WEEKLY ECONOMIC & FINANCIAL COMMENTARY February 06, 2009

Transcription

1 WEEKLY ECONOMIC & FINANCIAL COMMENTARY February 06, 2009 U.S. Review Falling Revenues Fuel Layoffs Employment losses have deepened considerably in recent months and revisions to previously published data suggest that total job losses for this recession will now top 6.5 million. Nonfarm employment plunged by 598,000 jobs in January and the unemployment rate rose 0.4 percentage points to 7.6 percent. Both numbers were slightly worse than consensus estimates. The January employment data also included revisions to previously published data going all the way back to April The new figures bring total job losses to slightly over 3.5 million since employment peaked in December The heaviest losses by far have occurred during the past five months, a period during which nominal GDP has been negative. Nominal GDP reflects the volume of goods and services produced throughout the economy and the price at which they were sold. In short, nominal GDP is the revenue of the entire economy. With total revenue declining at its worst pace since the late 1950s, many businesses and governments are in survival mode and have no choice but to cut jobs. Please turn to page Nominal GDP Compound Annual Growth Rate Nominal GDP - CAGR: -4.1% Nominal GDP - Yr/Yr Percent Change: 1.7% Forecast Central Bank Policy Rates US Federal Reserve: 0.25% Bank of England: 1.0 ECB: 2.0 Reserve Bank of Australia: 3.25% , o Recent Special Commentary Global Review Further Monetary Easing Abroad A number of major central banks held policy meetings this week and some, but not all, cut rates further. The Reserve Bank of Australia (RBA) kicked things off on Tuesday by slashing its policy rate by 100 bps, bringing the total amount of easing since September to 400 bps (see chart at left). Commodity exports are important to the Australian economy, and the deep global recession that is in train will surely exert a slowing effect on economic activity down-under. The RBA is cutting rates to cushion the blow to the domestic economy. Despite the deep global downturn, the Australian economy appears to be holding up better than most other major economies, at least so far. For example, retail sales in Australia shot up 3.8 percent in December from the previous month, bringing their year-overyear rise to a respectable 5.6 percent. (In contrast, total retail Please turn to page 4 Date Title Authors February-05 Buy American Legislation: An Economic Perspective Bryson & Quinlan February-04 Economic Downturn Challenges State and Local Tax Revenue Vitner & Khan January-28 State Employment: December 2008 Vitner, York & Whelan January-27 Employment: Digging Under the Headlines Silvia, York & Whelan U.S. Forecast Actual Forecast Actual Forecast Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Real Gross Domestic Product Personal Consumption Inflation Indicators 2 "Core" PCE Deflator Consumer Price Index Industrial Production Corporate Profits Before Taxes Trade Weighted Dollar Index Unemployment Rate Housing Starts Quarter-End Interest Rates Federal Funds Target Rate Year Note Data As of: January 14, Compound Annual Growth Rate Quarter-over-Quarter 3 Federal Reserve Major Currency Index, 1973=100 - Quarter End 2 Year-over-Year Percentage Change 4 Millions of Units INSIDE U.S. Review 2 U.S. Outlook 3 Global Review 4 Global Outlook 5 Point of View 6 Market Data 7

2 U.S. Review Economics Group U.S. Review (Continued from Page 1) Widespread Job Losses Should Continue in Early 2009 Job losses continue to be exceptionally broad based. Virtually every major industry category shed jobs in January, a trend that has become all too common. The heaviest job losses continue to be in the goods sector, where construction firms shed 111,000 jobs in January and factories cut 207,000 positions. Some of the largest cutbacks were in the motor vehicle sector, where extended plant shutdowns led to huge drops in employment and hours worked. Other areas with particularly large cutbacks in January include fabricated metals and industrial machinery. In all, durable goods producers slashed 157,000 jobs in January accounting for just over three-fourths of the loss in manufacturing jobs. Cutbacks in the durable goods sector are likely to continue. Factory orders declined more than expected in December. Overall orders fell 3.9 percent, following declines of 6.5 percent in November and 6.0 percent in October. Orders for non-defense capital goods excluding aircraft were down 6.3 percent in December and plunged at a 34.1 percent annual rate over the past three months. Shipments for this same key category fell at less than half that pace, declining at a 14.9 percent pace, indicating that further production cutbacks will be needed to bring production and inventories back in line with demand. There was very little cheer in this week s other economic reports. Weekly first time unemployment claims rose by 35,000 to 626,000 in late January, suggesting that February s employment data will once again post a hefty drop. Unemployment will also likely trend higher from January s 7.6 percent. Motor vehicle sales came in lower than expected, with cars and light trucks selling at just a 9.6 million unit annual rate. That pace was more than half a million units below the consensus estimate and marked the weakest pace for motor vehicle sales since The weakness in sales will make it even more difficult to clear out bloated inventories of domestic and imported vehicles, which means declines in production and imports will likely extend for a few more months. The only good news this week is that nonfarm productivity rose at a 3.2 percent annual rate during the fourth quarter, as businesses slashed hours worked at an even faster rate than output declined. While stronger productivity is a generally a good thing, much of the recent gain is likely coming out of necessity. Moreover, the flip side of this report is that businesses have been slashing jobs and hours worked. While these cutbacks are a necessary evil in a capitalist society, they are a very bitter pill to swallow. Selected Current Data Gross Domestic Product - CAGR Q % GDP Year-over-Year Q % Personal Consumption Q % Business Fixed Investment Q % Consumer Price Index December % "Core" CPI December % "Core" PCE Deflator December % Industrial Production December % Unemployment January % Federal Funds Target Rate Feb % Nonfarm Employment Change Change in Employment In Thousands Nonfarm Employment Change: -598, New Orders Non-Defense Capital Goods Ex-Aircraft Series are 3 Month Moving Averages 3 Month Annual Rate: -34.1% Year/Year Percent Change: -7.9% Productivity - Nonfarm Sector Qtr/Qtr Annual Rate: 3.2% Year/Year Percent Change: 2.7%

3 U.S. Outlook Economics Group International Trade Balance Wednesday The trade deficit narrowed considerably to $40.4 billion in November from $56.7 billion, dropping to a five-year low. A collapse in the value of oil imports explains much of the decline. However, non-oil imports weakened sharply as well, reflecting weakness in the domestic economy. Meanwhile, foreign recessions are causing exports to decline. 3 2 U.S. Exports and Imports Year-over-Year Percent Change, 3-Month Moving Average 3 2 It is clear that the combination of a global recession and the global credit crunch is causing worldwide trade to dry up. The trade deficit should continue to improve due in part to the decline in oil prices. Crude oil prices came off roughly 18 percent in December. We expect the trade deficit to continue to narrow to $36.0 billion in December. The real trade balance, which is used to calculate real GDP, should also narrow Previous: -$40.4 B Consensus: -$36.4 B % 2.5% -2.5% - Wachovia: -$36.0 B Retail Sales Ex-Motor Vehicles & Gasoline Stations 3-Month Moving Averages % 2.5% -2.5% - Exports: Imports: -0.1% Retail Sales Thursday Retail sales plunged 2.7 percent in December, the sixth consecutive decline. Revisions were substantial with November falling 2.1 percent. Core retail sales, which excludes gasoline stations, building materials and autos, fell 1.4 percent. The biggest drop was in gasoline station sales, which fell 15.9 percent. We expect retail sales will decline 0.2 percent in January with motor vehicle sales continuing to pull down the headline number. Light vehicle sales registered 9.6 million units in January, the lowest since Same store sales continue to show consumers pulling back on discretionary items with department store sales down sharply. Retail sales excluding autos should increase 0.6 percent due in part to a slight uptick in prices at the pump. - Sales, Year/Year Percent Change: -1.1% - 3-Month Annual Rate: % % Business Inventories Thursday Business inventories declined for the third consecutive month in November providing further evidence of a tough fourth quarter for business spending. The inventory-to-sales ratio continued to climb as sales fell faster than business owners could cut production. We expect business inventories to continue to decline in December due to the abruptness and depth of the current economic weakness which caught many producers, wholesalers and retailers by surprise. As a result, many had far too much raw material, workin-process and finished product. Wholesalers and retailers alike will look to curtail orders for new products, and manufacturers will have to continue to cut back output. Unintentional inventory increases during a weak growth period pose a considerable risk to production activity. We expect production will fall through the next three quarters. Previous: -0.7% Consensus: -0.6% Previous: -2.7% Wachovia: -0.2% Consensus: -0.4% Business Inventories Total Inventory-to-Sales Ratio 1.25 Total Inventory to Sales Ratio:

4 Global Review Economics Group Global Review (Continued from Page 1) spending in the United States plunged 9.8 percent in December.) Tax rebates that were legislated last autumn helped to boost Australian retail sales in December. But that s exactly the point. Australian policymakers (both monetary and fiscal) are taking aggressive steps to stimulate the economy. Although Australia may yet slip into recession, the downturn down-under probably will be less severe than in most other major economies. As widely expected, the Bank of England cut its policy rate by another 50 bps on Thursday. In its statement announcing the move, the Bank said that output thus far in the first quarter continues to contract at a very sharp rate. Indeed, real GDP in the fourth quarter declined at an annualized rate of 5.9 percent, the sharpest rate of contraction since the very deep recession of the early 1980s. As shown in the top chart, the purchasing managers indices for the manufacturing, construction and service sectors all edged a bit higher in January. That said, the indices remain in territory that is consistent with sharp contraction. In our view, the Bank of England will cut its main policy rate which already stands at an all-time low of 1.00 percent even further in the months ahead as the British economy remains mired in deep recession. The European Central Bank probably has more cutting to do as well. However, it did not exercise that option at its policy meeting this week, choosing instead to keep its policy rate unchanged at 2.00 percent. The ECB said that it had anticipated the sharp drop in economic activity that has occurred since it last met in early January, and it had responded to that anticipation by cutting rates last month. By that logic, the ECB would be on hold unless the economy weakens more than anticipated. As noted above, we believe the ECB will eventually cut rates further. Although the purchasing managers indices for the manufacturing and service sectors edged higher in January, they both remain in deep recession territory (see middle chart). Economic weakness likely will cause CPI inflation to decline further. Indeed, the overall rate of CPI inflation fell to 1.6 percent in December, and the preliminary estimate for January printed at only 1.1 percent, the lowest rate in nearly 10 years. In our view, severe economic weakness and rapidly declining inflation will give the ECB scope to ease policy further in the months ahead. Selected Global Data UK Purchasing Managers Indices Diffusion Indices UK Services: 42.5 UK Construction: 34.5 UK Manufacturing: Euro-zone PMI: 34.4 U.K. PMI: 35.8 European Manufacturing Purchasing Manager Indices Japan GDP Year-over-Year Q % CPI December % Unemployment December % BoJ Target Rate Feb Euro-Zone GDP Year-over-Year Q % CPI December % Unemployment December ECB Target Rate Feb UK GDP Year-over-Year Q % CPI December % Unemployment December % BoE Target Rate Feb Canada GDP Year-over-Year November % CPI December % Unemployment January % BoC Target Rate Feb Euro-zone Consumer Price Index Year-over-Year Percent Change CPI: 1.6%

5 Global Outlook Economics Group U.K. Unemployment Rate Wednesday British real GDP fell at an annualized rate of 5.9 percent in the fourth quarter, the sharpest sequential rate of contraction since Indeed, the current slump appears to be the deepest recession that Great Britain has suffered since the very painful downturn of the early 1980s. The unemployment rate already exceeds six percent, and the only question seems to be: How high will it go? U.K. Unemployment Rate Seasonally Adjusted The Bank of England will also release its quarterly Inflation Report on Wednesday. The Bank s forecasts for GDP growth and CPI inflation over the next two years will help investors judge how much more monetary easing the Bank may undertake. Data on house prices in January, which are on the docket for Monday, and the trade balance in December, which are slated for release on Tuesday, round out a busy week in terms of U.K. economic data % 5.5% % 5.5% Previous: 6.1% Consensus: 6.3% Euro-zone Real GDP Bars = Compound Annual Rate Line = Yr/Yr % Change 4.5% Unemployment Rate: 6.1% % Euro-zone Real GDP Growth Friday Real GDP in the Euro-zone declined 0.2 percent (not annualized) in the third quarter, and most monthly indicators suggest that the rate of contraction rose significantly in the fourth quarter. Indeed, we estimate that real GDP fell one percent in the fourth quarter. Not only did exports fall sharply, but growth in consumer spending probably turned negative as well last quarter. The Euro-zone appears to have slipped into its first recession, which incidentally is a deep one, since the inception of European Monetary Union in Compound Annual Growth: -0.8% Year-over-Year Percent Change: 0.6% G-7 Meeting Friday Finance ministers and central bank governors will gather in Rome next weekend for their semi-annual meeting. With the global economy mired in its worst recession in the post-world War II era, investors anxiously await steps that governments can take on a coordinated basis to help bring the current financial crisis to an end. G-7 meetings often serve as forums in which policymakers from major countries pledge cooperation to tackle pressing economic and financial problems. Most major countries in the Euro-zone also release their individual GDP growth figures on Friday, and the results are not expected to be pretty. We project that the German, French, and Italian economies (among others) all contracted markedly in the fourth quarter. Previous: -0.2% (not annualized) Wachovia: - Consensus: -1.3% 9% 6% 3% OECD Industrial Production Year-over-Year Percent Change 9% 6% 3% It is expected in many corners that U.S. policymakers will announce steps next week to buy toxic assets from U.S. banks and place the assets in a bad bank. If so, pressure will be on other countries to announce similar steps. In addition, more fiscal stimulus measures could be announced next weekend. -3% -6% -3% -6% -9% OECD Industrial Production: -4.8% % 5

6 Point of View Economics Group Interest Rate Watch Topic of the Week Weak Jobs Suggest Continued Fed Easing Today s weak employment report reinforces our view that the Fed will keep the funds rate in the 0-25 basis point range. Moreover, given the weakness in consumer spending, we expect that the Fed will continue to support consumer related asset backed facilities by buying commercial paper and asset backed paper. Financial stability and economic recovery continue to be the primary intermediate-term policy targets for the Fed. The recession will continue at least through the first half of this year. Because of continued economic weakness we expect that the Fed will maintain its expanded balance sheet to support financial markets. The Fed will continue with its outright purchases of Government Sponsored Enterprise (GSE) debt and Agency mortgage backed securities and asset-backed paper. Monetary policy continues to adjust to an environment of economic recession, lower inflation expectations and the imbalance of asset valuations. But Weak Jobs Also Raise Credit Concerns Credit quality will be challenged. Weak jobs suggest weak consumer spending and rising delinquency rates for all consumer-related debt. For many businesses top line revenue declines will reflect lower consumer spending. For many firms, the hit to cash flow and ultimately profits dictates wider credit spreads in the marketplace. Finally, weaker economic growth dictates weaker public sector revenues and thereby a squeeze on public finances. Longer dated federal and state debt will begin to reflect this credit/revenue issue in a steeper yield curve and perhaps even credit downgrades al lá California. 4.5% 1.5% % % % 1.0 Central Bank Policy Rates US Federal Reserve: Feb % ECB: Feb Bank of Japan: Feb Bank of England: Feb M 2Y 5Y 10Y Yield Curve US Treasuries, Active Issues Forward Rates 90-Day EuroDollar Futures February 6, 2009 January 30, 2009 January 6, Y February 6, 2009 January 30, 2009 January 6, 2009 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep % 1.5% % % % 1.0 Economic Downturn Challenges State and Local Tax Revenue The recession is taking a heavy toll on state and local tax revenue. With roughly 77 percent of total tax revenue nationwide coming from income, property and sales tax receipts, revenues are under pressure on nearly every front. Layoffs are cutting into income tax receipts, while falling home prices and the faltering stock market are hitting a whole variety of taxes and fees. Personal income tax receipts will likely be reduced considerably during the coming year due to a weakened labor market. The economy has shed more than 3.5 million jobs since the recession began, with more than 1.5 million jobs eliminated during the fourth quarter alone. With layoff announcements picking up at the start of the year, we expect total job losses to eventually reach more than five million. To meet balanced-budget requirements, many state and local governments are either pulling back on spending, raising taxes or both. Spending cuts are one of the few options open to state and local governments in the short term, and many have cut spending dramatically. Unfortunately, more cuts are likely unless funding can be secured from the federal government. Raising taxes in a recession often creates more problems than it solves. The recovery for state and local tax revenue should lag the overall economic recovery as the unemployment rate tends to peak well after the recession ends. We expect the unemployment rate to peak in early to mid-2010, which means state and local tax revenue will likely remain challenged until Read our report on the topic here. Subscription Info Wachovia s Weekly Economic & Financial Commentary is distributed to subscribers each Friday afternoon by . To subscribe please visit: The Weekly Economic & Financial Commentary is available via the Internet at And via The Bloomberg Professional Service at WBEC. 6

7 Market Data Economics Group Market Data Mid-Day Friday U.S. Interest Rates Foreign Interest Rates Friday 1 Week 1 Year Friday 1 Week 1 Year 2/6/2009 Ago Ago 2/6/2009 Ago Ago 3-Month T-Bill Month Euro LIBOR Month LIBOR Month Sterling LIBOR Year Treasury Month Canadian LIBOR Year Treasury Month Yen LIBOR Year Treasury Year German Year Treasury Year U.K Year Treasury Year Canadian Bond Buyer Index Year Japanese Year German Foreign Exchange Rates 10-Year U.K Friday 1 Week 1 Year 10-Year Canadian /6/2009 Ago Ago 10-Year Japanese Euro ($/ ) British Pound ($/ ) Commodity Prices British Pound ( / ) Friday 1 Week 1 Year Japanese Yen ( /$) /6/2009 Ago Ago Canadian Dollar (C$/$) W. Texas Crude ($/Barrel) Swiss Franc (CHF/$) Gold ($/Ounce) Australian Dollar (US$/A$) Hot-Rolled Steel ($/S.Ton) Mexican Peso (MXN/$) Copper ( /Pound) Chinese Yuan (CNY/$) Soybeans ($/Bushel) Indian Rupee (INR/$) Natural Gas ($/MMBTU) Brazilian Real (BRL/$) Nickel ($/Metric Ton) 11,386 11,349 26,575 U.S. Dollar Index CRB Spot Inds Next Week s Economic Calendar Monday Tuesday Wednesday Thursday Friday Wholesale Inventories Trade Balance Retail Sales Univ. of Mich. Confidence November -0.6% November -$40.4B December -2.7% January 61.2 U.S. Data December -0.7% (c) December -$36.0B (W) January -0.2% (W) February 61.0 (c) Retail Sales Less Autos December -3.1% January 0.6% (W) Business Inventories November -0.7% December -0.9% (c) Japan UK Euro-zone Global Data Machine Orders (MoM) Unemployment Rate GDP (QoQ) Previous (Nov) -16.2% Previous (Nov) 6.1% Previous(3Q) -0.2% China Trade Balance (USD) Previous (Dec) $38.98 B Note: (W) = Wachovia Estimate (c) = Consensus Estimate 7

8 Wachovia Economics Group John E. Silvia, Ph.D. Chief Economist (704) Mark Vitner Senior Economist (704) Jay H. Bryson, Ph.D. Global Economist (704) Sam Bullard Economist (704) Anika Khan Economist (704) Azhar Iqbal Econometrician (704) Adam G. York Economic Analyst (704) Tim Quinlan Economic Analyst (704) Kim Whelan Economic Analyst (704) Yasmine Kamaruddin Economic Analyst (704) Wachovia Corporation Economics Group publications are distributed by Wachovia Corporation directly and through subsidiaries including, but not limited to, Wachovia Capital Markets, LLC, Wachovia Securities, LLC and Wachovia Securities International Limited. The information and opinions herein are for general information use only. Wachovia does not guarantee their accuracy or completeness, nor does Wachovia assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice Wachovia Corp.