This will be reflected in sharp drops in December home sales and durable goods orders, and the icing on the cake will be the fourth-quarter 2008 real GDP report, which will show that output declined 5.8%, a very sharp drop the likes of which we have not seen since 1982.
While the economy is clearly on the ropes, we should not lose sight of the fact that prior to the sharp deterioration in economic conditions at the end of 2008, productivity growth was solid, while core inflation never mushroomed into any where near the problem that many had feared. As a result, monetary policy has moved to full throttle, and will remain at full throttle for a considerable period of time—a policy that will be reinforced next week in the press release after the January 28 meeting of the FOMC.
The problem right now, however, is that there are long and variable lags on monetary policy, especially when the banking system is so severely de-capitalized. So that points to the fiscal stimulus, which will be coming down the chute pretty quickly in the next three weeks. The president will keep Congress' feet to the fire on this schedule next week, but the early scoring of the tax and spending measures by the JCT and the CBO, respectively, points in the direction of a re-think to get more of the stimulus front-loaded into 2009, and directed more specifically to the devastated housing market.
Finally, we are likely to get more information from the new Treasury secretary on his thoughts for the direction the new administration will take on TARP II. The funds have been approved by Congress, and it is high time for some fresh thinking on this, as the banking system continues to be hamstrung by massive charge-offs on distressed mortgages and other consumer and commercial lending, while foreclosures keep rising. We know that the banks need much more capital, it is just a question of what is the best strategy for making this happen within the limits of the resources that have been made available.
KEY U.S. DATA RELEASES THIS WEEK
Monday, January 26 – Existing Home Sales (Dec.)
Global Insight: 4.30 Mil.
Consensus: 4.40 Mil.
Last Actual: 4.49 Mil. (Nov.)
What to Look For
- Existing homes sales expected to drop by 4.2%.
Implications
Existing home sales have dropped by 4% or more for three straight months, because of the deteriorating economy and tightening credit. We project a fourth decline of 4% or more in December. Mortgage rates have declined recently, and will probably decline further. This has resulted in a surge in refinancing, but hardly any change in applications to purchase homes, according to the Mortgage Bankers Association's purchase index. Going forward, therefore, we should expect to see a significant drop in home sales over the next two months, and further declines afterward, even if mortgage rates continue to fall. If financial markets continue to thaw, home sales should bottom out by the middle of this year.
Tuesday, January 27 – Conference Board Consumer Confidence (Jan.)
Global Insight: 35.0
Consensus: 39.0
Last Actual: 38.0 (Dec.)
What to Look For
- The overall index is expected to drop by 3 points, to 35.0.
Implications
The Conference Board's Consumer Confidence Index is expected to dip three points to another new low of 35.0 in January. The new year is bringing a succession of bad economic news--mounting job losses, declines in stock prices and home prices, and a mild back-up in gasoline prices. Meanwhile, unseasonably cold weather may be putting some pressure on energy bills, as some utilities have been slow in adjusting residential rates downward. All of these forces will keep real consumer spending on a downward path during early 2009.
Wednesday, January 28 – FOMC Rate Decision
Global Insight: 0.0–0.25%
Consensus: 0.0–0.25%
Last Actual: 0.0–0.25%
What to Look For
- We expect no change in the current target range for federal funds.
Implications
The FOMC is expected to vote to keep the target range for the federal funds unchanged at 0% to 0.25%, and will indicate once again that rates will remain exceptionally low for some time. The FOMC will also be reviewing the quarterly central tendency forecasts provided by the regional banks, and the press release will allude to a deterioration in the outlook for 2009 and 2010, and perhaps a further downward revision in the forecast for inflation, although we will not have the details until the minutes are released in February. Beyond that, the FOMC may reference the success of recent efforts to support the mortgage-backed securities market, which has helped to reduce spreads of mortgage rates over Treasuries.
Thursday, January 29 – Durable Goods Orders (Dec.)
Global Insight: -6.0%
Consensus: -2.0%
Last Actual: -1.5% (Nov.)
What to Look For
- Durable good orders expected to tank by 6.0% in December.
Implications
With both the domestic and overseas markets in a tailspin, the prognosis for durable goods orders is weak, and orders should fall 6.0% in December, based on ISM-manufacturing orders evidence. The sole positive is a small rebound in civilian aircraft orders, after a 38% plunge in November, but motor vehicles orders (which are larger) should get slammed with close to a double-digit drop. Orders for core capital goods bounced 3.9% higher in November, thanks to a quirky firming in search and navigation equipment and turbines and generators, but that bounce argues for a big December correction.
Thursday, January 29 – New Home Sales (Dec.)
Global Insight: 0.345 Mil.
Consensus: 0.400 Mil.
Last Actual: 0.407 Mil. (Nov.)
What to Look For
- New home sales plunged nearly 15% in December.
Implications
We are expecting a big drop in new home sales, based on December's single-family permits numbers, which plunged 12.3%. In recent months, two additional factors depressing home construction and sales have come into play. First, foreclosures and oversupply have driven down the prices of existing homes. Second, the credit crunch has made it difficult for builders with viable projects to obtain financing—so fewer new homes are appearing on the market. For December, we project that new home sales will plummet to 345,000 annualized units.
Friday, January 30 – Real Gross Domestic Product (Advance Q4)
Global Insight: -5.8%
Consensus: -5.3%
Last Actual: -0.5% (Final Q3)
What to Look For
- We expect a 5.8% annualized decline in real GDP during the fourth quarter, the steepest decline since the 6.4% drop in the first quarter of 1982.
Implications
Steep declines in consumption (down 3.6%), residential construction (down 18%), producers' durable equipment (down 27%), and exports (down 25%) will pull GDP down. Some of the decline in demand will be passed on to the rest of the world through lower imports (down 20%). The only major category of demand that should rise is nonresidential construction—a last hurrah before a steep drop in 2009. Worryingly for the future outlook, we do not expect a major drag on growth from inventories, which should retreat only slightly faster than in the third quarter. Given the rate at which sales are falling, that means that the inventory-to-sales ratio is rising sharply, and production will have to fall further in the first quarter to work off the excess supplies. As a result, we also expect first-quarter GDP to decline more than 5%.
Friday, January 30 – Michigan Consumer Sentiment Index (Final Jan.)
Global Insight: 60.5
Consensus: 61.9
Last Actual: 61.9 (Preliminary Jan.)
What to Look For
- The overall index is expected to peel back by about 1.4 points.
Implications
The Reuters/University of Michigan Index of Consumer Sentiment is projected to average 60.5 for the month, down from its early-January reading of 61.9, but little changed from December. Rising gasoline prices, a tumbling stock market, and further layoff notices suggest that sentiment worsened in the remaining days, after the historic and inspiring inauguration of President Obama.
by Brian Bethune and Nigel Gault