Economy in Trouble, No Matter Bailout Outcome
News about the Treasury’s plan to purchase distressed assets from financial institutions monopolized headlines this week, but regardless of the outcome of the political debates, new data indicated that the economy is poised for further difficulties.
The release of major indicators this week actually started out on a somewhat positive note. August existing-home sales posted a 2.2% decline and the median home price also fell, but some signs of stabilization emerged. The inventory of unsold homes on the market declined, possibly lifting pressure on prices. At the same time, the level of sales seems to be falling within a range that suggests some stabilization. “Looking at the longer-term picture, existing home sales have been largely stable for almost a year now. The significant volume of foreclosure sales have been one reason that total sales have held up,” wrote Abiel Reinhart of J.P. Morgan Chase.
However, data on new home sales on Thursday indicated that the housing may be borrowing from Peter to pay Paul. The foreclosures may be propping up existing home sales, but it appears to be at the expense of new home sales, which tumbled 11.5% in August. “With a record number of foreclosure starts in the second quarter, new home sales are likely to remain depressed in the coming months,” said Omair Sharif of RBS Greenwich Capital.
Also on Thursday, the manufacturing sector showed continued evidence of weakness. New orders for durable goods in August shrank 4.5%, much worse than expected, and the weakness was broad based. “Unfortunately, this isn’t a case where the headline was driven down by single volatile component; excluding the volatile transportation and defense sectors orders for capital goods shrank by 2%. The weakness is distributed among the remaining components,” wrote Goldman Sachs in a research note. “In real terms the slump looks to be even worse as the durable manufactured goods price index shows continued price increases in August.”
Meanwhile, the labor market continued to face pressure. As the market awaits the September employment report next Friday, the data on weekly jobless claims dropped to their lowest level since the Sept. 11 attacks. Though the number was distorted by the effects of Hurricanes Ike and Gustav, the picture for the jobs market is bleak. “Business cutbacks should intensify,” said Bruce Kasman at J.P. Morgan Chase. “Investment spending, which has continued to expand thus far, is expected to contract at close to an 8% annualized pace in the coming two quarters. We also expect payroll losses to average 150,000 per month in the coming six months, double the pace in the first 8 months of this year, and see the unemployment rate rising to close to 7% around the middle of next year.”
Finally, on Friday came the final revision to the second-quarter gross domestic product numbers, which had posted 3.3% growth at an annual rate in the previous estimate. The number wasn’t expected to change, as the final revision to GDP usually hews pretty close to the prior release. But the number was moved down five tenths of a percentage point to 2.8% growth, as consumer spending and trade effects provided less of a boost than previously thought. Consumer spending, at 70% of GDP, has long been a driver of growth but the credit crunch and deteriorating labor market has taken a major toll. “Available data point to an outright decline in consumer spending in the third quarter, which would be the first quarterly drop in 17 years,” said David Resler of Nomura Securities.
http://blogs.wsj.com/economics/2008...le-no-matter-bailout-outcome/?mod=rss_WSJBlog
News about the Treasury’s plan to purchase distressed assets from financial institutions monopolized headlines this week, but regardless of the outcome of the political debates, new data indicated that the economy is poised for further difficulties.
The release of major indicators this week actually started out on a somewhat positive note. August existing-home sales posted a 2.2% decline and the median home price also fell, but some signs of stabilization emerged. The inventory of unsold homes on the market declined, possibly lifting pressure on prices. At the same time, the level of sales seems to be falling within a range that suggests some stabilization. “Looking at the longer-term picture, existing home sales have been largely stable for almost a year now. The significant volume of foreclosure sales have been one reason that total sales have held up,” wrote Abiel Reinhart of J.P. Morgan Chase.
However, data on new home sales on Thursday indicated that the housing may be borrowing from Peter to pay Paul. The foreclosures may be propping up existing home sales, but it appears to be at the expense of new home sales, which tumbled 11.5% in August. “With a record number of foreclosure starts in the second quarter, new home sales are likely to remain depressed in the coming months,” said Omair Sharif of RBS Greenwich Capital.
Also on Thursday, the manufacturing sector showed continued evidence of weakness. New orders for durable goods in August shrank 4.5%, much worse than expected, and the weakness was broad based. “Unfortunately, this isn’t a case where the headline was driven down by single volatile component; excluding the volatile transportation and defense sectors orders for capital goods shrank by 2%. The weakness is distributed among the remaining components,” wrote Goldman Sachs in a research note. “In real terms the slump looks to be even worse as the durable manufactured goods price index shows continued price increases in August.”
Meanwhile, the labor market continued to face pressure. As the market awaits the September employment report next Friday, the data on weekly jobless claims dropped to their lowest level since the Sept. 11 attacks. Though the number was distorted by the effects of Hurricanes Ike and Gustav, the picture for the jobs market is bleak. “Business cutbacks should intensify,” said Bruce Kasman at J.P. Morgan Chase. “Investment spending, which has continued to expand thus far, is expected to contract at close to an 8% annualized pace in the coming two quarters. We also expect payroll losses to average 150,000 per month in the coming six months, double the pace in the first 8 months of this year, and see the unemployment rate rising to close to 7% around the middle of next year.”
Finally, on Friday came the final revision to the second-quarter gross domestic product numbers, which had posted 3.3% growth at an annual rate in the previous estimate. The number wasn’t expected to change, as the final revision to GDP usually hews pretty close to the prior release. But the number was moved down five tenths of a percentage point to 2.8% growth, as consumer spending and trade effects provided less of a boost than previously thought. Consumer spending, at 70% of GDP, has long been a driver of growth but the credit crunch and deteriorating labor market has taken a major toll. “Available data point to an outright decline in consumer spending in the third quarter, which would be the first quarterly drop in 17 years,” said David Resler of Nomura Securities.
http://blogs.wsj.com/economics/2008...le-no-matter-bailout-outcome/?mod=rss_WSJBlog
:laugh:
