Economic Highlights for the week ended May 2, 2008

Economic Week in Review: Fed Lowers Rate, Hints At Pause

Vanguard 5/2 - The Federal Reserve Board lowered its target for the federal funds rate by a quarter-point to 2.00% and gave clues that it may take a wait-and-see approach for additional actions in the short term. Otherwise, it was a week of mixed economic news that rang a "down but not out" theme. Gross domestic product remained in positive territory, and the employment picture, while weak, could have been worse. Consumers continued to spend, but their confidence levels deteriorated. The manufacturing sector cooled, but factory orders increased. Residential construction was weak, but nonresidential construction remained strong. For the week, the S&P 500 Index rose 1.1% to 1,414 (for a year-to-date total return of –3.1%). The yield of the 10-year U.S. Treasury note fell 2 basis points to 3.85%.

Fed Lowered Key Rate Again

Vanguard 5/2 - The Federal Reserve Board's 0.25% rate cut on Wednesday marked the seventh time the Open Market Committee (FOMC) lowered the federal funds rate target since September. The rate now stands at 2.00%, down from 5.25% at the start of the rate-easing campaign.
Bear Stearns 4/30 - Dallas Fed President Fisher and Philadelphia Fed President Plosser again dissented, as both preferred no change in rates at this meeting. 
On the economy, the Fed noted “Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further.”
On financial markets, “Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.”
On inflation, the Fed stated “Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months.”
The Fed noted that “The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity.”
With the dropping of the reference to “downside risks to growth” and the downplaying of the improvement in core inflation given energy and commodity price movements, this statement has a more neutral tone to it.  Moreover, although the Fed re-iterates its view that inflation will moderate, it acknowledges that “uncertainty about the inflation outlook remains high.”  We think, at this point, the Fed would like to take a pass at the June 24th/25th FOMC meeting and leave rates on hold at 2% at that time.  However, this statement leaves the door open for a further modest cut in interest rates at some point in the future, should economic conditions continue to deteriorate.

U.S. Economy Inched Forward In First Quarter

Vanguard 5/2 - The U.S. economy expanded in the first three months of 2008—but just barely. First-quarter real gross domestic product (GDP) grew 0.6% at an annual rate, according to an "advance" estimate from the Commerce Department. This matched the 0.6% pace in the fourth quarter of 2007. GDP has been in positive territory since the fourth quarter of 2001. Many economists predict that the economy is likely to contract in the coming months.
Bear Stearns 4/30 - The increase in real GDP in the first quarter resulted in the year-over-year change in real GDP remaining unchanged at 2.6% in the fourth quarter.
A weak and very much as expected GDP report, which showed the first contraction in real domestic final sales in over sixteen years.  The fact that there was technical growth in GDP in no way alters our view that the economy has fallen into recession.

Jobless Rate Better Than Expected

Vanguard 5/2 - The U.S. economy shed 20,000 jobs in April. This was far fewer than expected by analysts, whose predictions were more in line with job losses so far this year: Employers cut an average 80,000 jobs per month in the first three months of 2008. Unemployment fell slightly to 5.0% (and has ranged between 4.5% and 5.1% over the past year). The construction, manufacturing, and retail sectors suffered declines, while health care and professional and technical services added jobs. For workers in non-supervisory roles, average hourly earnings edged up 0.1%, to $17.88.
Bear Stearns 5/2 - The revisions to payrolls in the prior two months were negligible, as jobs were downwardly revised by a cumulative 8,000.  Private payrolls fell 29,000 in April (the fifth consecutive decline) as goods-producing industries shed 110,000 jobs.  In contrast, service-producing industries added 90,000 jobs in April.
Although the payroll decline was less than expected in April, private payrolls have fallen for five straight months and weakness in the goods-producing area appears to be intensifying.

Initial Unemployment Claims

Bear Stearns 5/1 - Initial jobless claims were significantly higher than expectations, rising 35,000 to 380,000 in the week ending April 26th.  The four-week average of claims fell 6,500 to 363,750.
Through the volatility in initial jobless claims (which continued at the end of April), the four-week average of claims, at 363,750, remains elevated and consistent with a weak labor market.  In addition, these data show the highest reading on continuing claims in four years (the last time continuing claims were this high, the unemployment rate stood at 5.6%).

Labor Costs Tame In First Quarter

Vanguard 5/2 - The employment cost index, which tracks what businesses spend on employee wages, salaries, and benefits, increased 0.7% in the first quarter. The reading, which was slightly below expectations, reflects a 0.8% increase in salaries and wages, and a 0.6% rise in benefits. Inflation-watchers viewed the report as a signal that wage pressures were contained.
Bear Stearns 4/30 - Labor cost trends in this report remain fairly benign. In an environment of rapidly rising prices, labor cost data should be closely watched going forward, given rising public concern over high gas and food prices, as a sign of possible pass-through into core inflation.

Personal Income And Spending

Vanguard 5/2 - Personal spending rose a higher-than-expected 0.4% in March, suggesting a level of consumer resiliency in the face of economic headwinds. Personal income rose 0.3%, though it was below February's 0.5% level; the personal savings rate was 0.2% in March, also off the previous month's rate.
Bear Stearns 5/1 - Core PCE prices rose 0.2% in March, pushing the year-over-year core PCE inflation rate up to 2.1% from 2.0% in the prior month.  The overall PCE deflator rose 0.3% in March (and is up 3.2% over the last year).

Consumer Confidence Sagging

Vanguard 5/2 - Consumer confidence slipped in April to the lowest level since the start of the Iraq war in March 2003, and the second-lowest level since 1993. The Conference Board Consumer Confidence Index fell to 62.3, from 65.9 in March, marking the fourth consecutive monthly decline.   Concerns about inflation, the labor market, and business conditions all drove negative sentiment for the month. Consumer plans to purchase a home or take a vacation fell to multi-decade lows.
Bear Stearns 4/29 - April showed another sharp deterioration in consumers’ assessment of labor market conditions.  The percentage of consumers judging jobs as being “plentiful” fell to 16.6% in April from 19.2% in March, while those viewing jobs as being “hard to get” rose to 27.9% from 24.5%.  Thus, the net “plentiful” less “hard to get” index fell to -11.3% in April from -5.3% in March.  During the technical recession period of March 2001 to November 2001, the net jobs reading did not get as weak as this.

ISM Manufacturing - April

Vanguard 5/2 - The economy's manufacturing sector contracted slightly in April, according to the Institute for Supply Management (ISM). The ISM Index stood at 48.6 for the second straight month—the third month in a row that the index fell below 50 (readings below 50 indicate the manufacturing sector is contracting). Demand and productivity were weak, while prices continued to rise. Industries reporting growth included computer and electronic products, printing, and paper products. Meanwhile, wood products, textile mills, and apparel products were among the industries that contracted.

Residential Construction: Glum

Vanguard 5/2 - Overall construction spending fell 1.1% in March, weighed down by a 4.6% drop in residential construction, which was down 19.7% from the year-ago level. Spending on nonresidential construction projects increased 1.3% in March and 11.8% from a year ago, driven in part by outlays for office buildings, hotels and motels, hospitals and medical buildings, and communications towers and buildings.
Bear Stearns 5/1 - February construction spending was upwardly revised to show an increase of 0.4% versus a previously reported 0.2% decline.  Over the last year, total construction spending has fallen 3.4%.

Challenger Layoffs Picked Up In April

Bear Stearns 5/1 - Challenger reported that the rate of layoff announcements picked up in April, with 90,015 job cuts announced versus 53,579 in March.  Layoff announcements in April were 27.4% above April 2007’s level (the data are not seasonally adjusted). In April, job cut announcements were led by the financial sector.
Thus far in 2008, layoff intentions are running 9.0% above the level seen in 2007. 

Fed Watch: FED Expands TAF Program

Bear Stearns 5/2 - Due to "liquidity pressures in some term funding markets," the Fed, the European Central Bank (ECB), and the Swiss National Bank (SNB) have announced an expansion of their liquidity measures.  The Fed is increasing the auction size for the biweekly Term Auction Facility (TAF), to $75 billion from $50 billion, beginning with the May 5th auction.  This will bring the monthly amount outstanding under the TAF to $150 billion.
The Fed also made a change to the Term Securities Lending Facility (TSLF) as the eligible collateral list has been expanded.  Beginning with the Schedule 2 TSLF auction to be announced on May 7th, primary dealers may now pledge AAA/Aaa-rated asset-backed securities in addition to already eligible residential MBS, CMBS, and agency CMOs.

The economic week ahead: May 5 – May 9

Vanguard 5/2 - Economic news on tap for next week includes reports on activity in the service sector (Monday), non-farm productivity and consumer credit (Wednesday), and the U.S. trade balance (Friday).
Bear Stearns 5/4 - The calendar is quieter this week as there are no major economic releases.