Insights & Advice


Economy Still Solidly in Recession

Sunday, November 30, 2008

Reports out this morning showed economic activity continues to slow across the country and sectors, from housing to manufacturing to the consumer.

New Home Sales Slide To 17-Year Low

New home sales fell 5.3% in October to a 433,000 annual rate, the fewest since January 1991.  Economists expected a drop of 3.0% to 450,000.  Additionally, the prior three months were revised slightly lower.  Sales plunged in the West and the South, but rose in the smaller Northeast and Midwest regions.  Sales are down over 40% from a year ago.  In Q3, 17% of all new home sales were financed by FHA, the most since Q1 1992.  Total home sales, however, have remained in a narrow range over the past year.

Inventories fell 8.0% to its lowest point since March 2004, but the I/S ratio ticked up to 11.1 months from 10.9.  Completed homes are taking a record 9.1 months to sell.

Prices are down 7% to 9% from a year earlier on a trend basis, as new homes need to compete with distressed sales of existing homes. Despite the drop, new home prices are still high relative to income.

Separately, October’s building permits were revised from to bad from horrible (to -9.3% from -12.0%).  There are way too few homes being built today relative to the population.

A drop in mortgage rates helped lift the MBA purchase index 5.3% last week from its lowest level in nearly eight years.  Refi activity, however, slipped 2.1%, as that index continues to flirt with its long-term support line.  Mortgage activity remains about 40% below its year ago level.

Regional Activity Decaying

No good news here either.  Regional reports indicate a sharp deceleration in activity across the country.  As a result, we expect the national ISM Index to decline further into negative territory on Monday.  Price pressures have abated significantly. 

The Chicago Business Barometer fell 4.0 points to 33.8 in November, its weakest reading since April 1982, when the economy was in the middle of a severe recession..  Expectations were for the barometer to be little changed at 38.0.  Among notables:

  • New orders dropped 5.3 points to 27.2, its lowest level since July 1980.
  • Order backlogs fell 10.8 points to 28.2, the worst since April 1982.
  • Employment gave up 8.1 points, falling to 33.4, the weakest reading since January 2002.
  • Price pressures were essentially neutral, falling 3.0 points to 50.7, the lowest level since July 2003.
  • Lead times, however, lengthened across the board, with buying time for production materials surging 20.5 days, second only to November 1973, to the longest since January 1980.

In the Kansas City Fed district, manufacturing activity also weakened further.  The decline was broad-based, with production, shipments, new orders, and order backlogs all falling to record lows.  Future activity indexes also fell, with many marking new lows.  Price pressures also dropped markedly. 

New York City business activity fell to its lowest level since April 2003.  Moreover, area purchasing managers are the most pessimistic they have ever been in at least 16 years, as economic and financial market concerns continue to drag the outlook lower.  Price pressures fell to the lowest level in two years.

Dismal Durables

Durable goods orders plunged 6.2% in October, more than double expectations of -3.0%, and the biggest decline in two years.  It was the 3rd straight drop.  The weakness was widespread, as all of the major categories posted declines.  Defense dropped over 25%.  Ex-defense, orders fell 4.6%.  Ex-transportation, orders were down 4.4%, the most since January 2002 right after the last recession, and was the biggest 3-month decline since May 1980.  Similarly, nondefense capital goods ex-aircraft, a proxy for capex, fell 4.0%.  Among notables, orders for primary metals were down 12.6%, a 3.2 S.D. event, bringing its y/y change down to a record -16.3%.  Additionally, September’s orders were revised down to -0.2% from 0.9%.  On a trend basis, orders are down 7% from a year ago.

Shipments declined 2.4%, as did shipments of nondefense capital goods ex-aircraft — a bad start to the quarter.  Unfilled orders fell 0.6%, its first decline in 26 months.  Inventories rose 0.4% and have risen for 14 consecutive months.

Consumer Spending Plunges

Personal income increased 0.3% in October, above expectations for a 0.1% gain.  But the prior two months’ readings were each downwardly revised by 0.1 point.  Hurricane Ike continued to put downward pressure on personal income.  Disposable personal income, which is income after taxes, increased 0.4%.

Personal consumption expenditures fell 1.0%, the most since 9/11.  The consensus was for a larger decline of 1.2%.  Durables goods’ share of total spending fell to a record low 9.5%, while services’ share rose to a record high 61.1%.  Real PCE fell 0.5%, as decreases in durable and nondurable goods purchases offset an increase in services.  On a trend basis, real PCE is off 0.6% from a year ago, the most in 28 years..  The personal savings rate jumped to 2.4% from 1.0%, as households chose to hold onto their incomes amid recession fears.

The PCE price index dropped 0.6% in October, the largest decline ever, pulling y/y growth down 0.9 points to 3.2%, the lowest in a year.  Core PCE was essentially unchanged for the first time since December 2001, bringing the y/y gain down to 2.1%, the least in over a year.  Similarly, the trimmed mean PCE rose at a 0.6% annualized rate in October, the second smallest gain ever after November 2003.

Consumer Sentiment Slumps to 28-Year Low

The Reuters/University of Michigan Consumer Sentiment Index fell 2.6 points from its midmonth reading to 55.3, the lowest level since May 1980.  The consensus was for a slight decline to 57.6.  The current conditions index dropped 3.9 points from midmonth to its lowest level since 1975, while the expectations component slipped 1.8 points.

Jobless Claims Still Consistent With Recession

Initial jobless claims fell by 14,000 last week to 529,000, but are still consistent with recession.  Expectations were for a 12,000 decline to 530,000, as the prior week’s reading was upwardly revised by 1,000.  Continuing claims in the prior week fell by 54,000 to 3.962 million, while the insured jobless rate held at 3.0%, the highest since June 2003.  On a trend basis, the deterioration in labor markets accelerated.  The four- and eight-week moving averages of initial and continuing claims each rose to their highest levels in almost 26 years.

Bad Business Barometer

The DJ-BTMU U.S. Business Barometer fell for the 11th straight week to its worst level since December 2001.  The y/y change fell to -4.0%, its worst showing since January 1992.