Spate of Weak Readings Continue Even as Hopes of Second Stimulus Package Gather Momentum

(RTTNews) - The parade of bleak economic readings continued through last week, accentuating the weakness of the economy. Consumer spending is weakening - a function of falling confidence and job losses. Additionally, consumer credit environment is showing tautness despite the government literally flooding the market with liquidity. In the past decade, consumer spending was supported by easy and inexpensive credit, which helped increase the share of real personal consumption expenditures and residential investment to GDP to 76% from the historical norm of 72% of the GDP.

Wachovia Securities expects to see an outright decline in consumer spending to occur in the second half of 2008 and early 2009. Thereafter, the firm expects consumer-spending growth to trail wage and salary growth, which should help consumers to strengthen their balance sheet and rebuild savings.

That said, there is a ray of hope as well. The president-elect Barack Obama has named some proficient persons to key posts. The New York Federal Reserve President Timothy Geithner has been nominated to the post of Treasury Secretary, Lawrence Summers has been named as the head of the National Economic Council, Peter Orszag as Budget Director and former Fed Chairman Paul Volcker as the head of a new economic recovery advisory board. Since then, expectations for a new and effective fiscal stimulus package by early 2009 have increased.

The housing sector, which most analysts believe to be the epicenter of the current economic crisis, continues to bring disappointing tidings. The National Association of Realtors reported last week that existing home sales fell 3.1% in October to a seasonally adjusted annual rate of 4.98 million units from a downwardly revised 5.14 million units in September. On a year-over-year basis, sales were down 1.6%. Regionally, sales declined in each of the four regions, while inventories at the end of October fell to 4.23 million from 4.27 million in September. However, the months' supply measure increased to 10.2 from 10 months in September due to lower sales activity. The nationwide median price of existing homes declined 11.3% from a year-ago to $183,300 in October.

Meanwhile, New home sales declined 5.3% to a seasonally adjusted annual rate of 433,000 from the revised September rate of 457,000. On a year-over-year basis, new home sales slumped 40.1%. The median sale price of new homes was $218,000, down from $221,700 in September and lower than $234,300 in the year-ago period.

The S&P/Case-Shiller 10-city composite home price index fell at a record year-over-year pace of 18.6%. Meanwhile, the 20-city composite home price index declined 17.4%. The Conference Board also reported that the consumer confidence index rose to 44.9 in November from 38 in October. The present situation index edged down 1.3 points to 42.2, while the expectations index climbed to 46.7 in November from 35.7 in the previous month.

The Bureau of Economic Analysis released two reports last week, one confirming the contraction of the U.S. economy in the third quarter and another showing a sharp pullback in personal spending. The third quarter GDP was revised down to a -0.5% annual rate from a -0.3% annual rate reported earlier. The downward revision was due to a downward revision to real personal consumption to a -3.7% rate. Core consumer price inflation was also revised down to 2.6% from 2.9%.

Personal spending declined 1% month-over-month in October even as personal income rose 0.3%. Real consumer spending was down 0.5%. Meanwhile the Commerce Department's durables goods orders report showed broad based weakness in October, with the downward revision to September data intensifying the weakness. Orders for big-ticket items fell 6.2% following a downwardly revised 0.2% drop in September. Excluding transportation orders, durable goods orders fell 4.4%, while non-defense capital goods orders, excluding aircrafts fell 4%.

The University of Michigan's consumer sentiment survey showed that the consumer sentiment index for November slid to 55.3 from the mid-month reading of 57.9 and also came in below the consensus estimate of 57.5. The Chicago NAPM's survey showed a further deterioration in manufacturing conditions in the region. The purchasing managers' index fell to 33.8 in November from 37.8 in October. On a positive note, the prices paid index also slid to 50.7 from 53.7 in the previous month.

As another trouble shooting measure, the Fed announced last week $800 billion in new Fed credit injections. The Fed agreed to buy up to $100 billion of the debt of Fannie Mae (FNM | Quote | Chart | News | PowerRating) and Freddie Mac (FRE | Quote | Chart | News | PowerRating), while also buying $500 billion of mortgage backed securities backed by these government sponsored mortgage lenders. In another move, the Fed agreed to lend up to $200 billion to holders of AAA-rated asset backed securities backed by new consumer and small business loans.

The unfolding week's economic calendar is heavily loaded, with a few key economic reports scheduled to be released. The Labor Department's non-farm employment report for November, the results of the Institute of Supply Management's November manufacturing and non-manufacturing surveys and the Fed's Beige Book are likely to be closely watched by traders for gaining additional clarity on economic conditions.

Additionally, market participants are likely to pay attention to the October construction spending report, the preliminary third quarter productivity & costs report, the Commerce Department's factory goods orders report for October and the Federal Reserve's consumer credit report. The regularly scheduled weekly oil inventory and jobless claims reports and speeches by Fed speakers, including Federal Reserve Chairman Ben Bernanke, are also likely to be on the radar.

Economists are pessimistic about the employment scenario, and therefore, look for the eleventh straight month of job declines, pushing up the jobless rate by a few ticks to 6.8%. Some economists have an above-consensus job loss estimate for November, with IHS Global Insight forecasting a loss of 370,000 for the month.

The ISM's manufacturing index is expected to slip below '35' in November, with a sub-35 reading witnessed only 6 times in the past 40 years and the last time being in 1980. IHS Global Insight expects all five component-series to turn in very weak performances. The non-manufacturing survey is also likely to reveal a further deterioration of conditions in the services sector, as weak earnings and downward pressure on capital ratios are battering the financial services industry.

In-line with the weak trend in the housing market, construction spending is likely to continue to decline, weighed down by the softer single-family housing market. Excluding improvement, construction spending is likely to reveal a steeper decline.

Monday

The Commerce Department's construction spending report to be released at 10 AM ET on Wednesday is expected to show a 0.9% decline in construction spending for October.

Construction spending declined by a smaller-than-expected 0.3% in September. Spending on private constructions edged up 0.1%, but residential construction spending declined 1.3% as an increase in renovations and multi-family construction partly offset a sharp decline in new single-family construction. Non-residential construction spending rose 1.2%, while spending on public constructions declined by 1.3%.

The results of the manufacturing survey of the Institute for Supply Management, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET on the same day. Economists expect the index to show a reading of 38 for November.

In October, the manufacturing index declined to 38.9 from 43.5 in the previous month. The new orders index fell by about 6.6 points to 32.2, while the production index also plummeted to 34.1. The index of new export orders fell 11 points to 41, falling below the '50' level demarcating a contraction and expansion. On a positive note, the prices paid index slumped 16.5 points.

Tuesday

Individual car and light duty truck manufacturers are scheduled to release their sales on Tuesday. These sales are a good indicator of the trend in consumer spending.

Philadelphia Federal Reserve Bank President Charles Plosser, who is a FOMC voting member, is due to speak about the U.S. economic outlook in Rochester, New York at 12:30 PM.

Wednesday

The ADP National Employment report, which sheds light on non-farm private employment, is scheduled to be released at 8:15 AM ET on Wednesday. The report is usually released two days prior to the Labor Department's employment report. Economists expect the report to show a loss of 173,000 jobs in the U.S. private sector.

The U.S. Labor Department is scheduled to release its preliminary report on third quarter non-farm productivity and unit labor costs at 8:30 AM on Wednesday. The consensus estimates call for a 0.9% increase in non-farm productivity.

Non-farm productivity for the second quarter rose 4.3% compared with the previous quarter, faster than the expected increase of 3.5%. Productivity of the business sector rose 4.3%. However, manufacturing sector's productivity dipped 2.2%, dragged down by a 4.5% slump in the productivity of the durable goods manufacturing sector.

Unit labor costs of the non-farm business sector dipped by 0.5% in the second quarter, while those of the durable goods manufacturing sector and non-durable goods manufacturing sector climbing at an annualized quarterly pace of 9% and 3.1%, respectively.

The ISM is scheduled to release the results of its non-manufacturing survey at 10 AM ET on Wednesday. The non-manufacturing index is likely to show a reading of 42.6 for November.

In October, services activity contracted, with the non-manufacturing purchasing managers' index dipping 5.8 points to 44.4. The indexes of business activity, new orders, employment, inventories and backlog of orders showed contraction, although the index of inventories improved from the month-ago levels. The index of new export orders remained almost unchanged at 50, while the prices paid index continued to fall, declining 16.6 points to 53.4.

The Energy Information Administration is also due to release its weekly oil inventory report at 10:30 AM ET on Wednesday.

The weekly oil inventory report for the week ended November 21st showed a 7.3 million barrel increase in crude oil stocks to 320.8 million barrels. Crude oil stockpiles were in the upper bound of the average range for this time of the year.

Gasoline inventories increased by 1.9 million barrels and were near the lower boundary of the average range. However, distillate inventories eased 0.2 million barrels and were near the lower boundary of the average range. Refinery capacity utilization averaged 85.2% over the four weeks ended November 21st compared to 85% in the previous week.

Richmond Federal Reserve Bank President Jeffrey Lacker is scheduled to speak about U.S. financial conditions and the economic outlook in Charlotte, North Carolina at 1 PM ET.

The Federal Reserve is due to release its Beige Book, which is a compilation of anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts, at 2 PM ET on the same day. The report is normally released about two weeks before the monetary policy meeting is held.

Thursday

The nine-member monetary policy committee of the Bank of England is due to hold a two-day meeting ending Thursday to determine the near-term direction of monetary policy. Any change in the policy is announced at 7 AM ET on the same day.

The Bank of England lowered its benchmark interest rates by a bigger than expected 150 basis points to 3% at its November meeting. The Bank said in a release that the past two months saw a substantial downward shift in inflation along with a marked deterioration in the outlook for economic activity at home and abroad. The Monetary Policy Committee saw downside risk to growth and a substantial risk of inflation undershooting its lowered look. The committee deemed it fit to reduce the bank rate to meet the 2% CPI inflation target in the medium term.

The European Central Bank's Governing Council is scheduled to meet at 7:45 ET on Thursday to determine its interest rate policy. Any change in policy is announced immediately after the meeting, while a statement is read out at a press briefing about 45 minutes after the meeting, followed by a Question & Answer session.

The ECB announced a 50 basis point reduction in interest rates to 3.25% at its November meeting. The reduction comes on top of a 50-basis point cut on October 8th, in a coordinated move with the other major central banks of the world.

A Labor Department report on the number of individuals claiming unemployment benefits during the week ended November 29th is scheduled to be released at 8:30 AM ET on Thursday.

The number of individuals claiming unemployment benefits fell 14,000 to 529,000 in the week ended November 22nd from the previous week's upwardly revised figure of 543,000. Economists had expected claims to have slipped to 537,000 in the recent reporting week from 542,000 reported initially for the previous week.

The Labor Department also said that the less volatile four-week moving average rose to 518,000 from the previous week's revised average of 507,000. Continuing claims for the week ended November 15th declined 54,000 to 3.962 million.

The Commerce Department is due to release its report on factory goods orders for October at 10 AM ET on Thursday. Orders for manufactured goods are likely to have decreased 2.7% in the month.

In September, new orders for manufactured goods fell 2.5% to $432 billion following a 4.3% drop in August. Excluding transportation, new orders were down 3.7%, marking the largest percentage decrease in record. While shipments of factory goods rose 2.8% in September, unfilled orders and inventories edged up 0.4% each.

Meanwhile, durable goods orders, which make up bulk of factory goods orders, released last week showed that orders for durable goods fell 6.5% in October, worse than the 2.5% drop predicted by economists. The weakness reflected an 11.1% drop in transportation equipment orders. Excluding transportations, new orders fell a more modest 4.4%. Non-defense capital goods orders, excluding aircraft -a key measure of capital spending, were down 4% in October compared to a 3.3% decline in September.

Friday

The Labor Department is scheduled to release its monthly non-farm payroll report at 8:30 AM on Friday. The report sheds light on the number of paid employees working part time or full time in the nation's business and government establishments, the number of hours worked in the non-farm sector, the basic hourly rate for major industries and the number of unemployed as a percentage of the labor force. Economists estimate that the U.S. economy lost 300,000 jobs in November and look for an unemployment rate of 6.8%.

Non-farm payroll employment fell by 240,000 in October, steeper than the 200,000 job losses expected by economists. The weakness that has been plaguing the economy has hit the job market hard, which is likely to increase the length and the depth of the recession foreseen, given the link jobs have with income and spending.

The unemployment rate based on the household survey rose 0.4 percentage points to 6.5%, ahead of the 6.1% rate expected by economists. Meanwhile, the average hourly earnings rose $0.04 or 0.22% to $18.21.

The goods producing sector lost 132,000 jobs, with the construction and manufacturing sectors losing 49,000 and 90,000 jobs, respectively. Meanwhile, the service-providing sector lost 108,000 jobs and retail trade jobs contracted by 38,000. While the professional and business services and leisure and hospitality sectors lost 45,000 and 16,000 jobs, respectively, employment in the educational and health services and government sectors expanded by 21,000 and 23,000, respectively.

The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 PM ET on Friday. Consumer credit for October is likely to show an increase of $2.7 billion.

In September, consumer credit increased at an annual rate of 3.25% or $6.9 billion to $2.59 trillion. Revolving credit, tied to credit card loans rose $0.9 billion to $971.4 billion, while non-revolving credit tied to auto loans climbed $5.9 billion to $1.62 trillion.

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