Reply #30: From RGE Monitor Newsletter [View All]

[Demeter]

It is quite an eventful week in terms of data releases in the U.S. It kicked off yesterday with the S&P Case-Shiller home-price index and the consumer confidence index by the Conference Board showing rapidly falling home prices and rising consumer worries about jobs and incomes. Today we will all follow with attention the advance estimate of Q1 real GDP growth and the FOMC decision. Thursday the ISM Manufacturing index – among other reports – will grab the attention of markets and analysts. The important employment report will then close the week on Friday.

We are in the third year of the U.S. housing recession and the bottom does not seem to be in sight yet. Housing starts (and completions) are falling but not yet fast enough to offset the sharper fall in demand (home sales) and therefore to insure a fast absorption of the rising home inventories that keep putting downward pressure on prices. In fact, more dismal news came yesterday from the S&P Case-Shiller home price index – now down almost 15% from its peak – according to which not only do house prices across the nation's biggest cities continue to fall but they are actually accelerating on their way down. Take a look at: “How Much Will U.S. Housing Prices Fall and How Long Will the Downturn Last?”, “Is the Worst Over Or Is the U.S. Housing Recession Getting Worse?” and “Are U.S. Homes Empty? A Look at the Homeowner Vacancy Rate”

While the end of the housing recession is nowhere in sight, Q1 might officially mark the first quarter of negative real GDP growth since 2001, or will it? Estimates for real economic growth for Q1 range from a negative -1.3% all the way to a positive 1.5%. Optimists argue that improved net exports and the strong rebound in inventories in Q1 – after large declines in Q4 – will sustain growth; but such excessive inventory build-up would bode poorly for Q2 growth. On the other hand, housing woes, the retrenchment in consumption and slowdown in business investment call for weak or possibly negative growth. The consensus foresees weak but positive GDP growth of 0.3%. Stay tuned for the Q1 real GDP numbers and the market reaction today!


While spikes in jobless claims and higher long-term unemployment show a sharp slowdown in hiring, lay-offs especially in the financial sector have also intensified in the recent weeks. Unemployment has also increased in states hard hit by housing, financial and auto woes. As the effects of the financial crisis are spreading to other sectors of the economy, the labor market is only expected to deteriorate further in the coming months, after a three-month consecutive payroll decline in Q1 2008. Given that labor market is a lagging indicator and subject to slow recovery, stronger job losses ahead, especially in high-paying sectors will weigh down heavily on the liquidity-constrained consumers.