Reports Consistent with Negative Economic Growth

MBA (3/10/2008 ) Velz, Orawin
February’s decline in total nonfarm payrolls of 63,000; downward revisions to previous months’ numbers; consecutive monthly drops in average weekly hours worked (a proxy for output growth); and a plunge in temporary hiring confirm that the current housing recession has led to declining overall economic activity.
Excluding the gain in government payrolls, employment in the private sector dropped 101,000—the third consecutive monthly decline. Construction payrolls saw another sizable loss, with builders shedding 39,000 jobs in both residential and nonresidential sectors. Since the peak in September 2005, the construction industry has lost 331,000 jobs.

The mortgage industry eliminated 3,900 jobs in January, a drop of 3.0 percent from December. (The Bureau of Labor Statistics releases some detailed categories of employment with a one-month lag.) Since its peak in October 2006, industry employment has declined about 26 percent. One silver lining is that job losses in the mortgage industry have moderated significantly since the August financial turmoil.

Combining with the dismal employment report, other reports last week pointed to negative economic growth in the current quarter. Both manufacturing and nonmanufacturing surveys from the Institute for Supply Management (ISM) indicated reduced manufacturing and service activities in February. Factory orders fell in January, confirming the results from the ISM manufacturing survey. Nonresidential construction spending dropped in January for the first time since September 2006. Anecdotal evidence from the Federal Reserve’s Beige Book also suggests weaker nonresidential real estate markets across the country compared to the end of last year.

Finally, housing and mortgage market data contained no surprises. The Pending Home Sales Index’s trend over the past several months indicated that existing home sales should hover at the current low level in the coming months. Mortgage credit quality deteriorated during the final quarter of 2007, with adjustable-rate mortgage loans (ARMs) representing a disproportionate share of the foreclosure starts.

Interest Rates
Long-term yields were volatile last week. On Wednesday, yields increased following an ISM nonmanufacturing report, showing better than expected improvement in the service industries. On Thursday, stock markets declined in response to the news of rising mortgage delinquency and foreclosure rates. The Treasury market rallied as a result of a flight to quality. On Friday, stocks plunged further and the flight to quality intensified in response to the biggest job loss since March 2003. The 10-year Treasuries stayed around 3.54 percent by mid-Friday afternoon, about the same as the rate on the previous Friday.

Housing and Mortgage Indicators:
Total construction spending dropped 1.7 percent in January, the largest decline since December 1996. Private construction spending declined 2.2 percent, as a result of declines in both private residential and nonresidential construction spending. Private residential construction spending decreased 3.0 percent in January and 19.7 percent from a year ago. Private nonresidential construction spending decreased 1.2 percent, the first drop since September 1996. Over the past year, private nonresidential construction spending was 17.3 percent higher than a year ago. Public construction fell 0.2 percent, the second consecutive monthly decline.

The Mortgage Bankers Association’s National Delinquency Survey reported that foreclosures and delinquency rates increased in the fourth quarter of 2007. The total delinquency rate increased 23 basis points from the third quarter to 5.82 percent, the highest level since 1985. While the delinquency rate increased for the third consecutive quarter, the increase in the fourth quarter was smaller than increases in either of the previous two quarters.

The share of homes entering the foreclosure process (foreclosure starts) rose from 0.78 percent in the third quarter to 0.83 percent—a record high. The increase in foreclosure starts was concentrated in adjustable-rate mortgage loans (ARMs). While subprime ARMs represent 7 percent of the loans outstanding, they represent 42 percent of foreclosure starts during the fourth quarter. Prime ARMs, which account for 15 percent of the loans outstanding, represent 20 percent of foreclosures starts.

California and Florida continue to represent a disproportionate share of the foreclosure starts in the country. Those two states represent 21 percent of all loans outstanding, but accounted for 30 percent of foreclosure starts.

The National Association of Realtors’ (NAR) Pending Home Sales Index was unchanged at 85.9, following two consecutive monthly declines. From last January, the index was down 19.6 percent. Regionally, pending home sales increased in two regions, jumping 13.0 percent in the West and edging up 0.6 percent in the Midwest. They dropped 4.1 percent in the Northeast and 6.1 percent in the South.

The index is based on signed contracts for existing single-family homes, condos and co-ops. It is a leading indicator of NAR’s existing home sales, which are based on closings, as the signed contract for the purchase of a home generally precedes its closing by one to two months. Last month, NAR reported that January’s pace of total existing home sales was the weakest in its nine-year history of the combined data of single-family detached homes and condos. Since pending home sales have not increased in the past four months, existing home sales should stabilize at the current slow sales pace in the coming months.

The Mortgage Bankers Association Weekly Survey of Mortgage Applications for the week ending February 29 showed that mortgage demand increased for the first time in four weeks as mortgage rates declined for the first time in six weeks. The Market Index was up 2.9 percent to 684.9. The Purchase Index climbed 1.4 percent, while the Refi Index rose 4.5 percent.

The 30-year fixed mortgage rate dropped 29 basis points to 5.98 percent. The one-year adjustable rate edged down one basis point to 5.83 percent.

The ARM share of mortgage applications of the number of loans increased 2.3 percentage points to 17.3 percent. The share of the dollar volume of new applications jumped 3.4 percentage points to 30.2 percent.

Economic Indicators:
The Institute for Supply Management (ISM) manufacturing survey showed that the nation’s manufacturing industry contracted in February following a temporary improvement in January. The manufacturing index fell to 48.3 in February from 50.7 in January. A reading of 50 or above indicates an expansion in the manufacturing sector. The index is at the lowest reading since April 2003 and the second reading below 50 in the past three months. The report confirmed results from regional manufacturing surveys for the month, showing declining manufacturing activity.

The ISM manufacturing index is based on a survey of purchasing executives at roughly 300 industrial companies. It includes nine different sub-indices: new orders, production, employment, supplier deliveries, inventories, prices, new export orders, imports and backlog of orders.

New orders—a forward-looking component of the index—edged down to 49.1. This is the third consecutive monthly decline and the third straight reading below 50. Production—another forward-looking component—fell to 50.7 from 55.2. The employment index fell 1.1 points to 46, its lowest level since June 2003 and the fourth consecutive reading below 50.

Nonfarm productivity, a measure of output per hour, increased 1.9 percent (annualized rate) in the fourth quarter, upwardly revised from an initial report of 1.8 percent. The upward revision was due entirely to a decline in hours worked of 1.6 percent, the biggest drop since the first quarter of 2003.

The productivity report showed that unit labor costs—a gauge of inflationary pressures from compensation—rose 2.6 percent in the fourth quarter, revised up from 2.1 percent. However, unit labor costs in the third quarter were revised downward to 3.4 percent from 4.0 percent. That downward revision helped keep the year-over-year gain in unit labor costs in the fourth quarter to only 0.9 percent, the smallest since the second quarter of 2004.

The report includes revisions to productivity growth back to the first quarter of 2006. For all of 2007, productivity growth was revised upward to 1.8 percent from 1.6 percent, accelerating from 1.0 percent in 2006.

Factory orders fell 2.5 percent in January, following a 2.0 percent increase in December. Durable goods orders dropped 5.1 percent, a small upward revision from the initially reported decline of 5.3 percent released last week. Nondurable goods orders edged up 0.3 percent.

The ISM Nonmanufacturing survey showed that activity in the service industries improved. The nonmanufacturing index rose to 49.3 in February from 44.6 in January. This is the second consecutive month that the index showed a reading below 50, indicating a contracting service sector. The pace of decline moderated, however, as the index recovered slightly more than half of the drop in January. Last month’s ISM nonmanufacturing survey sparked recession concerns when the index plunged 8.6 points in January to a reading below 50 for the first time since March 2003.

Payroll employment declined 63,000 in February. Job losses for January were revised higher to 22,000 from 17,000 and December gains were revised down to 41,000 from 170,000. As a result, average monthly gain the fourth quarter was 80,000. Government payrolls increased 31,000 during the month, indicating a decline of 13,000 private payrolls, the first drop in private industry payrolls since July 2003.

The unemployment rate, calculated from a separate household survey, fell to 4.8 percent as the decline in the labor force offset the increase in the number of unemployed workers.

Service-producing industries provided little offset to large losses in goods-producing industries. Retail employment dropped 34,000, and the January gain was revised away. Financial industry payrolls fell 12,000. Temporary help declined by 28,000, the largest decline since 2003. Leisure/hospitality industries added 21,000 jobs, while education and healthcare added 30,000 jobs.

Aggregate weekly hours fell 0.1 percent, following a decline of 0.4 percent in January. Hourly earnings edged up 0.3 percent.

Next Week:

• Monday: January wholesales inventories;

• Tuesday: January trade deficit;

• Thursday: February retail sales; February import prices; and January business inventories; and

• Friday: February Consumer Price Index and the preliminary estimate of the University of Michigan’s Survey of Consumer Sentiment for March.