The week's economic reports

Weak economic growth during the fourth quarter and the first month of job losses in over four years highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index surging 4.9 percent to 1,395, now down 5.0 percent for the year, and the yield of the 10-year U.S. Treasury note rose 2 basis points to 3.60 percent.
New Home Sales: Homebuilders slashed new home prices by ten percent in December but sales volume fell by five percent anyway - to the lowest level in 12 years. Sales of new homes plunged from a downwardly revised, seasonally adjusted, annualized rate of 634,000 in November to just 604,000 in December, far below the consensus estimate of 650,000.

From year-ago levels, new home sales have plunged 41 percent, however, since cancellations are not included in the data, these figures overstate the health of the homebuilding sector as cancellations continue to increase.

The lower sales total contributed to a higher inventory of unsold homes that now stands at a 26-year high, rising from 9.4 months of supply in November to 9.7 months.
The median price plunged by 10.4 percent on a year-over-year basis, from $244,700 in December of 2006 to $219,200 last month, the largest annual decline since 1970.

The news just keeps getting worse for homebuilders and there are no indications yet that the housing market is stabilizing. With each and every monthly report, it's more of the same - lower sales volume and lower prices

The report on new home sales follows last week's report on existing home sales that showed a 22 percent decline from year-ago levels and significantly lower prices. Retailers, manufacturers, and importers along with policy makers in Washington are fretting over the impact that lower home prices and the loss of "home equity wealth" will have on personal consumption that accounts for more than two-thirds of economic activity in the U.S.

Gross Domestic Product: Economic growth slowed sharply in the fourth quarter of 2007 to a seasonally adjusted annualized rate of just 0.6 percent. This figure was well below consensus estimates of 1.2 percent and, for the entire year of 2007, the economy expanded just 2.2 percent, the lowest rate of growth since 2002.

Note that this is the "advance" estimate for fourth quarter growth - the first of three estimates to be followed by the "preliminary" and "final" readings in February and March.

Housing continued to weigh on the economy posting its steepest quarterly decline in 26 years, plunging 24 percent. Residential investment alone subtracted 1.18 percentage points from growth, however, even more significant was the 1.25 percentage point subtraction due to declining inventories. Note that large changes in inventories have been "revised away" on a number of occasions in recent years.
Consumer spending, which accounts for more than two-thirds of economic activity, contributed just 1.37 percentage points to the bottom line, down from a 2.01 percentage point contribution in the third quarter and well below the average contribution of 2.2 percentage points over the last five years.

The price index for personal consumption expenditures, used to convert nominal GDP growth into real GDP growth, rose at an annual rate of 3.9 percent after increasing an upwardly revised 1.8 percent during the third quarter.

Overall, this report is worse than expected, but it has the potential to be revised upward in the months ahead due to the relatively large decline in inventories.

Labor Report: Nonfarm payrolls posted a decline of 17,000 in December, the first monthly job loss since October of 2003, and the Labor Department's annual revision to the payroll data, going as far back as January of last year, resulted in an overall decline of 376,000 jobs.

December job growth was revised up by 64,000, however, this gain was nearly wiped out by the 55,000 downward adjustment to the November data.

For the month of January, employment in construction and manufacturing declined by 27,000 and 28,000, respectively, and, as usual, strong gains were seen in education and health services where 47,000 new jobs were added.
Government employment declined by 18,000, driven by a decline of 26,000 in education positions at the state level - this was an unusually large decline that seems to occur about every other year in January.

Overall, the government category has been a consistent source of job growth, averaging almost 20,000 new positions per month during 2007.

The unemployment rate, which comes from a different survey, dipped slightly from 5.0 percent in December to 4.9 percent in January.

Average hourly earnings increased 0.2 percent to $17.75, an increase of just 3.7 percent on a year-over-year basis and below the current government-reported annual inflation rate of 4.1 percent.

ISM Manufacturing Index: The broadest measure of manufacturing activity in the U.S. was drowned out by much more important reports last week on economic growth and labor markets, but the ISM manufacturing index did manage to post a modest rebound in January after plunging in December.

Led by a gain in production, the index moved back up over the 50 level to 50.7, up 2.3 points from last month's first sub-50 reading in almost a year.

Note that readings above 50 indicate expansion and readings below 50 indicate contraction.
Production jumped almost 7 points to 55.2, however, employment fell 1.6 points to 47.1, indicating job losses, as confirmed in the Labor Department's employment report earlier in the day.

New orders rose from 46.9 in December to 49.5 in January, an improvement from last month but still indicating modest contraction.

Export orders rose sharply, up 6 points to 58.5, another indication of the ongoing revival for U.S. exporters as a weaker U.S. dollar has made U.S. goods more attractive overseas. And lastly, prices paid remain uncomfortably high, rising from 68.0 in December to 76.0 in January.

Summary: The two most important economic reports last week were both negative as economic growth during the fourth quarter and job growth during January both came in well below expectations. The only bright spots were seen in the 5.2 percent increase for durable goods orders (in what is a very volatile data series) and in a modest rebound for the manufacturing sector as indicated by the ISM manufacturing index.

Consumer confidence/sentiment might be leveling out a bit, though current readings are at fairly low levels as seen in last week's reports from the Conference Board and the University of Michigan, and housing continues to plumb new lows in both sales volume and home prices. For more on home prices see Tuesday's blog post More record home price declines for a colorful chart of the S&P Case-Shiller 20-city home price index.

The labor market, however, has to be the most disconcerting development in recent weeks - the one-two punch of last week's jump of 69,000 in weekly jobless claims to near-recession levels of 375,000 and the first monthly job loss since 2003 have sent a powerful message that the labor market is weakening, perhaps rapidly.

For all the criticism that Ben Bernanke has faced as a result of slashing interest rates by three-quarters of a point on January 22nd and then by another half-point last Wednesday, these cuts now seem a little bit more appropriate after recent news on economic growth and a weakening labor market.

The Week Ahead: The coming week will be highlighted by reports on productivity and costs on Wednesday and pending home sales on Thursday. Also scheduled for release are reports on factory orders on Monday, the ISM Nonmanufacturing survey on Tuesday, and consumer credit on Thursday.