Last week the Federal Reserve issued the latest FOMC minutes. Let's take a look at what they see regarding the current economic conditions.
Labor market conditions deteriorated further in March. Private nonfarm payroll employment registered its fifth consecutive large monthly decrease, with losses widespread across industries. Moreover, the average workweek of production and nonsupervisory workers on private payrolls ticked down in March from the low level recorded in January and February, and total hours worked for this group stayed below the fourth-quarter average. The civilian unemployment rate climbed to 8.5 percent, and the labor force participation rate edged down from its February level. The four-week moving average of initial claims for unemployment insurance remained elevated in April, and the number of individuals receiving unemployment benefits relative to the size of the labor force reached its highest level since 1982.
Total employment is still heading lower and
The percentage change from last year in the establishment job survey is still dropping
Average weekly hours is still heading lower and
The unemployment rate is heading higher
The Federal Reserve calls this chart "elevated" -- which it is. However, I would add that it looks to be topping.
Industrial production fell substantially in March and for the first quarter as a whole, with cutbacks widespread across sectors, and manufacturing capacity utilization decreased to a very low level. First-quarter domestic production of light motor vehicles reached the lowest level in more than three decades as inventories of such vehicles, while low, remained high relative to sales. The output of high-technology products decreased in March and in the first quarter overall, with production of computers and semiconductors extending the downward trend that had begun in the second half of 2008. In contrast, the production of communications equipment edged up in the first quarter. The output of other consumer durables and business equipment stayed low, and broad indicators of near-term manufacturing activity suggested that factory output would contract over the next few months.
Industrial production is dropping hard and
Capacity utilization is at record lows. I should add -- these are the two numbers that scare me the most.
The available data suggested that real consumer spending rose moderately in the first quarter after having fallen in the second half of last year. Real spending on goods and services excluding motor vehicles fell in March but was up, on balance, for the first quarter as a whole. Real outlays on new and used motor vehicles expanded in the first quarter following six consecutive quarterly declines. Despite the upturn in consumer spending, the fundamentals for this sector remained weak: Wages and salaries dropped, house prices were markedly lower than a year ago, and, despite recent increases, equity prices were down substantially from their levels of 12 months earlier. As measured by the Reuters/University of Michigan survey, consumer sentiment strengthened a bit in early April, as households expressed somewhat more optimism about long-term economic conditions; however, even with this improvement, the measure was only slightly above the historical low for the series recorded last November.
We've been over this a few times. I think retail sales have bottomed. I outlined my arguments in this article. Nothing has changed since then to change my mind (although it could). However, this report from the San Francisco Federal Reserve explains the problems going forward for the household sector.
The latest readings from the housing market suggested that the contraction in housing activity might have moderated over the first quarter. Single-family housing starts flattened out in February and March, and, after adjusting for activity outside of permit-issuing areas, the level of permits in March remained above the level of starts. The contraction in the multifamily sector also showed signs of slowing, as the drop in starts in the first quarter was well below the pace experienced during the fourth quarter of 2008. Recent data also indicated that housing demand might have stabilized. Sales of new single-family homes held steady in March after edging up in February, but the level of such sales remained low, leaving the supply of new homes relative to the pace of sales very high by historical standards. Existing home sales in March were slightly below the average pace for January and February. Most national indexes of house prices stayed on a downward trajectory. Lower mortgage rates and house prices contributed to an increase in housing affordability. Rates for conforming 30-year fixed-rate mortgages extended the significant decline that began late last year. Rates on jumbo loans came down as well, although the spread between the rates on jumbo and conforming loans was still wide and the market for private-label nonprime MBS remained impaired.
As I've said many times, housing won't recover until prices stop falling. And prices won't stop falling until inventory comes down. And there is a ton of inventory right now:
A full recovery for housing, and maybe the broader economy, depends on a third step: Prices must stop falling. On that front, as with other economic data, the "second derivative" is improving -- things are still getting worse, but at a slower rate.
Unfortunately, the day when prices start rising might still be far away.
That is mainly due to a dizzying supply of housing, which can keep a lid on prices even as demand rises. This glacier is melting slowly: Existing-home inventories are down to 9.8 months' supply, higher than their long-term average of six months, but off their recent peak of 11.3 months.
There is a massive shadow inventory of bank- and investor-owned homes, enough to push existing-home supply to 12 months, notes David Rosenberg, chief economist at Gluskin Sheff, a Toronto wealth-management firm.
So -- the economy is terrible, right? Well -- maybe not.
