Wednesday, March 28, 2007
Weak, Weak, Weak, And The Word Is Said
CHRIS RUPKEY, SENIOR FINANCIAL ECONOMIST, BANK OF TOKYO/MITSUBISHI-UFJ, NEW YORK:It really was weak. Gentle Ben duly gave his outlook (see CR here and here for excerpts & commentary). What struck me is that Gentle Ben acknowledged that there was "weakness" in housing and spillover to consumer spending and employment, plus a recent problem with manufacturing, yet still forecast moderate growth.
"It looks like orders are declining quite sharply ... This is very weak. It's persistent two months in a row.
"This is what it looks like when we are going into a recession. I'll be surprised if we don't.
"This means about 1-1/2 percent GDP. It's a disappointing report for the economy and the outlook."
I'm going to repeat myself from a few days ago. Retail showed that price-adjusted consumer spending on basics (groceries, gas) was negative YoY. Housing is still declining. Employment will follow shortly, although judged by weakness in remittances to Mexico, sub rosa employment or earnings is already affected. The latest durable goods report does seem to confirm that the manufacturing slump may well be a recession. Even by the most conservative estimates, building, consumer spending and manufacturing make up over 70% of GDP. I cannot construct a scenario in which all three are in decline but the economy continues to grow.
What really shocked people is that the January advance durable goods report was revised down to -9.3% for new orders. New orders rose in Feb, but not by much and they fell .1 if you exclude transportation. In fact, if you excluded aircraft, this is the fourth drop in five months.
Also, the unhappy suspicion that this report may be revised down also is probably generating even more nerves.
Inventories continue to increase:
Inventories of manufactured durable goods in February, up twelve consecutive months, increased $0.5 billion or 0.2 percent to $298.0 billion. This followed a 0.4 percent January increase.Inventories need to fall soon for new orders to rebound. Read the Bloomberg headlines - Walmart shares drop, Circuit City announces that it will be cutting thousands of jobs. It is very hard to make lemonade out of this bucket of lemons. The market has been valiantly adding sugar since the end of March, but I think the sourness is beginning to prevail. Companies vulnerable to a decline in consumer spending are going to have a very, very tough year both on Wall Street and Main Street.
"ONLY $900,000! BUY NOW, BEFORE PRICES CAN GO UP! BECAUSE PRICES HAVE NOWHERE TO GO BUT UP! UP! UP! UP! UP! BUY NOW OR BE PRICED OUT FOREVER! DON'T BE LEFT BEHIND!"
While the first bank repos are starting to show up, here and there down my street...
When the market gets truly bad, the marketing gets truly frenzied.
Setting up the groundwork for the Big Government Bailout coming just before or promised after the 2008 Elections.