The Week's Economic Reports

Following is a summary of last week's economic reports. New home sales came in well below expectations and consumer confidence fell during a week of mostly disappointing economic news. Stocks and bonds ended the week with the S&P 500 Index down 1.0 percent to 1,421, now up only 0.1 percent on the year, and the yield of the 10-year U.S. Treasury note rising 4 basis points to 4.65 percent.


New Home Sales: What some thought to be the beginning of a rebound in new home sales as last year drew to a close is looking increasingly like a head-fake as January and now February data show the continuation of a trend where home sales continue to plummet. Following January's 15.8 percent plunge, new home sales fell 3.9 percent in February to 848,000 units, the lowest annualized rate since 2001.

To make matters worse, there were huge downward revisions to the data for both December and January, revised down 76,000 and 55,000, respectively, and inventory is again rising. Now at a 16 year high, the supply of new unsold homes increased from 6.1 months in December to 7.3 months in January with the latest reading at 8.1 months in February. Once again, weather played a factor in the most recent report, but the underlying downward trend that began in mid-2005 when new home sales were more than 50 percent higher is still very much intact.

Consumer Confidence: As expected after the multi-month rise in gasoline prices, jittery stock markets, and continuing concerns over the nation's housing market, consumer confidence fell sharply in March to 107.2 from a downwardly revised level of 111.2 in February. The Present Situation Index rose slightly, from 137.1 to 137.6, but the Expectations Index plunged from 93.8 to 86.9 the continuation of a widening gap between the outlook for the future versus the present.

Consumers now put 12-month inflation expectations at 4.9 percent, up significantly from levels below 4 percent just a few months ago, and curiously, there were increases in both the number of respondents who felt jobs were "hard to get" and the number of respondents who thought jobs were "plentiful".

Durable Goods: Orders for durable goods rose in February but failed to meet expectations posting a 2.5 percent increase after a downwardly revised decline of 9.3 percent in January. The modest overall gain was driven by an increase in aircraft orders and the critical "nondefense capital goods orders excluding civilian aircraft" fell 1.2 percent following a 7.4 percent decline in January. On a year-over-year basis, new orders for durable goods were up only 0.1 percent in February and recent sluggishness in capital spending is expected to put downward pressure on first quarter GDP growth.

Real Gross Domestic Product: The final reading on fourth-quarter real GDP was revised upward to 2.5 percent from the preliminary estimate of 2.2 percent released in February. This is the last in a series of three monthly reports on quarterly economic growth, the "final" estimate coming after the "advance" and "preliminary" estimates a full three months after the conclusion of the reporting period that, in this case, ended in December of 2006. Note that the "final" estimate will be revised this summer as part of the annual revisions to this set of data.

Looking at economic data going back almost six months and considering the significant revisions occurring as the fourth quarter growth figures were released - first 3.7 percent, then 2.2 percent, now 2.5 percent - this report has very little relevance to current conditions. It is much more of a historical marker that can be useful in putting the last six months of economic activity into proper perspective.

The most recent revisions to fourth-quarter GDP were largely a result a reduction in imports, primarily lower prices for oil. On a year-over-year basis, real GDP came in at 3.1 percent and the overall 2006 figure was heavily influenced by a strong first quarter as shown in the chart below.

The PCE (Personal Consumption Expenditure) deflator, the Federal Reserve's preferred measure of inflation, was steady at 1.7 percent and core PCE (excluding food and energy) was unchanged at 1.9 percent. From year ago levels, the overall price index rose 2.5 percent and the core rate was 2.2 percent.

The advance estimate of first-quarter 2007 growth will be released at the end of April, but economists are already revising their estimates downward as a result of recent disappointing economic reports, continued concerns over housing, and increasing signs of companies reducing investment spending.

Earlier this month, the consensus estimate of economists called for GDP to grow at about 2.3 percent during the first quarter, down from earlier estimates of 2.5 percent the month before. If capital spending continues to be lackluster, housing continues to worsen, and energy prices continue to rise, this could be overly optimistic by a wide margin, some bearish estimates already coming in well below 2 percent.

Personal Income and Spending: Personal income and spending both rose 0.6 percent in February, far more than expected, adding to the continuing anxiety over wage pressure and its impact on consumer prices while at the same time quelling some fears of a precipitous drop in consumer spending. The most recent boost in income was primarily a result of salary increases for government workers, this increase following January's bonus-driven 1.0 percent surge.

Increases in consumption expenditures were concentrated in the services sector and gasoline sales, an effect that is likely to be more pronounced in next month's report. Recall that for much of 2006, rising gasoline prices made retail sales figures look healthier than they would otherwise appear and that effect is likely to continue early in 2007. The personal saving rate remained at negative 1.2 percent, meaning that personal expenditures on consumer goods outpaced after-tax income, the continuation of a trend that is over two years old.

Chicago PMI: The Chicago Purchasing Managers' Index jumped sharply in March to 61.7 from a level of 47.9 in February. This is the highest reading since mid-2005 and the increase was driven by new orders that rose from 48.7 in February to 72.2 in March. This reading follows five months of steady, significant declines from levels near 60 and since the survey is sometimes affected by small sample sizes, more likely than not, this will prove to be a one-off reading.

Consumer Sentiment: Confirming the mood shift indicated in the Conference Board's Consumer Confidence Survey on Tuesday, the University of Michigan's consumer sentiment index fell to 88.4 in March, down slightly from the mid-month reading but down significantly from the February level of 91.3. In contrast with the Consumer confidence survey and counter to rising prices at the pump, inflation expectations were unchanged from the previous reading of 3.0 percent - look for an increase in inflation expectations next month as gas prices show no signs of reversing.

Summary: As has been the case for a few weeks now, there was more bad news than good in the most recent batch of economic reports. The new home sales figure was abysmal, though weather was surely a factor, and weakness in manufacturing continues while consumer confidence has shown sharp declines recently coming from relatively high levels at the end of last year. Crude oil and natural gas inventories continue to decline as prices continue to rise, something that is sure to show up in future reports on inflation, spending, and consumer confidence.

The report on fourth-quarter GDP surprised to the upside and inflation appeared tame, but this data is up to six months old and really just serves to corroborate the conditions seen at the close of 2006. It provides no meaningful indication of what to expect in the months ahead, though next month's first look at first-quarter GDP growth will be highly anticipated.

The bright spots came in relatively low initial jobless claims where there continue to be few signs of trouble in the labor market as a whole, along with good reports on income and regional manufacturing, both of which could be fleeting. As stated here many times before, as long as employment remains steady, it will be hard to get too worked up over the downside risks to growth. Next week's labor report might provide some intrigue, but, based on recent initial jobless claims, probably not.

The Week Ahead: Economic reports in the week ahead will be highlighted by the labor report on Friday. Also scheduled for release are the ISM manufacturing index on Monday, pending home sales on Tuesday, the ISM non-manufacturing index on Wednesday, and consumer credit on Friday.