Insights & Advice


More Recessionary Evidence

Sunday, October 19, 2008

Today’s economic reports all point to an economy in recession.

Industrial Production Screeches to Halt

Industrial production dropped 2.8% in September, the most since December 1974 and well below the consensus for a 0.8% decline, resulting in the biggest overestimation by economists since at least 2002.  Hurricanes Gustav and Ike (which had a 2.25 point impact on production), in addition to a labor strike at Boeing (which curtailed production by 0.5 points), were cited for the dramatic decline.  Revisions were not a factor.  Industrial production is 4.5% below a year ago, the biggest y/y decline since December 2001 and a rate seen only in prior recessions, triggering a contraction signal for the economy. 

  • Manufacturing production fell 2.6% in September (the most since May 1980), despite a 1.9% pickup in auto and parts production.  The other bright spot was high-tech production, which rose 0.5%.  Business equipment dropped 7.0%, led lower by a 33% plunge in transit equipment (Boeing strike).  But there were widespread declines in core production in other areas of both durable and nondurable goods production .
  • Mining output plummeted 7.8%, the third largest drop on record, as crude and natural gas operations in the Gulf of Mexico were shut in due to the hurricanes, as were refineries. 
  • Utilities production, however, climbed 2.2%, as temperatures returned to normal.

Similarly, capacity utilization plunged 2.3 points, the most since December 1974, to 76.4%, its lowest level since October 2003.  It also triggered a contraction signal for the economy.  Consensus was for a drop of 0.7 points to 78.0%.

Philly Fed Plummets A Record To 18-Year Low

The Philly Fed General Business Activity Index plummeted 41.3 points in October, the most since records began in 1968, to -37.5, the lowest level 18 years.  Expectations were for a much smaller 8.7 point decline, resulting in the largest overestimation since at least 2002.  Other broad indicators fell sharply, notably new orders which plunged 36.1 points, the most since 1974, to its lowest in over 28 years.  Also, current employment indicators plummeted to their lowest levels since the last recession in 2001.

Manufacturers turned pessimistic about the six-month outlook, as the Future Activity Index plunged 35.0 points, the most since 1973, to -4.2.  Future new orders and shipments declined by record amounts, the latter to its lowest since 1979.  Future employment indicators fell by the most since January 1981 to their lowest levels in at least a decade.  Capex plans decreased by the largest amount since April 1988, as over 40% of respondents said the recent financial turmoil prompted them to revise plant or equipment spending over the the next six months.

Price pressures continued to moderate significantly, with the prices paid index falling 24.3 points to its lowest level in over five years.  Similarly, the prices received index dropped 10.2 points to its lowest in over a year.

Builder Pessimism Falls To Record Low

The NAHB/Wells Fargo Housing Market Index fell three points to a record low 14 in October amid uncertainties associated with financial market turmoil.  All three components fell to, or matched, record lows, led by a nine point drop in the expected sales component.  The last two times the expected sales index has declined by at least that much was right after 9/11 and immediately following the 1987 stock market crash.  All four regions deteriorated, with the South falling to a new low.

Beige Book Shows Broad-Based Weakness

The economy weakened across the country in September, according to the latest Beige Book report released Wednesday afternoon.  Moreover, there was widespread concern out the economic outlook and reduced credit availability.

  • Consumer spending declined in nearly all districts, with consumers trading down toward value and less expensive brands.  Retailers are expecting a slow holiday shopping season.  Auto sales fell.
  • Manufacturing activity slowed in most areas.
  • Capital spending was mixed.
  • Residential real estate activity weakened or remained subdued in all areas of the country, although some markets showed signs of stabilization.  Commercial real estate activity also slowed in most regions.
  • Lending to both consumers and businesses declined, as credit conditions and loan standards tightened.  Loan quality deteriorated.
  • Labor markets weakened, with the exception of demand for skilled labor.  As a result, wage pressures were largely limited.
  • Price pressures eased in most regions, although costs of energy, raw materials, food, and transportation remained elevated and margins were tight.  Retail prices were mixed.

Jobless Claims Remain Above Recessionary Threshold

Initial jobless claims fell by 16,000 last week to 461,000, in line with expectations for a 13,000 decline.  Also, the prior week’s claims were downwardly revised by 1,000.  Hurricane Ike continued to effect claims (Gustav no longer), although the impact has receded substantially.  Excluding the influence of the hurricane, claims would have been around 450,000, consistent with prior recessions.  Also, on a trend basis, initial claims are at their highest levels since 2001.  Continuing claims in the prior week increased by 40,000 to 3.711 million, the most since June 2003, while the insured jobless rate inched up to 2.8%, a five-year high.  On a trend basis, continuing claims and the jobless rate are at their highest readings since 2003, a sign labor markets are still deteriorating. 

Inflation Begins To Ease

Led by a 1.9% drop in energy prices, the CPI was unchanged (-0.031%) in September, below the consensus of +0.1%.  Excluding food and energy, prices rose 0.141%, below expectations of 0.2%.  Contributing to the downward pressure on the core, apparel prices fell 0.1% and vehicle prices fell 0.9%.  For the quarter, overall prices rose at a 2.6% annualized rate, while core prices rose at a 2.7% annual rate.  On a y/y basis, the overall CPI fell to 4.9% from 5.4%, while the core rate remained at 2.5%.  The inflation pipeline has peakedInflation is not a near-term concern.

Workers were able to capitalize, as real wages rose 0.2%.  And those receiving Social Security benefits will see a hefty 5.8% increase, the most since 1982, which will add to the budget deficit.

Separately, our Inflation Timing Model rose two points to +2, indicating neutral pressures.

CEOs Remain Cautious

For the third straight quarter, CEO Confidence was little changed, rising one point to 40, indicating a continuing negative assessment.  Unfortunately, the survey was conducted from mid-August to mid-September, so the results don’t fully reflect the recent developments in the financial markets.

Foreigners Continue To Dump U.S. Securities

Foreign investors dumped a net $8.8 billion in long-term U.S. securities in August, following a $25.6 billion sale in July, resulting in the largest two month disposal ever.  Foreigners got rid of stocks for the third straight month, the longest losing streak since 1995, selling $1.0 billion.  Foreigners also disposed of $7.8 billion in bonds.  Agencies led the decline, amid concern over the health of Fannie and Freddie, with foreigners selling off $29.5 billion.  Investors also got rid of corporates, dumping a record $13.1 billion.

Foreigners, however, continued to purchase Treasurys at a faster rate, led by private investors.  Treasurys now account for 55.5% of all bond purchases (on a 12-month total basis), the most since January 1998 and three times the proportion from a year ago, as investors continue to flock to quality.  Among foreign buyers, China, the U.K., OPEC, and Caribbean Banking Centers, all among the top five largest foreign holders of Treasurys, increased their holdings to record levels.

U.S. investors discarded $22.7 billion in long-term foreign securities, as investors disposed of a record amount of bonds and continued to dump stocks .  As a result, the net capital inflow to long-term securities was $14.0 billion.  Net TIC flows, the report’s broadest category recorded an outflow of $0.4 billion in August, from a $33.6 billion outflow in the prior month, as the paydown of banks’ liabilities to foreigners decreased.