Sunday, March 1, 2009

Weekly economic wrap-up: still heading down quickly

Yesterday I was thinking about the slew of economic reports that came out over the past week and felt that it was worth putting them all together in one post. No matter how you spin it, last week was certainly an economic bear of a week! Things are worsening rather than improving.

But I think that Warren Buffett says it well:
“The economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond,” said Buffett. “Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so.”
Lots of housing data paint the following picture: consumers are not buying homes, and there is still price discovery left to move through the system. From the NY Times on the National Association of Realtors January existing home sales report:
Chris York and Rebecca O’Connell are two such buyers. For the last year, they have been looking to move from Mr. York’s one-bedroom condominium to a three-bedroom home in northeastern Massachusetts or southern New Hampshire where they could start a family.

The couple say they intend to spend $350,000 to $400,000 bu
t that many homes in the area still seem overvalued. They have made two bids — one for $25,000 below the asking price, and another for $60,000 below the asking price — but have not been able to work out a deal. According to the Census Bureau, January new home sales, which are a mere fraction of existing home sales, plummeted 10% over the month. The current economic environment is simply not conducive to home buying: credit is tight, the rate of job loss is rising, and wealth is drying up. Eventually, prices and sales will find a bottom, but obviously that has not occurred yet.

The Census Bureau reported January new orders and shipments of durable goods for. This report is used as a signal of general investment trends, which were dismal in January. Durable goods fell 5.2% over the month for the sixth consecutive month. This was worse than December's report, which posted a 4.6% decline; not one category posted a positive growth in new orders.

Initial jobless claims for the week ending Feb. 21 grew to 667k, while continued claims - those workers that continue to receive unemployment benefits past the first week - grew to a record 5.1 million. These numbers are indeed shocking; however, a better gauge of the overall condition of the labor market to previous cycles is the number of claims as a share of all workers that are eligible for unemployment insurance - the insured unemployment rate - which surged another 0.1% to 3.8%.

The labor market is just brutal, and Friday's employment report is expected to post another 650k drop in payroll for February.

ISM, Chicago released the results of its Chicago purchasing manager's index for February; this is one of the important regional manufacturing reports - along with the Philly Fed and Empire State surveys - used to gauge national manufacturing activity, as measured by the Institute for Supply Management. The Chicago pmi got an 0.9 February bounce to 34.2, but the index remains deep in recession territory. Some of the components - employment is bad and prices continue to decline - paint a rather gloomy picture.

And last but certainly not least, the Bureau of Economic Analysis released its preliminary findings (second release) on Gross Domestic Product (GDP), which was revised downward to a -6.2% annualized rate. You can see the advanced findings (first release) here. My take on the report was: all of the boost from inventories was revised out of the headline growth rate, and private domestic demand (consumption and investment) has officially stepped out of the economic picture. Please see David Beckworth's take on how "nominal spending is crashing in the United States".

I am repeatedly shocked by the rate of economic decline that is popping up in these reports. I think that Zach Pandl, Nomura Global Economics, describes the economic reality well:
The decline in GDP in the fourth quarter was the largest since 1982 and the fourth largest in post-war US history. But perhaps the most surprising thing about it is how commonplace it looks in the current global environment: Fourth quarter Real GDP declined by 5.8% in the Euro area, 6.0% in the UK and 12.7% in Japan. Many emerging markets also experienced double-digit declines during the quarter.

And don't forget Buffett (beginning), "It [U.S. economy] has unleashed human potential as no other system has, and it will continue to do so.”

Rebecca Wilder


  1. And to think that McCain was derided for his "America's economy is fundamentally strong" comment. Billionaire's comment is more valid than Republican senator?

    (I didn't vote 2004 and 2008 so I'm a non-voter, myself.)

    As for the economy itself: I've been anticipating GD2 for several months now so the turn of events are only validating my gut feeling (helped by info & comments at CalculatedRisk). Note that I'm 20% cash and 80% short (since Aug'07) so I'm putting my money where my mouth is (and have done very well 2008 and 2009 YTD)....

  2. These are all symptoms of a credit strangling. If you want to fix it, then please help get Bernanke to stop paying banks to keep credit reserves on deposit with him (by charging an excess reserve fee instead of paying 0.25% interest when the target rate is way below that floor.) We have to convince someone called Margaret Gillis DeBoer (Federal Register notice 73 FR 59482-6) but it seems she also goes by the name Marnie. She's a section chief financial analyst at the Fed in charge of the practice of paying interest on reserve balances.


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