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Economy

Fed's Beige book: "Noted slowing of economic activity" From the Fed's Beige Book: Consumer spending was characterized as softening across most of the country, with some Districts reporting year-over-year declines in retail and/or auto sales. ..Reports on real estate and construction were generally anemic for the residential sector; activity in the commercial sector has slowed. On Real Estate and Construction: Housing markets and home construction remained sluggish throughout most of the nation, though there were few signs of any quickening in the pace of deterioration. Ongoing weakness in housing markets, in general, was reported in almost all Districts. Consumer spending and commercial real estate were two of the key areas that helped keep the U.S. economy out of recession for most of 2007. Now that these areas are weakening, this is more evidence that the U.S. economy is now in recession.

• Economy sends signals of more weakness to come Higher unemployment claims and weak readings from two economic indexes reinforced recession worries Thursday. The Labor Department said Thursday that applications for unemployment benefits rose to 372,000, an increase of 17,000 from the previous week. Separately, the New York-based Conference Board's gauge of future economic activity rose 0.1 percent for March, reversing five months of decline. But the private business group's indicator has shown a 3.3 percent annual rate of decline since March 2007. That's "the kind of result, that whenever we've seen it in the past, the U.S. economy has been heading into a recession," Michael Gregory, senior economist for BMO Nesbitt Burns, a Toronto investment bank. "The recession signal here is clear and unequivocal."
• Philly Fed Indexes Reflect Weaker Activity The typical investment pattern is for residential investment to lead the economy into a recession, and then for non-residential investment to slump as the recession starts. The Philly Fed survey this month provides more evidence that the cycle is following the typical pattern (see the special question on capital spending at the bottom of this post).

• Investment Matters Recently many companies have announced plans to cut capital spending in 2008. This probably means non-residential fixed investments will decline in 2008, as compared to 2007.This decline in investment is an important indicator for the economy, since changes in fixed investment correlate very well with GDP. However, the typical pattern is residential investment leads non-residential structure investment. The normal pattern would be for investment in non-residential structures to have turned negative now. And based on construction spending, anecdotal stories, and the most recent Fed loan survey, it appears the non-residential structure investment bust is here.
  

Retail Sales & Inflation 

March Retail Sales Tip Higher-Consumers, beset by a credit crunch, rising energy and food costs and a prolonged housing slump, stayed away from the malls in March. Retail sales posted only a small increase after a big drop in February. The new report did nothing to dispel worries that consumers will cut back so sharply on spending that the country will tumble into a recession. Consumer spending accounts for two-thirds of total economic activity. Consumer confidence plunged to the lowest reading in 26 years in early April, according to the University of Michigan's consumer sentiment index, underscoring the pressures that households are facing and raising the likelihood that retail sales will remain depressed in coming months. The 0.2 percent increase in retail sales was slightly better than the 0.1 percent increase that analysts had expected and the February decline was revised from an even-bigger 0.6 percent plunge that had been initially reported. However, the March gain reflected the big jump in sales at gasoline service stations. Sales in most areas either declined or posted lackluster increases such as a tiny 0.2 percent rise in auto sales.

• False Positive for Retail Sales? U.S. retail sales climbed in March, but the small increase was the work of gasoline station sales, driven by the higher oil prices that have otherwise subdued consumers and drained the economy. Business inventories grew again in February. (WSJ) Don't be fooled by retail 'rise' That's no reason to do cartwheels. The economy still is in deep trouble. (MW)
• Retail Sales Retail sales were slightly higher in March due to increases in gasoline prices. Excluding gasoline stations, nominal sales were flat in March compared to February.More importantly, in real terms - inflation adjusted - retail sales are now below the year ago level. Although the Census Bureau reported that nominal retail sales increased 2.1% year-over-year, real retail sales declined almost 1.1% (on a YoY basis). This is a recessionary level for retail sales.(CalculatedRisk) Retail Sales Rise on Gasoline Prices (BigPicture)

Food Costs Rising Fastest in 17 Years- The U.S. is wrestling with the worst food inflation in 17 years, and analysts expect new data due on Wednesday to show it's getting worse. That's putting the squeeze on poor families and forcing bakeries, bagel shops and delis to explain price increases to their customers. U.S. food prices rose 4 percent in 2007, compared with an average 2.5 percent annual rise for the last 15 years, according to the U.S. Department of Agriculture. And the agency says 2008 could be worse, with a rise of as much as 4.5 percent. Higher prices for food and energy are again expected to play a leading role in pushing the government's consumer price index higher for March.

• U.S. Producer Prices Rise Twice as Fast as Forecast; Manufacturing Expands
• March consumer prices up despite big drop in clothing costs

Why Inflation Can Lead or Lag Economic Cycles There is a certain faction of folks who missed the early warning signs of inflation. These same folks are now telling us not to worry about inflation, since the threat of an economic slow down is more important. Yes, the same folks who told us there wouldn't be a recession, and are now saying its over, have brought the same wonderful approach to rising prices. Hence, PPI, reported yesterday, is not a lagging indicator. And properly understood, it provides lots of insight into future inflation. How? We can track inflation as it moves through the manufacturing pipeline, from "crude" (raw materials) goods to "finished goods." What has been taking place over the past few years has been the price of "crude goods" have been escalating a whole lot faster than the finished products. This is evidence of future inflation, as it eventually shows up in the form of higher prices for finished products. For a long while, manufacturers and retailers were eating these price pressures, making up for them via a combination of increased efficiency,  outsourcing to the lowest price producer overseas, and absorbing a hit to their margins. But that can only go on for so long, and it seems to have reached a peak several quarters ago. How do we know this? The "inflation spread" between the crude goods and finished goods.

Housing

Foreclosures jump 57% in March Foreclosure filings jumped 57% in March compared with the same month last year and rose 5% versus February, as the nation's housing market continues to deteriorate.RealtyTrac, an online marketer of foreclosure properties, said Tuesday that 234,685 homes were hit with foreclosure filings last month, which include default notices, auction sale notices and bank repossessions. Of those, 51,393 homes were lost to foreclosure - a 10% increase over the number of homes lost in February."What this report shows us is that the housing market correction is ongoing and we shouldn't expect the subprime problem to vanish anytime soon," said Jared Bernstein, a senior economist with the Economic Policy Institute. On a year over year basis, the number of homes repossessed by banks are up 129%. By contrast, the number of foreclosed going up for auction increased a comparatively low 32% since March 2007.That discrepancy suggests that more troubled borrowers are simply walking away from their homes after defaulting, according to RealtyTrac CEO James Saccacio. NAHB: Builder Confidence Unchanged at Near Record Lows, DataQuick on SoCal: Record House Price Decline, Record Low Sales for March

Housing: March was a Bust From some stories today:“With the traditional home buying season now well underway, we have not seen the bump in sales activity that we normally would this time of year.” Sandy Dunn, NAHB president, April 15, 2008 The seasonal boost in sales between February and March was less than half its normal level and a record low. The weak start to the home buying season also saw another record dive in the median sales price ...DataQuick on Southern California, April 15, 2008 "[T]here are cases where people as early as 18 to 24 months ago had one value on that property, and as they started to sell it or refinance it, they realize that valuation was 40% below what it was 18 to 24 months ago, and they're walking away from those homes in those markets." Dowd Ritter, CEO Regions Financial Corp., April 15, 2008 March is a key month for both new and existing home sales. Another year, another lost selling season.

• Housing Construction Plunges to 17-Year Low

Single Family Housing Starts Lowest Since Jan '91 The Census Bureau reports on housing Permits, Starts and Completions. Some key points: Housing permits in March fell sharply to 927 thousand at a seasonally adjusted annual rate (SAAR). This is the lowest since 1991. Single family housing starts were at 680 thousand SAAR. This is also the lowest since Jan 1991. Completions are still very high. Privately-owned housing completions in March were at 1.216 million (SAAR). Completions will probably fall to the level of starts - and this will impact construction employment.

Study: Home-Remodeling Spending To Fall 4.8% through 2008 I think this might be optimistic. First, falling house prices and the inability for homeowners to borrow against their homes (mortgage equity withdrawal) are probably "inhibiting remodeling spending" more than the weakening economy and consumer confidence. Second, we have recently seen warnings from Home Depot and Lowe's that suggest same store sales are falling off a cliff (about 8% year-over-year). And third, the Joint Center for Housing Studies forecast is mild compared to declines in home improvement spending during previous housing busts.

Strategic Factors: Credit, Commodities, Structural Shifts 

Credit Crisis: Third Wave Here is a simple explanation of this chart: This is the spread between high and low quality 30 day nonfinancial commercial paper. What is commercial paper (CP)? This is short term paper - less than 9 months, but usually much shorter duration like 30 days - that is issued by companies to finance short term needs. Many companies issue CP, and for most of these companies the risk of default is close to zero (think companies like GE or Coke). This is the high quality CP. Here is a good description. Lower rated companies also issues CP and this is the A2/P2 rating. This doesn't include the Asset Backed CP - that is another category. (see commercial paper table). The spread between the A2/P2 and AA paper shows the concern of default for the A2/P2 paper. Right now that concern is still pretty high.

Soros Says Commodity `Bubble' Still in `Growth Phase' Billionaire George Soros said the boom in commodities is still in a ``growth phase'' after prices for oil, wheat and gold rose to records. ``You have a generalized commodity bubble due to commodities having become an asset class that institutions use to an increasing extent,'' Soros said today at an event sponsored by the Centre for European Policy Studies in Brussels. ``On top of that you have specific factors that create the relative shortage of oil and, now, also food.''  Commodities are in their seventh year of gains, with oil rising to a record $115.54 a barrel today as the dollar plunged to an all-time low against the euro. Rice has more than doubled in a year, while corn has advanced 68 percent and wheat 92 percent. Investments in commodities rose by more than a fifth in the first quarter to $400 billion, Citigroup Inc. said April 7. Commodities have outpaced stocks and bonds this year, spurring pension funds and other investors to increase holdings in wheat, gold, copper and tin, which climbed to a record.

Workers Get Fewer Hours, Deepening the Downturn Throughout the country, businesses grappling with declining fortunes are cutting hours for those on their payrolls. Self-employed people are suffering a drop in demand for their services, like music lessons, catering and management consulting. Growing numbers of people are settling for part-time work out of a failure to secure a full-time position. The gradual erosion of the paycheck has become a stealth force driving the American economic downturn. Most of the attention has focused on the loss of jobs and the risk of layoffs. But the less-noticeable shrinking of hours and pay for millions of workers around the country appears to be a bigger contributor to the decline, which has already spread from housing and finance to other important areas of the economy. While official unemployment has risen only modestly, to 5.1 percent, the reduction of wages and working hours for those still employed has become a primary cause of distress, pushing many more Americans into a downward spiral, economists say.Moreover, this slippage is a critical indicator that the nation may well be on the verge of a recession, if not already in one.Last month, the hours worked by those on American payrolls dropped, compared with six months earlier, according to an index maintained by the Labor Department. The last time the index moved into negative territory was February 2001, when the economy was on the doorstep of recession. A similar slide emerged in August 1990, one month into what proved an even more severe downturn.