The week's economic reports

The worst labor report in more than five years and the sharpest decline in manufacturing activity since 9/11 highlighted the week's economic reports.

Stocks and bonds ended with the S&P 500 Index down 9.4 percent to 1,099 (for a year-to-date total return of -23.3 percent) and the yield of the 10-year U.S. Treasury note fell 19 basis points to 3.64 percent.
Personal Income and Spending: Incomes rose but spending was flat in August - good news for workers but bad news for the economy. Personal income rose 0.5 percent in August, a big rebound from the upwardly revised decline of -0.6 percent in July. On a year-over-year basis, personal income is now up 4.6 percent while overall PCE inflation is up 4.5 percent, producing meager wage gains in inflation-adjusted terms.

Spending was unchanged in August after rising an upwardly revised 0.6 percent in July. The September data for personal consumption is expected to be flat or negative, part of a continuing slowdown that may produce a quarterly decline in consumer spending in nominal terms for the first time since 1991. This would make it very difficult to post a positive number for economic growth for the third quarter.

Case-Shiller Home Price Index: The S&P Case-Shiller Home Price Index revealed record annual declines of 17.5 percent and 16.3 percent for the 10-City and 20-City Composite Home Price Indices, respectively, paced by Las Vegas and Phoenix where annual declines were 29.9 percent and 29.3 percent. Though a few areas posted month-to-month increases, all 20 cities were in negative territory on a year-over-year basis. For a colorful chart of all 20 cities in the index, see this item from Tuesday

Consumer Confidence: Moderating gasoline prices have helped to push consumer confidence up off of historically low levels seen just a few months ago, however, a rapidly deteriorating job market is beginning to have an impact. The Conference Board's confidence index rose from an upwardly revised 58.5 in August to 59.8 in September but those saying jobs are hard to get rose 1.1 percentage points to 32.8 percent while those saying jobs are plentiful fell 1.3 percentage points to 12.2 percent. Not more than a year ago, these two measures were about equal in the mid-20s range.

ISM Manufacturing Index: The nation's broadest measure of manufacturing activity plunged from 49.9 in August to 43.5 in September, its lowest level in almost seven years, in a clear indication that the economic slowdown is gaining pace and that the manufacturing export boom - one of the few bright spots in the economy this year - is faltering.

A move of this magnitude is quite unusual, the 6.4 point drop having been exceeded only once in the last 25 years immediately after the September 11th attacks as shown in the chart.

Recall that readings above and below 50 indicate expansion and contraction, respectively. Manufacturing has now contracted during eight of the last ten months with the highest reading during that time being just 50.7 in January.
New orders plunged almost 10 points, from 48.3 in August to 38.8 in September, an ominous sign for the period ahead. Production also fell sharply, down from 51.2 to 40.8 and employment dropped from 49.7 to 41.8, a development that was confirmed in the labor report on Friday where a net loss of 51,000 manufacturing jobs was seen.

Both inventories and backlogs remained weak and prices paid fell once again, now at a more typical level of 53.5 rather than the 70s and 80s as seen over the summer when oil prices were surging. Export orders remained the only bright spot, though not nearly as bright as just a few months ago, falling 5 points to 52.0 last month.

ISM readings in the low-40s (rather than simply below the expansion/contraction level of 50) have been associated with recessions in the past - based on this report, there should be little doubt that we are now in a recession.

Motor Vehicle Sales: The consumer spending slowdown and the tightening of credit markets resulted in plunging U.S. motor vehicle sales during September, paced by a 34 percent drop at Ford Motors relative to a year ago. Industry wide, vehicle sales declined 26 percent with Japanese imports tumbling as well, sales at Nissan down 37 percent, Toyota down 32 percent, and at Honda 24 percent below year ago levels. Due to aggressive discounting General Motors sales fell only 16 percent.

In what is generally viewed today as an industry in "collapse", customers are either "walking away" from vehicle purchases or being stymied by a lack of financing, larger down payments, or tougher credit standards, similar to changes that have been seen in the mortgage lending industry over the last year or so.

Labor Report: See this item from yesterday.

Summary: A quickly deteriorating labor market and manufacturing sector were front-and-center last week, a testament to the very real impact of the credit market crisis that entered a new heightened stage of distress over the summer. The most recent data for both employment and manufacturing were clearly at recession-levels and, now that Congress has passed the bailout bill aimed at loosening up the credit markets, look for action to address the rapidly slowing economy in the weeks ahead.

According to a report on Friday by Goldman Sachs, the recession is now expected to be "significantly deeper" than previously thought with unemployment rising to 8 percent next year. Estimates of economic growth were revised downward to minus two percent in the third quarter and minus one percent in the fourth quarter.

With Congress set hit the campaign trail prior to the November 4th elections, it would appear to be up to the Federal Reserve to slash interest rates to provide support at this point. As home prices continue to fall, job losses mount, and the export boom fades, the task of avoiding a recession is now turning into one of minimizing the severity of a recession.

The Week Ahead: The coming week will be highlighted by a report on international trade on Friday. Also scheduled for release are reports on consumer credit on Tuesday, pending home sales on Wednesday, and import/export prices on Friday.