ratio is still close to all-time lows, it has begun to pick up and the pace of inventory investment has accelerated sharply, which is a common recession dynamic.  Rising inventories likely reflect unanticipated shortfalls in demand (note the sharp slowdown in sales) and often heralds cutbacks in orders and production.

Jobless Claims

Bear Stearns 4/10 - Initial jobless claims were much lower than expected, falling 53,000 to 357,000 in the week ending April 5th.  Despite the decline, the four-week average of claims continued to rise, increasing 2,500 to 378,250.  Through the volatility, jobless claims continue to trend higher into recession territory.

International Trade: February Trade Deficit Jumped

Vanguard 4/11 - Despite the ongoing weakness of the U.S. dollar, the nation's trade deficit in goods and services grew 5.7% in February, to $62.3 billion, according to the Commerce Department. The increase surprised analysts, who had expected the gap to shrink. It marked the second consecutive gain and left the deficit at its highest level since November. Imports rose 3.1% from January, while exports increased 2.0%. In an interesting development, imports of petroleum decreased in February following 11 consecutive monthly increases. Over the past year, both exports and imports have posted strong gains; exports have grown 20.8%, and imports have risen 16.4%.

Bear Stearns 4/10 - While export growth continues to cushion the downturn in the domestic economy, the surprise widening of the trade gap in February suggests that trade will add only marginally to growth in the first quarter.

Import Prices Rising At The Fastest Rate On Record In March

Bear Stearns 4/11 - Import prices were much higher than expected, rising 2.8% in March.  Imported petroleum prices jumped 9.1% in the month and are up 60.0% over the last year.  Over the last 12 months, import prices have surged 14.8%, a record high (up from 13.4% year-over-year increase in February).

Non-petroleum import prices jumped 1.1% in March, the largest one-month increase on record.  This raised the year-over-year inflation rate on these prices to 5.4% from 4.5%.  Nonfuel import prices rose 0.9% in the month, boosting the year-over-year change in these prices to 5.0% from 4.3%.

Price increases are broad based, although obviously led by energy and food.  Over the last year, import prices have risen a record 14.8%, while the share of imports in GDP is close to 17%.  This implies that the contribution of rising import prices to inflation pressures is the equivalent of 2½% of GDP.  With energy prices still elevated and the dollar weak, we do not see this pressure reversing in the near future.

University Of Michigan’s Consumer Sentiment - April

Bear Stearns 4/11 - The University of Michigan’s consumer sentiment gauge fell by more than expected, to 63.2 in early April from 69.5 in March.  Current conditions dropped to 78.4 in April from 84.2 in March, while expectations dropped to 53.4 from 60.1 in the prior month. Consumer sentiment has fallen to levels not seen since the recession in the early 1980's.

One-year inflation expectations rose to 4.8% in April from 4.3% in March, and five-year inflation expectations rose to 3.1% from 2.9%. One-year inflation expectations have moved above the post-Katrina spike to the highest levels seen since 1982. 

The Economic Week Ahead: April 14 – April 18

Vanguard 4/11 - The coming week will offer a much more robust helping of news for economy-watchers to digest. The week kicks off with Monday's readings on retail sales and business inventories. Also on tap are gauges of producer prices (Tuesday); consumer prices, new residential construction, industrial production, and regional economic conditions (“Beige Book”: Wednesday); weekly jobless claims and leading economic indicators (Thursday).