Recent Reports Show Accelerating Downturn

Ugh.

Last week brought bad economic news pretty much across the board. Consumer spending, manufacturing, and housing indicators pointed to an accelerating downturn in economic activity.

As we review the indicators each week, it's worth noting that the economic news we are continually receiving is not as timely as the newspaper headlines might suggest. Now, in late October, most of the latest economic "news" is actually from reports on events that happened a month or two ago. In the current environment, it seems probable that the latest economic developments are at least as bad as the data for August and September. Last week was notable in part because we also had survey results for consumer and housing activity from early October, and those results were especially weak.

Consumer. Perhaps the most important report on the consumer front was not an actual spending number, but a fuzzy, touchy-feely survey of consumer sentiment. The University of Michigan's Consumer Research Center has long conducted a careful survey of consumer attitudes and buyer intentions, and the latest report provided a dismal reading. The survey's overall index came in at 57.5 in early October. If results for the balance of the month are in line with the preliminary reading, the October decline would be the worst in the history of the survey. The index had recovered somewhat in August and September, but the early October reading fell back in line with results in June and July, which in turn were the most depressed levels since the nasty 1980 recession.

Retail sales were already in bad shape, even before the swoon in sentiment following the market turmoil in early October. On Wednesday last week, the Commerce Department reported that retail sales fell a sharp 1.2% from August to September, the third consecutive monthly decline. We haven't had a string of three straight monthly declines like that since the early 1980s. The chart below shows the year-over-year change in retail sales, both in total and after stripping out the gasoline station and grocery store categories, where prices had been rising relatively rapidly. Things have clearly deteriorated in 2008, especially lately.

Manufacturing. Purchasing manager surveys in Philadelphia and New York were also released last week, as well as the Federal Reserve's regular monthly report on industrial production. The overall index for the Philadelphia survey came in at its worst reading since the 1990 recession, while the New York "Empire State Index" hit its lowest level since the survey started in 2001. The Fed's industrial production index also had a sharp decline, partly due to some special factors including the impacts of an aircraft production strike and hurricanes in the Southeast. Still, the decline in September was broad-based by industry, and the overall decline was the sharpest since the 1973-75 recession.

Housing. There were two important housing indicators last week--the monthly housing starts report and a survey of homebuilder expectations. The Commerce Department reported that housing starts fell to their lowest seasonally adjusted annual rate since January 1991. It's been a long, hard downward plunge in starts in the last couple of years.

In turn, the National Association of Homebuilders reported that its "index of homebuilder optimism" plunged to record lows in early October.

Well, what do we have to look forward to this week? Maybe the best news is the scarcity of data. The Conference Board reports its index of leading economic indicators on Monday, and we will take a close look at this index and its components next week. The CPI and PPI came out last week, and the recent declines in energy prices were reflected in better news on the inflation front. We will also take a closer look at recent inflation trends next week.