Saturday, May 03, 2008
Modest economic growth, a contracting labor market, and plunging home prices highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index up 1.1 percent to 1,414, now down 3.7 percent for the year, and the yield of the 10-year U.S. Treasury note fell 6 basis points to 3.85 percent.Consumer Confidence: The Conference Board's measure of consumer confidence dropped from an upwardly revised 65.9 in March to just 62.3 in April, the worst reading since 1991. Aside from a worsening view of the job market, the most shocking part of this report was the big jump in one-year inflation expectations to 6.8 percent. This level was seen briefly during the energy price shock following Hurricane Katrina in 2005, a shock that ebbed much more quickly than the current one is likely to.
S&P Case-Shiller Home Price Index: Home prices for the 20-city index fell 2.7 percent from January to February and annual price declines reached a new all-time record, down 12.7 percent from year-ago levels. The steepest annual declines were seen in Las Vegas (-22.8 percent), Miami (-21.7 percent), and Phoenix (-20.8 percent). For more details and a colorful chart of home price indexes for all 20 cities over the last eight years, see this item from Tuesday.
Gross Domestic Product: The Commerce Department reported that inflation-adjusted economic growth in the U.S. remained in positive territory during the first quarter, but just barely. Real gross domestic product rose at a seasonally adjusted annualized rate of just 0.6 percent from January through March in the "advance" estimate of economic growth, the first of three readings for the first quarter.
The "preliminary" estimate will be released at the end of May and the "final" reading will come at the end of June.
Consumer spending posted its lowest quarterly contribution in almost seven years adding just 0.68 percentage points to the overall figure. Personal consumption expenditures have not been this low since the second quarter of 2001 and, prior to that, you have to go back to 1991 to find a worse reading (a detailed chart of contributions to GDP appears in this item from Wednesday).
Residential fixed investment continued to be a drag on the economy and it has now been joined by a decline in commercial building. Nonresidential investment contracted for the first time in over two years and posted its sharpest decline since 2002.
Net exports declined but were still positive, contributing 0.22 percentage points to growth, down from much higher levels over the last year. This is likely due to the higher cost of imported oil in recent months that has eaten away at export gains. A key factor in making the overall number positive during the first quarter was the contribution of 0.81 percentage points from rising inventories, likely an unintended buildup consistent with the consumer spending slowdown. If the inventory build is removed from the calculation, real GDP falls to -0.2 percent.
Price inflation came in at an annualized rate of just 3.5 percent for the quarter, down slightly from the 3.9 percent reading during the previous quarter, however, for the purposes of adjusting nominal GDP for inflation to arrive at "real" GDP, the 2.6 percent GDP deflator is used instead. More than anything else, understated inflation is now responsible for keeping economic growth in positive territory.
ISM Manufacturing: The widest measure of the health of the nation's manufacturing sector, the Institute for Supply Management's manufacturing survey, was unchanged from March to April at 48.6.
This is below the level of 50 separating expansion from contraction and marks the fourth sub-50 reading in the last five months, but it is still well above the low-40s region that has normally been associated with recessions over the last few decades.
New orders continued to contract, unchanged for the month at 46.5. Export orders remain one of the few bright spots in this report (and for the economy as a whole) rising from 56.5 in March to 57.5 in April, part of an ongoing rebound in exports due, in large part, to the falling value of the U.S. dollar.
Confirming other indicators that point to a weakening job market, not the least of which was Friday's decline of 46,000 in manufacturing payrolls, the ISM's measure of employment fell almost 4 points, from 49.3 in March to 45.4 in April.
Personal Income/Spending: Personal income rose 0.3 percent in March following a gain of 0.5 percent in February and spending rose 0.4 percent after a gain of 0.1 percent the month before. In inflation-adjusted terms, consumption advanced by just 0.1 percent in March as spending on durable goods such as autos, furniture, and other long-lasting items fell.
Labor Report: Nonfarm payrolls declined by 20,000 and the unemployment rate dipped to 5.0 percent after analysts had been expecting a decline of 85,000 in payrolls and a 5.2 percent unemployment rate.
This was the fourth consecutive monthly decline in payrolls with a total job loss during that period of 260,000. Figures for February and March were revised modestly lower.
Construction and manufacturing firms continued to cut payrolls aggressively, down 61,000 and 46,000, respectively.
Job loss in construction has now spread to the commercial sector with payrolls declining 13,000 to go along with a loss of over 33,000 spots in residential building.
Retail trade employment declined by 27,000, almost half of the job losses occurring at building material and garden supply stores. This is part of the continuing fallout of the housing market bust and is consistent with news from companies like Home Depot where job layoffs and store closures were announced on Friday.
Gains of 52,000 were seen in education and health services and payrolls rose by 39,000 in professional and business services with strong gains in computer systems design and accounting. Temporary employment, considered a good leading indicator of future job growth, fell by over 9,000. While federal, state, and local governments contributed only 9,000 new jobs in April, the health care industry continued as a stalwart in job creation with a gain of 43,000.
Overall, this was a weak report but far better than the jobs data for the last three months. However, it is clearly not an indication of a rebound in the labor market given the worsening problems elsewhere in the economy and the fact that employment is a lagging indicator.
Summary: The story remains the same week after week - plunging home prices, sagging consumer confidence, a weakening labor market, and an "inflation-adjusted economy" that would appear much, much worse if a truer measure of inflation were used instead of the government's tortured consumer price index and other measures.
The home price declines in some parts of the country reported in the S&P Case-Shiller Home Price Index were stunning, as were the latest "inflation expectations" from the Consumer Confidence survey. It's hard to imagine that home prices will stop their descent anytime soon or that the price at the pump will return to lower levels - the current conditions are likely to wear on consumers for some time, putting great pressure on an economy soundly based on a public accustomed to spending freely.
A growing chorus of disbelievers in government data is now being heard as real world experience increasingly departs from that indicated in the "official" data and the amount of "spin" applied to the data grows. Here's the official take from the Treasury Department on recent economic reports:
Employment Fell in April:Sometimes you have to wonder how long the government and their economists will be able to continue to pull the wool over the eyes of the consumer regarding the job market and consumer prices. A closer look at the lower unemployment rate reveals that the "improvement" was due to a huge increase in those working part-time "due to economic reasons" and that full-time employment fell. As for consumer prices, "core inflation" means little to most Americans who are now all too aware of how much food and gasoline cost. As former Fed chief Alan Greenspan lamented on more than one occasion, the problem with gasoline prices is that they are too easy for the public to measure.
Job Growth: Payroll employment fell by 20,000 in April, following a decrease of 81,000 in March. The United States has added 8.0 million jobs since August 2003. Employment increased in 39 states and the District of Columbia over the year ending in March.
Low Unemployment: The unemployment rate was 5.0 percent in April, down from 5.1 percent in March.
Signs of Economic Strength Include Exports and Low Inflation:
Exports: Strong global growth is boosting U.S. exports, which grew by 9.5 percent over the past 4 quarters.
Inflation: Core inflation remains contained. The consumer price index excluding food and energy rose 2.4 percent over the 12 months ending in March.
How can things be so bad with an unemployment rate of five percent and inflation at just two or three percent?
The Week Ahead: The coming week will be relatively light on data highlighted by a report on the trade deficit on Friday. Also scheduled for release are the ISM nonmanufacturing survey on Monday and three reports on Wednesday - productivity/costs, pending home sales, and consumer credit.