Saturday, September 13, 2008
Large declines in retail sales in July and August along with a sharp rebound in consumer sentiment highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index up 0.7 percent to 1,252 (for a year-to-date total return of –12.9 percent) and the yield of the 10-year U.S. Treasury note rose 7 basis points to 3.73 percent.
International Trade: The trade gap between the U.S. and the rest of the world widened sharply in July, from a downwardly revised $58.82 billion in June to $62.2 billion, driven largely by the surging dollar value of crude oil imports. Oil imports rose to a new all-time high of $43.4 billion as the average price of crude rose from $117.13 to $124.66 a barrel, a trend that is set to reverse abruptly in August.
Aside from energy, imports shrank from $32.5 billion to $29.6 billion, most of which is attributed to a general slowing in the U.S. economy. Overall, imports rose 3.9 percent while exports gained 3.3 percent, exports once again being led by industrial and automotive products.
Initial Jobless Claims: Initial claims for unemployment insurance fell from an upwardly revised 451,000 during the last week of August to 445,000 during the week of September 6th. The four-week moving average now stands at 440,000, a figure consistent with the last two recessions in 1990-1991 and 2001, while continuing claims rose 122,000 to 3.53 million.
The labor market is bad and getting worse with an increasing number of calls for job losses in the months ahead in the 150,000-200,000 range or perhaps worse. Unemployment is expected to continue rising with 6.5 percent being the new optimistic forecast, some analysts now pegging the jobless rate at 7 percent or more in 2009.
Retail Sales: For a complete report on retail sales, see this item from yesterday.
Producer Prices: As expected given the recent plunge in energy prices, wholesale inflation reversed course in August, dropping 0.9 percent after a 1.2 percent surge in July. On a year-over-year basis, producer prices are up 9.7 percent. Energy prices fell 4.6 percent after rising 3.1 percent the month before and food prices rose 0.3 percent in August, the same increase seen in July.
The core rate of inflation for producer prices (excluding food and energy) was in line with expectations rising 0.2 percent, down from an increase of 0.7 percent the month prior, largely due to heavy discounting from automobile dealers.
Consumer Sentiment: The mood of the consumer, as measured by the Reuters/University of Michigan Consumer Sentiment Index, surged to its highest level since January, rising to 73.1 after a month-end August reading of 63.0. This is the first of two readings for September with the final reading due on the 26th. Inflation expectations declined sharply, tumbling from 4.8 percent to 3.6 percent for the one-year outlook and down 0.3 percentage points to 2.9 percent for the five-year period.
More than ever before, consumer sentiment and the Conference Board's similar consumer confidence survey are being driven by gasoline prices and, with the price at the pump having fallen more than 60 cents a gallon recently, this improvement should not be surprising. It is important to note, however, that current sentiment/confidence levels have been associated with recessions in the past and a one month surge in confidence is not necessarily the beginning of a trend, more likely, something of a "relief rally" for the consumer.
Summary: The decline in retail sales was, by far, the most important economic development last week and it gives credence to the idea that, after a four month respite due to government stimulus checks and high gasoline prices, the resumption of the consumer spending slowdown is underway. Falling home prices, a weakening job market, and tight credit markets have combined to transform a spendthrift American consumer into a cautious spender and this bodes ill for the economy.
During the last slowdown in 2001, home prices were already rising at eight percent per year and, once the Fed's low interest rates hit the mortgage market, there were waves and waves of refinancing which eventually led to even bigger home price gains and then the housing bubble that burst five years later. This time, there is no such remedy in store.
With foreclosures still rising and the next wave of defaults now appearing - the "maturing" Alt-A, Option-ARM products - the housing market will get much worse before it gets any better, perhaps accelerating the consumption slowdown. Pending home sales dropped again in July, however, it is home prices, not home sales, that are much more important in determining how freely American's spend in the period ahead.
After a few months of relatively better economic data, we may now be set to begin another leg down as the troubles in the labor market intensify, the credit market continues to deteriorate, and the export boom once spurred by a weaker dollar begins to throttle back due to the combination of a stronger dollar and slowing growth overseas.
The Week Ahead: The coming week will be highlighted by reports on consumer prices on Tuesday and housing starts on Wednesday. Also scheduled for release are reports on industrial production and New York area manufacturing on Monday, the National Association of Home Builders' housing market index on Tuesday, and both leading economic indicators and the Philadelphia area manufacturing survey on Thursday.