Saturday, August 02, 2008
Mounting job losses and revisions showing negative real economic growth in the fourth quarter of 2007 highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index up 0.2 percent to 1260 (for a year-to-date total return of –13.3 percent) and the yield of the 10-year U.S. Treasury note fell 16 basis points to 3.97 percent.
Consumer Confidence: After last week's surprising rebound in the Reuters/University of Michigan consumer sentiment survey, it was a bit of a disappointment when the Conference Board's consumer confidence survey showed little improvement from June to July. Rising from an upwardly revised 51.0 in June to 51.9 in July, this index remains at historically low levels and clearly indicates that consumers remain pressured by the many recent economic ills - falling home prices, rising energy prices, a falling stock market, and a weakening labor market.
The job sentiment category which, late last year, was about evenly balanced between those saying jobs are "hard to get" and those saying jobs are "plentiful", is now decidedly skewed in favor of the former by a margin of 30.3 percent to 13.5 percent, a view that proved accurate in predicting more losses in Friday's labor report. Inflation expectations, an important yardstick for the Federal Reserve, remained elevated with the one-year outlook down one-tenth to 7.6 percent.
Gross Domestic Product: The first reading on economic growth during the second quarter - the "advance" estimate, to be followed by the "preliminary" estimate in August and the "final" estimate in September - came in at a somewhat disappointing annualized rate of 1.9 percent. Most analysts were expecting a figure closer to 2.4 percent for the second quarter, following a first quarter reading of 0.9 percent.
More than any other factor, soaring exports drove the most recent growth contributing a full 2.4 percentage points to the overall gain. Personal consumption was responsible for 1.1 percentage points, private domestic investment subtracted 2.3 percentage points (mostly due to the housing market), and government spending contributed 0.7 percent (for more on these breakdowns, see this item from Thursday).
Amazingly, the GDP price index (also known as the GDP price "deflator") rose at an annual rate of just 1.1 percent following a 2.6 percent gain in the first quarter. This low value was attributed to the 2.2 percent decline in residential fixed investment, apparently a result of declining home values that show up in the GDP inflation data but not in the consumer inflation data.
The separately calculated Personal Consumption Expenditures index climbed from an annual rate of 3.5 percent in the first quarter to 4.2 percent in the second quarter, much more consistent with other price gauges but still far below the annualized rate of 7.6 percent during the same period for the Consumer Price Index.
As important as any of the second quarter data was, this release also included revisions going back as far as 2005 and revealed the first quarter of negative GDP growth since the 2001 recession at the end of 2007. Fourth quarter real economic growth was revised from an annualized rate of 0.6 percent to -0.2 percent, largely due to a big downward revision to personal consumption. Also, economic growth was revised downward for each of the last three years by approximately 0.2 percentage points each year.
Initial Jobless Claims: Initial claims for unemployment insurance surged from a revised 404,000 to 448,000 over the last week, the highest reading since April of 2003. The increase was largely a result of the recently enacted federal extension of emergency unemployment benefits (where those exhausting previous benefits filed again for the extension) and this influence is expected to fade over the next month. The more significant "continuing claims" total surged to almost 3.3 million, its biggest weekly increase since June of 1998, and the 14th straight week that claims have been above the 3 million mark.
Labor Report: The Labor Department reported the nation's unemployment rate reached a new four-year high of 5.7 percent in July and employers slashed payrolls by another 51,000.
The rise in the unemployment rate from 5.5 percent in June to 5.7 percent in July was due in large part to a surge in unemployment among younger workers. Over the last three months, the unemployment rate for 16 to 19-year olds averaged 19.0 percent and the jobless rate for 20 to 24-year olds was 10.2 percent.
The unemployment rate has risen by almost a full percentage point since the 4.8 percent reading in February, the steepest five-month climb since 2001.
Job losses during the month of July occurred in the usual categories - construction and manufacturing - with an even bigger drop in trade, transportation, and utilities where declines were broad based as wholesale trade, retail trade, and transportation all fell sharply (for more on this subject, see this item from Friday).
As has been the case for many months now, job creation in health care and government offset some of the other job losses but, so far in 2008, nonfarm payrolls have declined by 463,000 and year over year job growth again rounds to 0.0 percent. Moreover, when the benchmark revisions are performed later this year, it is likely that even bigger job losses will result as the overstatement of job creation via the "birth-death model" is corrected.
ISM Manufacturing: The nation's broadest measure of manufacturing activity held steady last month, dropping only slightly from a modestly expansionary reading of 50.2 in June to an even 50.0 in July indicating neither expansion or contraction. In a very bad sign for the period ahead, new orders plunged almost 5 points to 45.0, the lowest reading since 2001, after showing strength in recent months.
Though the manufacturing sector continues to lose jobs in the monthly nonfarm payrolls report, the ISM employment index surged 8 points to 51.9, its highest level in over a year. Prices paid remain quite high at 88.5, about the same as in June.
Summary: The downward revision into negative territory for fourth quarter real GDP growth and the rising unemployment rate are continuing evidence that the U.S. economy is struggling mightily. Whether or not the late-2007/early-2008 period will be designated a "recession" will be left to the National Bureau of Economic Analysis who will make that determination sometime in the next year, however, at least until the 2009 revisions, there will be at least one quarter of negative GDP growth included in the calculation.
Home prices continue to fall, consumer confidence is stuck near historic lows, and the health of the manufacturing sector remains far better than it would otherwise be without surging exports, one of the very few bright spots in the U.S. economy at the moment.
This has been a painful year for the economy so far and conditions are more likely to get worse than better in the near-term as falling stock prices, falling home prices, and the seemingly never-ending credit crisis slowly impact more and more parts of the economy.
The Week Ahead: The coming week will be highlighted by reports on personal income/spending on Monday and pending home sales on Wednesday. Also scheduled for release are the ISM nonmanufacturing report on Tuesday along with reports on consumer credit on Thursday and productivity and costs on Friday.