The information reviewed at the March 17-18 meeting indicated that economic activity had fallen sharply in recent months. The contraction was reflected in widespread declines in payroll employment and industrial production. Consumer spending appeared to remain at a low level after changing little, on balance, in recent months. The housing market weakened further, and nonresidential construction fell. Business spending on equipment and software continued to fall across a broad range of categories. Despite the cutbacks in production, inventory overhangs appeared to worsen in a number of areas. Both headline and core consumer prices edged up in January and February.
The only good news here was the increase in prices which help to alleviate deflationary fears; all the other information is extremely troubling.
Let's look in more detail at the Fed report:
Labor market conditions continued to deteriorate. Private payroll employment dropped considerably over the three months ending in February. Employment losses remained widespread across industries, with the notable exception of health care. Meanwhile, the average workweek of production and nonsupervisory workers on private payrolls continued to be low in February, and the number of aggregate hours worked for this group was markedly below the fourth-quarter average. The civilian unemployment rate climbed 1/2 percentage point in February, to 8.1 percent. The labor force participation rate declined in January and February, on balance, likely in response to weakened labor demand. The four-week moving average of initial claims for unemployment insurance continued to move up through early March, and the level of insured unemployed rose further.
First -- and always keep in mind -- employment is a lagging economic indicator. That being said, consider these charts:
I drew a horizontal line from the current year over year rate of change in establishment jobs back to other times. Notice the last time the year over year rate of change in establishment job growth was this low was the end of the 1950s.
The last time the unemployment rate was this high was the second recession of the early 1980s.
Aggregate weekly hours worked is cliff-diving right now.
Industrial production fell in January and February, with cutbacks again widespread, and capacity utilization in manufacturing declined to a very low level. Although production of light motor vehicles turned up in February, it remained well below the pace of the fourth quarter as manufacturers responded to the significant deterioration in demand over the past few months. The output of high-tech products declined as production of computers and semiconductors extended the sharp declines that began in the fourth quarter of 2008. The production of other consumer durables and business equipment weakened further, and broad indicators of near-term manufacturing activity suggested that factory output would continue to contract over the next few months.
The above chart shows the year over year rate of change in industrial production. Notice the last time we were at these levels was the great depression and retooling after WWII and the mid-1970s.
Capacity utilization is dropping hard and fast. This does not bode will for the strength of the recovery. When there is idle capacity there is little reason to invest in new capacity. This will lower overall GDP at the beginning of the next expansion.
The available data suggested that real consumer spending held steady, on balance, in the first two months of this year after having fallen sharply over the second half of last year. Real spending on goods excluding motor vehicles was estimated to have edged up, on balance, in January and February. In contrast, real outlays on motor vehicles contracted further in February after a decline in January. The financial strain on households intensified over the previous several months; by the end of the fourth quarter, household net worth for the first time since 1995 had fallen to less than five times disposable income, and substantial declines in equity and house prices continued early this year. Consumer sentiment declined further in February as households voiced greater concerns about income and job prospects. The Reuters/University of Michigan index in early March stood only slightly above its 29-year low reached in November, and the Conference Board index, which includes questions about employment conditions, fell in February to a new low.
First, here is a chart of total retail sales:
Notice the uptick over the last month or so. This is what the Fed is referring to when they say real retail consumer activity held steady. A big issue is auto sales. Here is a chart from Martin Capital Advisers:
Note these sales have been dropping for the last year. There is little reason to think they will increase anytime soon. While the consumer has shown they are starting to buy non-durable goods, durable goods purchases are down. The the primary reason is the massive destruction of overall wealth we have seen over the last 6 quarters. As the Fed points out, net worth has taken a huge hit from both collapsing stock and housing prices. There is a debate about whether or not this will keep consumers on the sidelines for the foreseeable future or not. I personally think it will force consumers to moderate their spending for some time. Consumers have to rebuild their wealth right now which will force them to pull in their wings, as it were.
Housing activity continued to be subdued. Single-family starts ticked up in February, and adjusted permit issuance in this sector moved up to a level slightly above starts. Multifamily starts jumped in February from the very low level in January, and the level of multifamily starts was close to where it had been at the end of the third quarter of 2008. Housing demand remained very weak, however. Although the stock of unsold new single-family homes fell in January to its lowest level since 2003, inventories continued to move up relative to the slow pace of sales. Sales of existing single-family homes fell in January, reversing the uptick seen in December. Over the previous 12 months, the pace of existing home sales declined much less than that of new home sales, reflecting in part increases in foreclosure-related and other distressed sales. The weakness in home sales persisted despite historically low mortgage rates for borrowers eligible for conforming loans. After having fallen significantly late last year, rates for conforming 30-year fixed-rate mortgages fluctuated in a relatively narrow range during the intermeeting period. In contrast, the market for nonconforming loans remained severely impaired. House prices continued to decline.Housing is still a wreck. Here is the same chart from Martin Capital Advisers I used above. This time pay attention to the bottom panel:
New home sales have been dropping for three years. Existing home sales leveled off in 2008, but have since moved lower as well. However, the real indicator for the housing market is prices:
When we see the year over year rate of decline in prices slow to 3%-5%, then I'll call a bottom in housing. But so long as prices are dropping over 10% year over year, we're nowhere near a bottom in housing.
Here's the bottom line with the overview of the US economy. We're still in a recession. There have been hints over the last few months that we're getting out of it; but they are just hints so far.
