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Key U.S. Data Releases and Events21 Mar 08One of the key issues that we will be tracking next week is whether the recent sharp drop in spreads on mortgages and other term borrowing marks a decisive change in recent trends, or just a technical pull-back. Otherwise, next week's economic indicators are not expected to alter much the picture of an economy that is navigating through a recession in the first half of 2008. U.S. financial markets saw some abrupt reversals from recent trends in the past week—gold and crude oil prices collapsed, while the U.S. dollar and industrial equity markets rebounded. This radical shift was likely triggered by the recent bold moves of the Federal Reserve to lower benchmark interest rates by 75 basis points and provide massive liquidity support for the banking system and the securities dealers. With the Fed's pledge to accept an unusually broad range of collateral, including highly rated residential and commercial mortgage-backed securities, borrowing spreads on these securities—which had run up to historically high levels in February through mid-March—declined sharply over the past week. One of key indicators we will be tracking next week is whether this sharp drop in spreads marks a decisive change in recent trends, or just a technical adjustment. It is clear that the Federal Reserve is pulling out all the stops to unlock trading and arrest severe price deflation in these securities, and if they are successful, this could mark an important watershed. Markets have concluded for now that it is probably wise not to bet against the Fed at this particular juncture. Next week's reports on February durable goods orders, new and existing home sales, real consumer spending, and March final consumer sentiment are not expected to alter much the picture of an economy that is navigating through a recession in the first half of 2008. KEY U.S. DATA RELEASES AND EVENTS THIS WEEK Monday, March 24 – Existing Home Sales (Feb.) Global Insight: 4.84 Mil. What to Look For
Implications Home sales in February benefited from good weather, and from low mortgage rates in January (mortgage rates dropped 70 basis points between Christmas and the end of January, although they have since bounced back). We are nonetheless expecting a drop in both existing and new home sales because of the credit squeeze, which remained acute through mid-March 2008. Wednesday, March 26 – Durable Goods Orders (Feb.) Global Insight: +0.5% What to Look For
Implications Durable goods orders are expected to have barely remained in positive territory for February, on a sharp rebound in aircraft orders, but little else of significance will likely be positive. Nondefense capital goods orders (excluding aircraft) should sink sharply, falling close to 3.0%. Key industries such as building materials, construction machinery, and motor vehicles are still experiencing severe downward cyclical pressure, while profit margins have been squeezed by higher input costs. Those forces are restraining the growth of business equipment and software spending. Wednesday, March 26 – New Home Sales (Feb.) Global Insight: 0.570 Mil. What to Look For
Implications Home sales in February benefited from good weather and from low mortgage rates in January (mortgage rates dropped 70 basis points between Christmas and the end of January, although they have since bounced back). We are nonetheless expecting a drop in both existing and new home sales because of the mortgage credit squeeze, which remained acute through mid-March. Thursday, March 27 – Real Gross Domestic Product (Final Q4) Global Insight: +0.5% What to Look For
Implications The sharp slowdown in fourth-quarter GDP growth is ancient history by now. We expect a small revision in growth to 0.5%, from 0.6% in the preliminary estimate. Construction spending in all major categories—private residential, public nonresidential, and public—is expected to be revised down, foreshadowing declines in all of these categories during the first quarter. Friday, March 28 – Personal Income, Consumption, and Prices (Feb.) Personal Consumption, Nominal Personal Consumption, Real Core PCE Price Index Personal Income What to Look For
Implications Average hourly earnings growth in February was steady, at 0.3% month-on-month, but overall hours worked fell 0.1%. Private wage and salary disbursements, which make up 45% of personal income, should increase only about 0.2%. Special adjustments kept transfer payments down in January, and we expect a bounce back in February. Nevertheless, the growth of personal income is in the process of slowing down in the first half of 2008. Sales used to estimate consumer spending in the GDP accounts (excluding automotive dealers and building and garden supply stores) fell 0.2%, and auto sales were unchanged. We are still expecting a small gain (0.1%) in consumer spending driven by services. Adjusted for inflation (which temporarily disappeared in February), spending should also be up 0.1%. Real spending has been about flat for three consecutive months, and that adds up to a very weak first quarter for real consumer spending. Look for the core PCE to decelerate in February, rising just 0.1%, down from the 0.3% pace set in the previous month. On a year-on-year basis, core PCE inflation will edge toward the Federal Reserve's 1–2% comfort zone and drop to 2.1%, from the 2.2% rate over the previous two months. Although significant risks to the inflation outlook remain, the downward move delivers a modest lift to a Fed faced with one of the most challenging policy environments in its near 100-year history. Friday, March 28 – Univ. of Michigan's Index of Consumer Sentiment (Final Mar.) Global Insight: 69.0 What to Look For
Implications Consumer confidence, already in a recessionary range, is expected to edge lower in March. Both the Conference Board and the Reuters/University of Michigan indexes are likely to lose another 1–2 points after steep declines in February. Rising unemployment insurance claims, higher gasoline prices, the collapse of Bear Stearns, and the deepening financial crisis will create more anxiety among consumers, leading to cutbacks in discretionary spending during the first half of 2008. by Brian Bethune and Nigel Gault
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