Wednesday, January 7, 2009

Translating Fed Speak

Yesterday the Fed released the minutes of their latest meeting. These provide an excellent overview of the US economy. Let's coordinate the Minutes with some charts and graphs:

The labor market continued to worsen. According to the November employment report, payroll employment fell at a rapid pace over the preceding three months, with substantial losses across a wide range of industry groups, including manufacturing, construction, retail, financial activities, and business services. Indicators of hiring plans also dropped steeply in November, and other labor market indicators suggested that jobs remained in short supply. The unemployment rate climbed to 6.7 percent in November, while the labor force participation rate fell after remaining steady for much of the year. New claims for unemployment insurance rose sharply through early December.

The establishment's year over year survey has been dropping for a few years and

the unemployment rate has been increasing for about two years.

Industrial production, excluding special hurricane- and strike-related effects, fell markedly in November after sizable declines in the preceding two months. The recent contraction in industrial output was broadly based. The steep pace of decline in the production of consumer goods reflected not only cutbacks in motor vehicle assemblies but also drops in the output of other goods, such as appliances, furniture, and products related to home improvement. The production of business equipment was held down by declines in the output of both industrial and high-tech equipment. The output of construction supplies extended its decline after a brief pause in the middle of the year, and the contraction in the production of materials intensified. In particular, steel production plummeted, and the output of organic chemicals contracted noticeably. For most major industry groups, factory utilization rates declined relative to their levels in July and remained below their long-run averages. Available forward-looking indicators pointed to a significant downturn in manufacturing output in coming months.

Industrial production has been dropping for most of the year and is currently "cliff diving".

Capacity utilization is also dropping. This means that when the economy starts back-up there will be a dearth of investment as companies seek to first utilize capacity that lay idle.

Real personal consumption expenditures (PCE) fell for the fifth straight month in October, with the slowdown evident in nearly all broad spending categories. Sales of light motor vehicles, which slumped in October, fell further in November, but the available information on retail sales suggested a small increase in real outlays for other consumer goods. The annualized three-month change in spending on services in October was just one-third of the rate registered in the first half of 2008. Preliminary data for October and November suggested that overall fourth-quarter real spending would receive a modest boost from recent price declines for gasoline. Real incomes were also boosted by the reversal in energy prices, though the negative wealth effects of continued declines in equity and house prices likely offset this somewhat. Measures of consumer sentiment released in November and December remained low, and available evidence suggested further tightening in consumer credit conditions in recent months.

Consumers are closing their wallets big time.

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Retail sales (inflation adjusted) are falling hard and fast, and on a year over year level

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Retail sales are falling off a cliff

Broader consumer spending is also dropping.

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Personal consumption expenditures are also dropping for the first time in 10 years, and on a year over year basis

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They are falling off a cliff

Housing demand remained weak, and although the number of unsold new single-family homes continued to move lower, inventories remained elevated relative to the current pace of sales. Sales of existing single-family homes changed little, although a drop in pending home sales in October pointed to further declines in the near term.

Housing has been a mess for a few years and there is no indication that will change soon.

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Sales evened out for most of 2008 but took a big drop last month.

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The absolute inventory of existing homes has been fluctuating between 4 and 4.5 million for a year and a half now, and

The number of months it would take to clear existing inventories at the current sales pace has been between 10 and 11 months for the last 6 months.

As a result:

Home prices in 20 major U.S. cities declined at the fastest rate on record, depressed by mounting foreclosures and slumping sales.

The S&P/Case-Shiller index declined 18 percent in the 12 months to October, more than forecast, after dropping 17.4 percent in the year through September. The gauge has fallen every month since January 2007. Year-over-year records began in 2001.

The financial market meltdown that’s reverberated around the globe has prompted banks to curb lending, signaling the housing slump will persist for a fourth year in 2009. Falling property values have eroded household wealth, causing consumers to pare spending and deepening what is projected to be the longest recession in the postwar period.

The bottom line is clear.

1.) Consumers have stopped spending in a big way. The drops in PCE's and real retail sales are sharp and strong. As a result:

2.) Home sales will continue to drop, and

3.) Industrial production will remain at depressed levels.