Friday, February 26, 2010

Economics: Trends have been weakening, adding downside risk to our growth forecast

After last week’s encouraging data, this week’s data was quite disappointing as
consumer confidence completely reversed the small improvement of the last three
quarters and new home sales derailed. The core CPI moved from disinflation to deflation. Initial jobless claims come in much weaker than expected and the details of the January durables report were weak.


Initial jobless claims increased to their highest level since mid-November. Some
technical factors are at work in the latest week, but the bottom line is that the pattern
of claims in recent weeks is sending a concerning signal on labor markets.


The details of the January durables report were weak: ex-transportation orders were
down 0.7% and core (nondefense, ex-aircraft) capital good orders fell 2.9%, the
biggest tumble in this indicator of capital spending since last April. While these
numbers are bad, looking at the December-January numbers together one sees a
much less alarming message.


The January new home sales figures were terrible. New single-family home sales
declined to a record low. With sales so low, the level of inventories actually rose for
the first time since early 2007, and the months’ supply increased to the highest since
May 2009. Not only is the level of new home sales weak, but it is below the number
of new single-family homes being built for sale, which we estimated at 325,000 in
January. This suggests significant near-term weakness in new home construction.
Consumer confidence

The Conference Board consumer confidence index showed a disappointing drop in
February. The expectations index, which had been slowly improving over the last
nine months, reversed its gains by falling from 77.3 to 63.8. At this stage confidence
appears to be stuck in a rut because of persistently high unemployment, continued
uncertainty over the economic outlook, and the pullback in equity prices from the
January highs.


The Consumer Price Index (CPI) increased 0.2% last month as energy prices rose
2.8%. More surprising was the 0.14% decline in the ex-food and energy core CPI.
The policy implications of today's number are clear, core inflation is moving further
below the Fed's implicit inflation target and in the process real interest rates are
moving higher: this is new news and reinforces the case for a Fed on hold for an
extended period.

Monetary Policy

There was no shift in the monetary policy outlook in Bernanke's semi-annual
monetary policy report to Congress. The Chairman twice stated that the funds rate
target is likely to remain exceptionally low for an extended period and once stated
that the policy outlook was about unchanged since the January FOMC meeting. Not
only was the discussion of the policy outlook dovish, but the description of the
economy tilted toward emphasizing the ills associated with weak levels of economic
y. [jp morgan]

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