Recession Under Way?

Last Week
Employment, housing, and consumer spending indicators continued to suggest a recession in overall economic activity is under way in the United States.

Labor Markets. The latest BLS report indicated that U.S. nonfarm payroll employment declined for the sixth consecutive month in June. Since the 1960s, we've never had a string of six monthly declines without a recession being under way at the same time. Within the overall results, employment in the temporary-help services industry (a fairly reliable leading indicator, particularly on the downside) continued to decline in line with the pace earlier this year. (Note: The annual benchmark revision to the payroll data arrives in February each year. The data are revised as the BLS adjusts its sample-based estimates to more complete "universe" counts from unemployment insurance tax records that are available only on a lagged basis. This annual revision can sometimes be dramatic, especially around economic turning points. The BLS releases a preliminary estimate for this revision in early October, and significant downward revision is possible.) In the separate BLS household survey, the unemployment rate remained unchanged at 5.5% in June, but only after spiking higher from 5.0% in April to 5.5% in May. The unemployment rate's most recent low came in March 2007, at 4.4%, and the increase in the unemployment rate since then has been in line with the increases in past recessions.

Traditional indicators of print-based help-wanted advertising have been very weak in the past year, and it isn't all due to the problems facing print media. The Monster.com index of online advertising for job openings has been posting year-over-year declines of about 10% in recent months.

Housing. The National Association of Realtors' "Pending Home Sales" index fell again in May, about twice as much as analysts forecasting the index had expected. The index, which measures contracts signed but unclosed, has fallen about 15% over the past year. Separately, the NAR revised its forecast for 2008 existing home sales downward again, and now expects sales to be down 6% in 2008, with a rebound still expected in 2009.

Consumer. Large store chains reported June sales results July 10. Overall sales were boosted by government checks and pent-up demand arriving with seasonally-tardy warm weather. Discount stores continued to post relatively strong results, a measure of continued underlying consumer weakness.

Consumer confidence has been swan-diving. In June, the University of Michigan's index of consumer sentiment fell to its lowest level in 28 years, and the preliminary results for early July released last Friday were little changed from June.

Overall/Inflation. Our standard government statistics are based on sample surveys that don't necessarily cover the whole economy well all of the time. The statistical dragnet doesn't always pick up timely and/or accurate results from small businesses, for example. One survey that helps fill in the gaps is done by the National Federation of Independent Business. The NFIB has long conducted a monthly survey of small-business owners, and the latest results for the overall "optimism index" produced by this survey were described by the survey organizer as a "recession level reading." Small-business owners' expectations of future conditions have fallen especially sharply, reaching close to their worst levels (1980-1982) in the survey's history. The percent of firms reporting "inflation" as their worst problem since 1983 has averaged only 3%. But this number has been rising sharply in 2008, climbing from 8% in February to 20%, its highest level in 20 years. The perception of inflation as a problem is also reflected in a significant increase in net percent of firms reporting declining earnings, even as prices charged to customers are rising. The net percent of firms reporting earnings improvement has fallen to 1980-1983 levels during 2008.

More bad "private-sector" news on inflation has been coming from surveys of purchasing managers. The "prices-paid" component of the national ISM manufacturing survey climbed above 90 in June, reaching its highest level since 1974.

This Week
We've got a heavy data week ahead, with important reports coming on housing, manufacturing activity, consumer spending, and inflation.

Overall/Inflation. The inflation area gives us two of the most important reports this week--the PPI and the CPI, which come out Tuesday and Wednesday, respectively. The Federal Reserve releases the meeting minutes for the FOMC June meeting on Wednesday.

The Producer Price Index for finished goods (measuring prices received for some goods and services) has been rising at a faster pace in recent months, while the PPI's indexes for intermediate and crude goods (measuring prices received at earlier stages of processing) have risen at especially rapid rates in 2008. The PPI for intermediate goods for May came in 13% above May 2007, and the PPI for crude goods came in 42% above the year-earlier level. It bears watching whether such rapid increases continue in these areas, and whether they begin feeding into the PPI for finished goods and the overall CPI as well. The CPI has been relatively sedate this year, although year-on-year increases have been rising up to the 4% level in recent months.

As noted above, private surveys seem to be depicting a more dire inflation picture in the U.S. than the government data.

Consumer. The U.S. retail sales report comes out Tuesday.

Excluding gas stations and grocery stores, where prices have been rising rapidly, retail sales growth has weakened significantly this year. It seems to make sense to keep watching underneath the overall total and stripping out those sectors.

Manufacturing. The Federal Reserve's monthly industrial production report comes out Wednesday. The "Empire State" survey of purchasing managers in manufacturing enterprises in New York comes out Tuesday. The Philadelphia Fed releases its purchasing managers survey on Thursday.

Industrial production peaked most recently in January 2008, and has been falling since then. The rate of decline has not been as bad as in 2001, but the estimates for industrial production are based in part on employment data, and both are subject to revision. It will be worth watching durable goods industries within the overall industrial production data in Wednesday's report.

Housing. The National Association of Home Builders releases its Housing Market Index on Wednesday. The Commerce Department releases the monthly housing starts report on Thursday.

Housing starts have fallen very, very sharply in the past year. Where's the bottom?