Saturday, April 19, 2008
Continued weakness in retails sales, manufacturing, and home construction along with soaring prices at the wholesale level highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index up 4.3 percent to 1,390, now down 5.3 percent for the year, and the yield of the 10-year U.S. Treasury note rose 28 basis points to 3.75 percent.
Retail Sales: In a surprise to most analysts, retails sales rose 0.2 percent in March after an upwardly revised decline of 0.4 percent in February. The increase, however, was largely due to surging gasoline prices - excluding gasoline sales, retail sales were unchanged.
On a year over year basis, overall retail sales have risen just 1.97 percent. Since these figures are not adjusted for inflation, real retail sales (adjusted for inflation) are now well into negative territory.
Retail gasoline prices rose 6.9 percent in March pushing gasoline station sales up 1.1 percent. From year-ago levels, gasoline purchases have risen 18.9 percent though actual consumption of gasoline has been flat during the same period.
Excluding gasoline station sales from overall retail sales results in just a 0.3 percent increase in the last year, a clear indication of how weak consumer spending has become and of much higher prices at the pump.
Producer Prices: Led by rising energy prices, wholesale prices posted their second largest increase in the past 33 years, rising 1.1 per cent in March after a 0.3 percent gain in February (the largest increase since 1975 occurred last November when producer prices rose 2.6 percent. On a year-over-year basis, producer prices have risen 6.9 percent.
Energy prices surged 2.9 percent for the month paced by a 13.1 percent jump in home heating oil while natural gas prices rose 4.2 percent and gasoline prices increased 1.3 percent. Consumer food prices increased 1.2 percent and have now increased at an annual rate of 10.1 percent over the last three months. Faced with these rapidly rising prices, businesses face one of two choices - either pass the cost increases on to consumers or take a hit to their bottom line. Their decision should be apparent in both the consumer price index and company earnings in the months ahead.
New York and Philly Fed Manufacturing Surveys: The two regional surveys of manufacturing activity in the Northeast moved in markedly different directions last month, but these are very volatile surveys and the month-to-month moves are really unimportant - it's the general trend that matters and that trend remains decidedly down.
The New York Fed's Empire State survey improved from -22.2 in March to +0.6 in April on rising shipments and stabilizing new orders. Meanwhile, conditions worsened considerably to the southwest as the Philadelphia Fed survey fell from -17.4 in March to -24.9 in April with a severe contraction in new orders which fell from -9.3 in March to -18.8 in April. Recall that numbers above zero indicate expansion and numbers below zero indicate contraction. In both reports, prices rose considerably and more weakness in employment was reported, corroborating recent manufacturing job losses in the monthly payrolls data from the Labor Department.
Consumer Prices: After no increase during the month of February, government-reported inflation rose 0.3 percent in March and is now up 4.0 percent from year-ago levels.Energy prices once again rose sharply, heating oil surging 7.9 percent in March and now up 40.2 percent on a year-over-year basis. Gasoline prices rose 1.3 percent for the month and 26 percent from last year at this time. Overall energy costs rose 1.9 percent last month and 17.0 percent from a year ago.
Helping to keep the overall inflation figure down, clothing prices fell 1.3 percent in March and are now down 1.4 percent over the past year. The cost of women's and girl's apparel fell 2.6 percent last month and prices have dropped 5.4 percent from year-ago levels.
Food costs continue to rise, however, as the price of bread rose 14.7 percent over the past year and milk prices have increased 13.3 percent.
As noted on a number of occasions in recent months (see Stagflation, then and now) it is virtually impossible for government-reported inflation to move much higher than the current 4 percent rate unless rental prices move up considerably, something that is not likely now that there is a glut of unoccupied homes (although a report last week indicated that rental costs have been increasing in Western states).
With the rising price of food and energy having a big impact everywhere but in the government's headline inflation numbers, the manipulation of the inflation statistics over the last 25 years is becoming more and more noticeable to ordinary consumers who are having an increasingly difficult time reconciling the four percent inflation rate they hear on the evening news with their own experiences making purchases at grocery stores and gasoline stations.
New Home Construction: Housing starts and permits for new construction plumbed new 17-year lows in March, dashing the hopes of some who continue to believe that the homebuilding industry can't have much further to fall given the dramatic move down over the last two years.
Housing starts fell 11.9 percent for the month and 36.5 percent on a year-over-year basis while permits for new construction, a leading indicator for future homebuilding activity, dropped 5.8 percent from February to March, now down 40.9 percent from year-ago levels.
Tightening credit conditions, uncertain labor markets, a glut of unsold homes for sale, and an increasing number of foreclosures coming onto the market at depressed prices (in some parts of California, as many as two-thirds of all homes sold are foreclosure sales) continue to depress the housing sector with no sign of a turn-around on the horizon.
Multi-family housing starts fell 24.6 percent and single-family starts declined 5.7 percent. Starts dropped in all four regions, led by a 21 percent plunge in the Midwest.
Earlier in the week the National Association of Home Builders reported a flat month-to-month reading for their housing market index at 20, a historically low level just above the all-time low of 19 and far from readings of over 50 reported at the peak of the housing boom.
The homebuilders' group forecast housing starts would fall 30 percent this year, compared with a previously estimated 27 percent drop, as the housing and credit crises continue. Southern California-based RealtyTrac, Inc. reported a huge jump of 57 percent in foreclosures during March from year-ago levels and bank repossessions more than doubled from this time last year. They reported an increasing number of homeowners "walking away" from their homes as property values tumble and adjustable-rate mortgages continue to reset.
The nation's housing market is likely to get worse before it gets better.
Initial Jobless Claims: After reaching the psychologically important level of 400,000 three weeks ago and then tumbling by over 50,000 a week later, last week initial claims for unemployment insurance rose 17,000 to 372,000, a figure consistent with the recent trend. The four week moving average held about steady at 376,000, now up 17 percent on year-over-year basis, and still near its highest level since the hurricane-affected spike in late-2005.
As more evidence of the further deterioration in the nation's labor market, continuing claims for unemployment insurance, a good indicator of the difficulty that displaced workers are having in securing new employment, rose to highs last seen in early-2004. Unemployment in California now stands at 6.2 percent, far above the national rate of 5.1 percent.
Summary: It was really just more of the same last week for bad economic news - weak retail sales with higher energy prices, more contraction in both the manufacturing and housing industries, soaring prices at the wholesale level, and rising consumer prices that show up almost everywhere but in the headline consumer price index.
There were three bright spots last week, however, though none of these portend a major rebound for the U.S. economy. A continuing high rate of capital flows into the U.S. indicate that foreigners have not yet tired of supporting the huge debt that continues to be racked up by government, businesses, and individuals. Also, worker productivity unexpectedly improved and the Conference Board's index of leading economic indicators posted its first gain in six months, rising 0.1 percent.
There hasn't been much good economic news lately - this is about as good as it gets.
The Week Ahead: In a relatively light week of data, the coming week will be highlighted by two reports on the nation's troubled housing market - existing home sales on Tuesday and new home sales on Thursday. Also scheduled for release are reports on durable goods orders on Thursday and consumer sentiment on Friday.