The Week's Economic Reports

Following is a summary of last week's economic reports. Though equity markets were the more important story by a wide margin, for the first time in weeks, a very mixed set of economic data was reported, the most significant development being the much-anticipated downward revision of fourth quarter GDP from 3.5 percent to 2.2 percent. For the week, the S&P 500 Index fell 4.4 percent to 1,387 and the yield of the 10-year U.S. Treasury note fell 16 basis points to 4.52 percent.


Durable Goods Orders: Orders for durable goods fell 7.8 percent in January, far more than expected, after posting gains during the prior two months. This report has become exceptionally volatile over the last two years, swinging wildly from month to month, mostly due to the civilian aircraft component that fell 60.3 percent in this report after rising 31.3 percent in December.

Excluding the transportation category, durable goods orders fell 3.1 percent for the month and new orders for non-defense capital goods excluding aircraft, a barometer of future investment, fell 6 percent posting the first year-over-year decline in three years. On a year-over-year basis, new orders are up 2.1 percent, significantly below the yearly increases near 10 percent during most of 2005 and 2006. This is a clear indication of a slowing manufacturing sector and soft demand.

Existing Home Sales: Sales of existing homes rebounded in January, up 3 percent to an annualized rate of 6.46 million, the highest level in seven months. All parts of the country saw increased sales, the West (up 5.6 percent) and the Midwest (up 4.8 percent) posting the strongest gains. Inventory was unchanged at a 6.6 month supply, still high by historical measures, but down from a recent high of 7.3 months in November.

The median home price fell for the sixth consecutive month, down 5.0 percent from December to $210,600, the lowest level in two years. Unusually warm weather helped to increase the sales volume, but high inventory, skittish buyers, and a rapidly changing mortgage lending environment are beginning to put significant downward pressure on prices and this impact is expected to continue into the spring.

Consumer Confidence: The Conference Board's measure of consumer confidence rose from 110.2 in January to 112.5 in February, the highest level in five and a half years. Inflation expectations eased slightly and a marginal improvement was seen in the future expectations index while the bulk of the monthly increase came from the present situation index.

This measure of the consumers' outlook is completely at odds with the Reuters/University of Michigan Consumer Sentiment report released later in the week where a five-month low was reached with current levels registering below the average of the last few years. It makes you wonder which one is more accurate and the overall value of polls such as these if they can be so wildly divergent

Gross Domestic Product: Real GDP for the fourth quarter was revised sharply downward from an annualized rate of 3.5 percent to 2.2 percent. This is the second of three readings for economic growth in the closing quarter of 2006 - the final tally will be available at the end of March. Since the changes to inventory investment have been known for weeks, this revision was widely anticipated and fell in line with expectations just above the 2.1 percent rate of growth for the third quarter.

Downward revisions were also seen for business fixed investment, software spending, and government spending. On a year-over-year basis, growth for 2006 now totals 3.1 percent, up slightly from the year-over-year growth of 3.0 percent posted in the third quarter.

Since the advance estimate last month, the Personal Consumption Expenditures (PCE) deflator rose from an annualized rate of 1.5 percent to 1.7 percent, while the core PCE deflator (excluding food and energy) fell from an annualized rate of 2.1 percent to 1.9 percent. The PCE is the Federal Reserve's preferred measure of inflation. On a year-over-year basis, the overall PCE deflator now stands at 2.5 percent while the core rate posted a 2.2 percent annual gain, both still above the comfort levels of those at the Fed.

New Home Sales: Sales of newly constructed homes fell sharply in January, down almost 17 percent from December to less than one million units, marking a new four-year low. Sales declined in all regions with greater weakness seen in the West where sales fell back to 1995 levels. Recall that new homes make up less than 20 percent of overall home sales, but they are generally a leading indictor for both sales volume and home prices.

Inventory climbed to 6.8 months from 5.7 months in December, consistent with the sharp declines in both housing starts and building permits seen just a few weeks ago. Since record-high cancellations are not included in the inventory numbers, the supply of unsold homes is actually much worse than the official statistics. The median price of a new single family home fell to $239,800 in January, a 2.1 percent decline from year ago levels. Further price declines are likely, given a host of factors working against the housing market at the present time.

Chicago PMI: The Chicago Purchasing Managers' Index fell from 48.8 in January to 47.9 in February, further confirmation of a slowing in business activity in the Midwest (readings below 50 indicate contraction while levels above 50 indicate expansion). Declines were led by new orders, backlog orders, and higher inventories.

ISM Manufacturing Index: The Institute for Supply Managements' index, the broadest measure of manufacturing activity in the nation, surprised to the upside in February posting a 52.3 reading after a January mark of 49.3. As in the Chicago PMI above, readings above and below 50 indicate expansion and contraction.

The increase was driven by new orders and backlog order and the rebound follows a contraction in two of the three previous months. Readings near 60 were common in 2004 while the mid-50s was the norm during 2005 and the first half of 2006. Since last summer, there has been a steady decline to the 50 level with the February reading the best showing in five months.

Personal Income and Spending: Personal income rose sharply in January, up 1.0 percent after an increase of 0.5 percent in December, partially reflecting bonuses paid and the exercise of stock options that generally occur at this time of year. Consumption rose at a rate of 0.5 percent after a 0.7 percent increase in December, also exceeding expectations. The savings rate remained negative at -1.2 percent, improving from last months level of -1.4 percent.

Construction Spending: Construction spending fell more than expected in January, down 0.8 percent after a decline of 0.4 percent in December. Residential construction fell 1.8 percent, adding to the gloom that has overtaken the housing market in recent months.

Consumer Sentiment: In contrast with the all-time high in the Conference Board's Consumer Confidence measure on Tuesday, the Reuters/University of Michigan Consumer Sentiment index fell from a mid-month reading of 93.3 to 91.3. Both current conditions and future expectations fell, while inflation expectations were unchanged. In recent years, the outlook of consumers has been influenced more by gasoline prices than anything else. With gasoline prices now rising, along with continuing troubles in housing, new volatility in equity markets, and early signs of weakness in employment (consistently higher weekly jobless claims), look for confidence to fade in next month's report.

Summary: This was very much a mixed week for economic reports. Economic growth was revised downward, but this was widely expected. Sales of existing homes rose while new home sales fell sharply, with price declines evident in both reports. Two readings on consumer confidence showed very different results and a Chicago area report on business activity was opposite the broader, ISM manufacturing index. The underlying volatility belied the poor fundamentals for the decline in durable goods while both income and spending were healthy. It has been many weeks since the mixture of good and bad reports has been this even.

The Week Ahead

Most people will be watching equity markets next week, but there are some very important economic reports due and heading the list will be the employment report on Friday. Since initial jobless claims have been rising over the last month or so, this report will be scrutinized for signs of weakness in the labor market. Also on tap are reports on productivity and factory orders on Tuesday, the Fed's Beige Book and consumer credit on Wednesday, and international trade on Friday.

Chart courtesy of Northern Trust.