Further Evidence That We Are in a Recession

As if a horrible housing market isn’t enough of a drag on the economy, businesses are now curtailing their spending as well. In December, a survey of manufacturers indicated that their budgets are being cut, and this week we learned that service sector businesses are also contracting. The bad news: recession. The good news: additional Fed rate cuts.

Economic Growth………………………………………………………………….C-
As expected, slower economic growth was reported during the fourth quarter, with early estimates of GDP growth at just 0.6%, which is down substantially from 4.9% growth in the third quarter. Employment growth also fell sharply, falling to a year-over-year change of just 977,000 payroll jobs, or 0.7% growth. Unemployment fell slightly to 4.9%, but mass layoff events during the month of December were 20% higher than one year prior. Personal income growth fell to 5.8%, and retail sales growth has slid to a year-over-year change of 4.1%, which is below its historical average of 5.6%. Core CPI, which is a key gauge of inflation, increased in December to 2.4% its highest value since March.

Leading Indicators…………………………………………………………………D+
Nearly every one of our leading indicators performed worse, which points to continued tough economic conditions ahead. The Institute for Supply Management reported that the non-manufacturing sector contracted significantly. The Leading Economic Index has declined at an annualized rate of 2.5%, which is the largest drop since early 2001. The major stock indices fell 3-6% sequentially, and three of the four we track have shown negative returns over the last year. Residential investment continues to decline as a percentage of overall GDP, falling to 4.2%, which is its lowest share in 10 years. Oil prices continue to rise, with crude oil at $92.95 per barrel for the month, contributing to consumers’ woes. Manpower’s weaker employment outlook for the first quarter is weaker than in previous quarters, with only 22% of companies surveyed planning to add employees to their payrolls in the quarter, and 10% planning to decrease employment.

Mortgage Rates…………………………………………………………………….B+
Falling interest rates in recent weeks will help the more qualified home buyers who are in trouble refinance their way out of the problem. The surprise 75 basis point rate cut by the Fed in mid-January, followed by another 50 basis point cut a week later brought the Fed Funds rate to just 3%, which is its lowest value since early 2005. Interest rates fell across the board in response, with the 30-year fixed rate at 5.68% and the one-year adjustable rate at 5.05% at January month-end. As reported by the Mortgage Bankers Association, the percentage of mortgage loan applications with an adjustable interest rate continues to drop, reaching just 8.6% of all loans originated during the last week of January. The performance of subprime loans continues to weaken, as measured by the ABX 06-2 BBB- series index, which has declined 83% in the last year.

Consumer Behavior……………………………………………………………….C
Consumer behavior was generally weaker this month, as consumer confidence declined to 87.9, well below its long-term average of 98.6. The University of Michigan’s Consumer Sentiment index improved slightly in January from a two-year low in December, but still remains much lower than its long-term average. The Consumer Comfort index fell to its lowest monthly average in 5 years, based on respondents’ impressions of the national economy, personal finances and buying climate.

Existing Home Market……………………………………………………………D
The existing home market remains weak, with few signs of improvement this month. The for-sale homeowner vacancy rate increased to 2.8% in the fourth quarter, matching the first quarter of 2007 as the highest rate of vacancy since the Census began tracking the statistic in 1956. Tied to the increased vacancy, the homeownership rate fell to 67.8%, continuing a steady decline after peaking above 69% in this cycle. Annualized existing home sales dipped to 4.89 million, representing a 22% decline in the last year, and a declining pending home sales index means sales are likely to fall further. Prices in the resale market have fallen 6.5% in the last 12 months, according to the National Association of Realtors. A positive note in this sector is that the number of homes for sale continues its gradual decline, falling to 3.9 million homes or 9.6 months of supply, though supply still remains above year-ago levels.

New Home Market…………………………………………………………………F
The new home market weakened even further, as sales activity and prices continue to decline and levels of supply are increasing. The NAHB’s Housing Market Index, which measures sales and traffic, improved slightly to 19 from a downwardly revised December figure, but remains near its historical low. New home sales activity fell to 604,000, representing a decline of 41% in the last year and a decline of nearly 57% from its peak level in July 2005. The relative level of unsold new homes increased to 9.6 months of supply, which is the highest since October 1981. This includes approximately 3.9 months of unsold completed new homes alone. The Census Bureau reported that the median new home sales price of $219,000 represented a 10% decline over the last year, which is the worst year-over-year decline since December 1970.

Housing Supply…………………………………………………………………….F
The supply of housing continues to decline as builders show restraint in this tough market. The annual volume of new home completions fell to 1.3 million, which is the lowest total since December 1995. Housing starts continue to fall, reaching 1 million over the last 12 months, which is a leading indicator that completions are likely to continue to decline for the near future. Single-family permits fell below 700,000, which is the lowest volume since early 1991, and a 41% decline in the last year alone. Multifamily permits continue to decline as well, and the total seasonally adjusted permit activity has fallen below 1.1 million – a level not seen since March 1993.

If you have any questions, please contact Chris Porter at (949) 870-1218 or by email.