Consumer Confidence Dropped Sharply in February

U.S. Consumer Confidence plunged in February, dropping to 75 from a revised lower 87.3 in January.  The market had been looking for a drop to 82.  The index hasn't been this low since early 2003, when the US began the Iraq conflict.  If the early 2003 data is ignored, the index is at a 15 year low.  Both the current and future expectations indexes weakened materially.  The present situation index fell from 114.3 to 100.6 in February versus January.  Future expectations eased to 57.9 vs 69.3 the prior month, and are now at a 17 year low set in January 1991, during the last major housing downturn. 

 

The difference between jobs plentiful vs easy to get fell into negative territory for the first time in over six months.  The number seeing jobs as not plentiful rose to 55.6, while those seeing jobs plentiful fell to 20.6.  As recently as last July the jobs plentiful figure was 50% higher at 30.  Views of business conditions also worsened.

 

Looking at expectations for conditions in six months, there were large increases for worse business conditions (21.4 vs 16.3) and fewer jobs (27.9 vs 21.9) versus January.  The percentage of respondents expecting income to decline rose a more modest +.3 MoM.

 

Buying intentions over the next six months surprisingly showed upticks in home purchases and major appliances, though they were slight.  Those expecting to take a vacation fell.

 

Inflation expectations over the next year held steady at 5.3% YoY.

 

The survey is based on 5,000 households, and all calls were completed by February 19th.

 

This data indicates that growth probably continued to slow in early 2008 and recession risks are rising.

S&P Case Shiller Home Price Index Shows Record Home Price Declines

The December 20-city index fell -2.15% MoM, and -9.1% YoY.  This was a slower pace of annual decline than consensus had expected of -9.7%, but still notably higher than the -7.7% annual drop reported in November.  The trend over the past three months shows acceleration with monthly declines of -1.4% in October and -2.1% in November, and -2.15% in December.  All 20 cities saw declines in December.  The smaller 10-city index, which is focused on cities that had larger price gains, saw a -2.3% MoM decline, and a -9.8% YoY drop. 

 

The largest monthly decline was Phoenix at -3.5% MoM, followed by San Diego, San Francisco and Los Angeles, which all had monthly declines of over 3%.  On an annual basis, Miami leads the decline with a fall of -17.5% YoY, followed by Phoenix at -15.25% YoY.  Other cities seeing double digit annual declines include San Diego, Tampa, Detroit, Los Angeles and San Francisco.

 

The national 4th quarter Case-Shiller data shows a -5.36% quarterly drop, and a much larger than expected decline of -8.9% YoY (consensus -6.5-7%).  The quarterly drop, when annualized, equates to almost a 20% annual price decline.

 

The Case-Shiller index includes homes from all price ranges and is based on actual selling prices for individual properties.  The national figure is based on a composite index of major markets weighted by their capitalization. 

January Producer Price Inflation Rises to 25+ Year High

Inflation continues to accelerate, and at a much faster pace than anticipated.  Headline inflation rose a much stronger than expected +1% MoM (consensus +.4%), and to a 25+ year high (1981) of 7.4% YoY (consensus +7.3%, prior +6.3%).  Food and energy price gains were much stronger than expected.  Food prices rose +1.7% MoM (+8.3% YoY) and energy rose +1.5% MoM (+22.6% YoY).  Gasoline rose an even stronger +2.9% MoM and 48.1% YoY.  Core PPI, which excludes food and energy, rose +.4% MoM (consensus +.2%) and +2.3% YoY (consensus +2.2%, prior +2%).  The monthly increase in core inflation was the largest in almost a year.

 

There was a broad-based rise in core consumer goods (+1.1% MoM) and capital equipment (+.4% MoM) in January.  Drug costs rose +1.5% MoM, the largest monthly gain in a year and a half.  Computers, cars, and women's apparel are the only major categories showing annual price declines.

 

Crude food prices, which covers grains such as corn and wheat, that have been hitting new record highs this year, rose +2.7% MoM in January.  Producer prices for all crude goods, the earliest level in the chain of production, rose +2.5% MoM (+31.3% YoY), while intermediate goods prices rose +1.4% MoM (+8.8% YoY).  Excluding food and energy, crude goods have risen +4% MoM and +21% YoY, while intermediate core PPI prices have risen +.8% MoM and +4.1% YoY.  It is clear that pipeline pressures are re-emerging.

 

This was the last of the major inflation indicators for January.  CPI and import prices also showed strong gains, with the annual increase in import prices hitting an all-time record high of 13.78% YoY. Higher commodity prices are clearly feeding into final prices, as are rising labor wages in Asia.

Existing Home Sales

Existing home sales showed signs of slowing decline in January.  December's figure was revised slightly higher to 4.91 million, and January's level came in at December's originally reported level of 4.89 million annualized pace of homes sold.  This was considerably better than the 1.8% decline forecast by the market to a 4.8 million annual sales pace.  Net, sales fell -.4% MoM, but were unchanged from December's originally reported decline.

The strength emerged in single family sales, which rose +.5% MoM (-22.4% YoY) to an annualized pace of 4.34 million homes, while condos fell -6.5% MoM (-30.2% YoY). 

Inventory rose in single-family homes to 10.3 months from 9.7 months in January, and fell to 11.8 months in condos from 11.9 months the prior month.  Both inventory levels are down from the highs of last October when single-family supply was 10.2 months and condos ran at 12.5 months.  It is fairly normal for inventory levels to rise in January.

Median home prices continue to slide.  Single-family median home prices are down -5.1% YoY to $198,700, and condos are down -1% YoY to $220,400.  In aggregate, existing home prices fell -2.9% MoM and -4.6% YoY.  From the peak, existing home prices are down -11.8%.

Correction-

 

Inventory rose in single-family homes to 10.1 months from 9.4 months in January, and fell to 11.8 months in condos from 11.9 months the prior month.  Both inventory levels are down from the highs of last October when single-family supply was 10.2 months and condos ran at 12.5 months.  The combined inventory for the two categories was 10.3 months in January versus at peak of 10.5 months in October.  It is fairly normal for inventory levels to rise in January.

Weekly Economic Calendar

February 25-29, 2008

                                                                                                            Consensus       Prior

Monday, 2/25

            January Existing Home Sales                                            4.81M             4.89M

Expected to decline -1.8% MoM to a new cycle low

                        Pending home sales in December were weak, falling -1.5% MoM

                        Existing home sales have fallen -24% YoY

                        Weakness is evenly distributed among all 4 major geographic regions          

                        Fed Governor Kroszner speaks on Risk Management

                        Fed Governor Mishkin speaks on Stabilizing Inflation

Tuesday, 2/26

            January Producer Price Index                                MoM   +0.3%             -0.1%

                                                                                                YoY     +7.5%             +6.3%

                        Core PPI (Ex- Food and Energy)                 MoM   +0.2%             +0.2%

                                                                                                YoY     +2.2%             +2.0%

                        Headline PPI expected to exceed November’s 25+ year high of 7.2% YoY

Annual Core PPI growth running slightly above 12m average of 1.9%

Food prices expected to rise sharply in January, up +.6-.7% MoM

Seasonal adjustments may cause gasoline prices to fall again (-4.8% MoM in December)

                        Fewer vehicle incentives may push up car and truck prices, and core PPI

                        PPI more impacted by commodity prices than CPI

            December 20-City Case-Shiller Home Price Index  YoY           -9.8%              -7.7%

                        Expected to decline -1.5-2% MoM in December

                       

            4^th Qtr National Case-Shiller Home Price                       YoY                             -4.5%

                        Decline expected to accelerate to -6.7% YoY from -4.5% YoY in 3^rd qtr

            February Consumer Confidence                                        82                    87.9

                        Expected to plunge to a 4y low as economic growth deteriorates

                        Present situation index has fallen over 5 of last 6 months

February Richmond Fed Manufacturing Index                -7                     -8

4^th Qtr OFHEO Home Price Index                         QoQ   -1%                 -0.4%

Expected to show a record quarterly decline and first annual decline since series started in 1975

Actual YoY drop for 2007 expected to be -1.1%

A -1% quarterly decline annualizes to a -4% YoY deterioration in prices

            Fed Vice-Chairman Kohn speaks on U.S. Economy and Monetary Policy

Wednesday, 2/27

            January Durable Goods Orders                             MoM   -4%                 +5%

                        Ex-Transportation                                        MoM   -1.3%              +2.3%

Sharp decline in Boeing aircraft orders (65 vs 287) will reverse December’s headline strength, which was broadbased

Transportation orders likely fell by 10% MoM

Machinery and tech orders also expected to retrench, pulling down

ex-transportation growth (machinery orders grew +7.3% MoM in Dec)

ISM Manufacturing new order growth has been slowing as sentiment becomes more gloomy

            January New Home Sales                                                   600k                604k

                        Only a -0.7% ease expected following December’s -4.7% drop

                        Single-family permits are at lowest level since 1991 recession

New home sales have been falling even faster than existing home sales, and are down -41% YoY

Slight improvement seen in NAHB index past two months (20 vs 18)

Fed Chairman’s Semi-Annual Report to Congress on Economy and Fed Policy       

New FOMC forecast just released which reduced 2008 GDP growth to 1.3-2% range, pushed unemployment higher to 5.2-5.3% by the end of year, and raised inflation expectations (see PCE data below)

Presents to House on Wednesday, Senate on Thursday

            Fed Governor Mishkin speaks on Importance of Financial Literacy

Thursday, 2/28

            Initial Jobless Claims                                                          350k                349k

                        Continuing Claims                                                  2773k              2784k

                        Jobless claims’ 4-week average has risen rapidly over past month to 361k

            Preliminary 4^th Qtr GDP                             Annualized    +0.8%             +0.6%

                        Slight improvement expected, mainly due to higher export growth

                        Domestic consumer demand expected to weaken

            Preliminary 4^th Qtr Personal Consumption                     +2%                +2%

            Preliminary 4^th Qtr GDP Price Index                                +2.6%             +2.6%

            Preliminary 4^th Qtr Core PCE QoQ                                  +2.7%             +2.7%

            January Help Wanted Index                                               21                    22

                      

Friday, 2/29

            January Personal Income                                                    +0.2%             +0.5%

                        Sluggish growth expected as labor demand softens

                        Aggregate payroll hours fell -0.3% while hourly wages rose +0.2%

            January Personal Spending                                                            +0.2%             +0.2%

                        Weak vehicle and home improvement sales impeding growth

Real (inflation adjusted) sales are likely to have been flat, as higher prices account for all of increase in nominal sales

           

January PCE Deflator                                             YoY     +3.5%             +3.5%

                        Running well above Fed’s new target of 2.1-2.4% annual growth

            January Core PCE                                                   MoM   +0.2%             +0.2%

                                                                                                YoY     +2.2%             +2.2%

Core growth at upper edge of Fed’s forecast of 2-2.2% annual growth

            February Chicago Purchasing Manager                           49.7                 51.5

                        Large declines seen in Empire and Philly Fed indexes recently

            Final February U of Michigan Consumer Confidence    70                    69.6

Preliminary reading fell a huge -8.8 points from Janaury with current and future expectations falling around 9 points

ABC/Washington Post survey holding steady at lows

1-year inflation expectations popped up to 3.7% from 3.4% last month

U.S. Monetary Policy Forum

Fed Governor Mishkin and Boston Fed President Rosengren speak at panel on “Leveraged Losses:  Lessons from the Mortgage Market Meltdown”

Atlanta Fed President Lockhart speak at panel on “The Subprime Crisis – Is it Contagious?”

Chicago Fed President Evans and St. Louis Fed President Poole speak at panel on “Balancing Financial Stability, Price Stability and Macroeconomic Stability”

           

New Home Starts Pause Decline Near Lows

Housing starts held near their 17 year lows in January, rising +.8% MoM, while building permits continued to fall -3% MoM.  Both results were in line with expectations as the inventory overhang in new and existing homes persists, and rising foreclosures continue to add to the glut of homes on the market.  Housing starts have fallen by over 20% in the past few months, so a pause is reasonable.  But, it is too early to declare stabilization.

 

Single-family construction continues to see the brunt of the weakness.  Single-family starts fell -5.2% MoM (-34% YoY), and permits fell -4.1% MoM (-40% YoY).  As expected, multi-family construction rebounded in January after the unusually weak activity in December.  Multi-family starts rose +22% MoM (-4% YoY) and permits only declined by -.8% MoM (-15% YoY).

 

Houses under construction continue to decline, falling -2.4% MoM and -15% YoY.  Completed housing rose +1.8% MoM, but is down -26% YoY.

 

For all of 2007, construction began on 1.355 million homes, the lowest number since 1993, and a 25% decline from 2006.  Housing starts peaked in January 2006 at 2.29 million - a thirty year high.  New home starts are expected to continue falling through most of this year as new home sales are down almost 60% from their peak in July 2005.

 

Regionally, starts rose +19% MoM the Northeast and +12% MoM in the Midwest in January, while they fell -3% MoM in the South and -6% MoM in the West.  In fact single-family new home starts in the West were the lowest last month since records began in 1959!

Consumer Inflation Rising Faster than Expected

Headline CPI inflation rose +.4% MoM (consensus +.3%) and +4.3% YoY (consensus +4.2%), while core, which excludes food and energy price hikes, rose +.3% MoM (consensus +.2%) and+2.5% YoY (consensus +2.4%).  The broad based increase in inflation will be a concern for the Fed. 

 

The annual increase in core CPI is the highest since last March, and has risen steadily over the past four months from 2.1% to the current +2.5% YoY.

 

The +4% annual increase in headline CPI has only occurred 9 times (months) in the past 17 years, and three of those occurrences have been over the past three months.  Prior to this increase, the last time headline inflation rose over 4% YoY was in the summer of 2006.

 

Energy and food prices both rose a strong +.7% MoM in January.  Energy prices have risen +20% YoY while food prices are up +5% YoY.  Food accounts for about 20% of the US CPI index.  Owner's equivalent rent held steady at +.3% MoM growth for the third month in a row.  Tenant rents also rose +.3% MoM in January.  Over the past year, housing costs have risen +3% YoY.  Rental costs represent approx. 40 percent of the core CPI index.. 

 

Personal computers broke their deflationary streak in January, rising +1% MoM, but are still down a substantial -12% YoY.  Gasoline rose +1.2% MoM and is up +35% YoY.  Almost all categories saw rising prices.  Apparel rose +.4% MoM (-.2% YoY), transportation rose +.5% MoM (+9% YoY), medical care increased +.5% MoM (+5%YoY), and education +.4% MoM (+3% YoY).  Commodity and service prices saw the largest gains in a long time.  Lodging away from home rose a strong +1.1% MoM.

 

The only outright pricing decline was in vehicles, which fell -.1% MoM, and are unchanged year-over-year. 

 

The CPI is the government's broadest indicator of prices paid by consumers for goods and services, and uses costs averaged over the entire month.  Higher inflation rates are part of the reason that longer-term interest rates have been rising again recently, and are also keeping the dollar under pressure to devalue.  Today's data indicates that higher import prices, which are at record levels, are impacting the broader economy.  Producer prices will not be released until next week.