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The week's economic reports

Saturday, March 08, 2008

A rapid deterioration in the labor market that saw nonfarm payrolls post their biggest monthly decline in almost five years highlighted the week's economic reports.

Stocks and bonds ended with the S&P 500 Index down 2.8 percent to 1,293, now down 11.9 percent for the year, and the yield of the 10-year U.S. Treasury note rose 3 basis points to 3.56 percent.
ISM Manufacturing Index: The nation's broadest measure of manufacturing activity, the ISM Manufacturing Index, plunged back below the expansion/contraction line for the second time in three months, falling from 50.7 in January to 48.3 in February, close to the five year lows reached last December.

A rebound like the one seen early last year doesn't appear to be in the cards for 2008. Given how other economic indicators have deteriorated lately, a further plunge into the low forties sometime in the months ahead seems to be the more likely outcome, as was the case early in 2001.
Recall that a level of 50 delineates expansion from contraction and no one starts to really worry about the ISM numbers until they drop below 45.

Declines were seen in production (down 4.5 points), inventories (down 3.7 points), vendor deliveries (down 2.7 points), employment (down 1.1 points), and new orders (down 0.4 points).

Prices were relatively stable, dropping from 76.0 to 75.5, and new export orders fell from 58.5 to 56.0. These were the only two categories that remained above the 50 mark.

The plunge in inventories was an indication that manufacturers are reducing their stockpiles of finished goods rather than allowing them to build up as business conditions soften, but falling inventories hurts an already weak manufacturing labor market as more and more companies reduce plans for future production. Friday's labor report showed a decline of 52,000 in manufacturing payrolls, the steepest drop since the summer of 2003, and is yet another indication of the dramatic slowdown in the U.S. economy.

ISM Nonmanufacturing Survey: The ISM nonmanufacturing survey rebounded sharply from last month's abysmal reading that came as a major shock to financial markets. The business activity index jumped from 41.9 in January to 50.8 in February, back above the important expansion/contraction line of 50. New orders were strong, surging from 43.5 in January to 49.5 in February, backlogs rose from 46.0 to 49.5, and employment improved from 43.9 to 46.9. As in the ISM manufacturing report released the day before, costs remain elevated, but they did drop back into the 60s, from 70.9 in January to 67.9 last month.

Pending Home Sales: The National Association of Realtors' pending home sales index was unchanged from January to February, however, on a year-over-year basis, the index is now down 19.6 percent. Much is being made by many of the "housing-optimists" regarding the possible leveling off in home sales and the potential for a rebound later this year, however, it is important to remember that it is home prices that are critical for the broader economy at the moment.

Home sales have been at historically low levels for months now and it is only natural to think that they can't fall much further because people will always be buying homes due to job relocations and life events such as marriage, but, despite what you may hear in the financial media or from your local real estate agent, this is not an indication of a rebound in the housing market in general and certainly not an indication that prices will stop falling or head back up. Downward price pressure will remain until inventory is brought back in line with historical norms.

Labor Report: The national labor market saw a net loss of 63,000 jobs last month and significant downward revisions were made to prior month's data. December payroll growth was revised from +84,000 to +41,000 and the job loss in February increased from -17,000 to -22,000.
The steepest monthly declines were seen in the usual areas of construction and manufacturing, but there is growing weakness in retail trade within the trade, transportation, and utilities category which tumbled by 39,000 last month.

Job losses at department stores totaled 11,100 in February and, part of the continuing fallout from a deeply troubled housing market, employment at building material and garden supply stores fell by 6,800.

The health care industry, restaurants, and all levels of government continue to hire. If government jobs were removed from the mix, instead of a job loss of 44,000 over the last three months, a total decline of 141,000 would result.

The unemployment rate (from the household survey) fell from 4.9 percent to 4.8 percent as a result of 450,000 individuals leaving the labor force for one reason or another. The number of respondents reporting that they were employed during the February household survey actually fell by 257,000 which is clearly at odds with the headline of falling unemployment.

Summary: There were just a few glimmers of hope in the two ISM reports last week, but the total loss of over 100,000 jobs during the last three months in the labor report (i.e., after factoring in the new February data along with the revisions to prior months' data) came as a shock to many who were expecting modest job growth or at least a smaller decline.

In many ways, the pace of the slowdown has quickened substantially in just the last two months and, now that the labor market (normally a lagging indicator) has confirmed much of the other data indicating a rapid deterioration in the economy, most observers are "throwing in the towel" for the first quarter, now projecting negative real economic growth.

The advance estimate of first quarter real GDP will not be available until the end of April.

The commercial real estate market seems to be about to collapse, initial jobless claims are trending higher, and prices continue to pinch pocketbooks all across the country as every single reading of consumer confidence shows a quickly souring mood on the part of the U.S. consumer. This sets up a truly ominous set of possibilities for the consumption-based U.S. economy if the long-awaited "consumer retrenchment" is finally at hand. As noted on a number of occasions over the last six months or so, recent developments really do seem to indicate that this is the "beginning of the end" for life as we've known it in our borrow-and-spend culture of over-consumption.

The first round of tax rebates will surely not be enough to save the economy, nor will the second or third.

With a presidential election in just eight months, what is to come may make the stimulus programs that we've seen so far look tame by comparison, but, unless there is another "good" asset bubble to inflate (i.e., not commodities), where we can all feel rich again and spend beyond our means, it looks to be a long and difficult period of adjustment directly ahead.

The Week Ahead: The coming week will be highlighted by reports on retail sales on Thursday and consumer prices on Friday. Also scheduled for release are reports on international trade on Tuesday, import/export prices on Thursday, and consumer sentiment on Friday.

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