Economic Data Consistent with Recession

MBA (4/7/2008 ) Velz, Orawin
While Fed Chairman Ben Bernanke warned last week that a recession is possible; economic data reinforced strongly the notion that a recession is already in progress.
The labor market saw steady job losses in the first quarter. Total nonfarm payrolls fell by 80,000 in March. The Bureau of Labor Statistics also revised downward the previous months’ payroll numbers. As a result, job losses widened from 63,000 to 76,000 in February and from 22,000 to 76,000 in January. During the first quarter, the labor market shed 232,000 jobs or about 77,000 a month on average. The unemployment rate jumped to 5.1 percent from 4.8 percent.

Construction payrolls saw another sizable loss, with builders shedding 51,000 jobs in both residential and nonresidential sectors. Mortgage industry employment appeared to stabilize, standing at 364,100 in February and edging down from 364,800 in January. (The Bureau of Labor Statistics releases some detailed categories of employment with a one-month lag.) Since its peak in February 2006, industry employment has declined about 28 percent, with sharp drops occurring in the two months following the August financial turmoil and modest declines in recent months.

Other reports last week continue to point to declining economic activity. The four-week moving average in the weekly initial jobless claims has been trending up, suggesting a continued soft labor market. Both the manufacturing and nonmanufacturing surveys from the Institute for Supply Management (ISM) indicated reduced manufacturing and service activities again in March. The pace of decline has moderated from the previous month, however. So far, the declines in the indices have been mild by historical standards of an economic downturn.

Factory orders fell in February for the second consecutive month, confirming the results from the ISM manufacturing survey and suggesting soft nonresidential investment for equipment and software. Combined with the drop in private nonresidential construction spending in February for the third consecutive month, the ISM and factory orders reports indicated that nonresidential investment likely declined in the first quarter following a 6.0 percent annualized increase in the fourth quarter.

Long-term interest rates rose steadily through Thursday but reversed on Friday in response to the weak employment report. The 10-year Treasury yield hovered around 3.49 percent on Friday, about the same as the closing rate at the end of last week. Fed funds futures doubled the odds of a 50-basis point cut at the next Federal Open Market Committee meeting on April 29-30 to about 40 percent from 20 percent before the employment report.

Housing and Mortgage Indicators:
Construction spending fell in February for the fifth consecutive month. Total construction spending edged down 0.3 percent in February. Private construction spending dropped 0.5 percent, as a result of declines in both private residential (0.9 percent) and nonresidential construction spending (0.1 percent). Over the past year, private residential construction spending has been 18.8 percent lower than a year ago.

While private nonresidential construction spending fell for the third consecutive month, it has increased 13.2 percent from a year ago. Public construction spending rose 0.4 percent. The report suggests that residential investment would continue to subtract from economic growth in the first quarter, while nonresidential investment is unlikely to contribute appreciably to growth.

Economic Indicators:
The Institute for Supply Management (ISM) manufacturing index edged up to 48.6 from 48.3 in February. A reading below 50 indicates a contraction in the manufacturing sector. This is the third reading below 50 in the past four months. The report was better than expected as it contradicted results from several regional manufacturing surveys for the month, showing sharp declines in manufacturing activity around the country.

The ISM manufacturing index is based on a survey of purchasing executives at roughly 300 industrial companies. It includes 10 different sub-indices: new orders, production, employment, supplier deliveries, inventories, customers’ inventories, prices, new export orders, imports and backlog of orders.

Forward-looking components of the index suggested continued slow activity ahead. New orders declined 2.6 points to 46.5, its lowest level since October 2001. The production index fell two points to 48.7, the first reading below the 50 threshold since December. Manufacturers continue to see strong overseas demand for capital goods but it’s small relative to weakening domestic demand.

The component related to prices showed a worrisome trend, with the prices manufacturers paying for inputs rising sharply. The prices-paid index increased eight points to 83.5 and now stands at its highest reading since the aftermath of Hurricane Katrina in October 2005. Elevated commodity prices, including oil, have largely pushed up input prices.

Factory orders fell 1.3 percent in February, following a 2.3 percent drop in January, as both durable and nondurable goods orders declined.

The Institute for Supply Management (ISM) nonmanufacturing index edged up to 49.6 from 49.3 in February. A reading below 50 indicates a contraction in the manufacturing sector. This is the third consecutive reading below 50. The last time the nonmanufacturing index was below 50 for at least three months was in 2001-02 as the economy was emerging from a recession.

Nonfarm payroll employment fell 80,000 in March, and the downward revisions to prior months total 67,000 jobs. Excluding the gain in government payrolls, employment in the private sector dropped 98,000, the fourth consecutive monthly decline.

The unemployment rate increased to 5.1 percent, its highest rate since September 2005 following Hurricane Katrina. Average hourly earnings growth remained steady at 0.3 percent. Over the past 12 months, earnings rose 3.6 percent, slowly decelerating since reaching a peak of 4.3 percent at the end of 2006.

Manufacturers cut 48,000 jobs, the biggest decrease since July 2003. The drop included a loss of 24,000 jobs in the auto manufacturing and parts industries, which largely reflected the effects of strike at a supplier for General Motors Corp.

Service industries added 13,000 after an increase of 6,000 in February, with leisure/hospitality and education/healthcare employment continuing to grow. Temporary help services shed 22,000 jobs, following a decline of 34,000 in February. Retail payrolls decreased by 12,400 after dropping 46,700 in February.

Average weekly hours edged up to 33.8 hours from 33.7 hours.