The Economic Hits Keep On Coming

Some people hear the word “hit” and quickly think of positive uses for the word, such as hit song or “one hit wonder.” In reviewing recent economic and other data thus far in May, I see the negative use – to strike or deal a blow – as more fitting when talking about the domestic economy. While there were some bright spots, the vast majority of the data was unfavorable in my opinion and points to a continued economic soft patch. I say continued because Gross Domestic Product (GDP) in the first quarter of 2011 slowed to a revised +1.8 per cent compared to +3.1 per cent in the last quarter of 2010.

While there was a lot of data to chew through, the three that give me the greatest concern are manufacturing, housing and jobs. I say manufacturing because that sector has been a key factor in the economic rebound over the last several quarters, however new data suggests a weakening trend. According to The Federal Reserve Bank of Philadelphia, Chicago, and Richmond, manufacturing activity decreased for the month of April/ May and is at its lowest expansion rate since the fourth quarter 2010.
In the text of the Richmond Federal Reserve Bank’s manufacturing sector activity survey for May we learned that not only Didi the overall activity index turn negative due to weak shipments and new orders, but also that districts under the Richmond Fed’s purview reported that capacity utilization turned negative and backlogs fell further. These regional commentaries were affirmed by the greater than expected drop in Durable Goods Orders in May as reported by the Commerce Department.

This Philadelphia Fed’s Business Outlook Survey for May depicted a weaker manufacturing economy. More specifically, the survey’s diffusion index, which is its broadest measure of manufacturing conditions decreased from 18.5 in April to 3.9, the lowest reading since last October. While the month over month decline in May is troublesome, what is more alarming is the sharp fall in survey’s future general activity index, which fell by 17 in May to 16.6 after registering a 29 point decline in April.

Turning to housing, a sector that has been weighing on the economic recovery for a number of quarters, it remains poised to be a drag over the next several quarters. As more cities across the nation experience double dips in home prices, more than half (54 per cent) of U.S. adults believe recovery in the housing market will not happen until 2014 or later, according to survey released by RealtyTrac. According to Rick Sharga, senior vice president at RealtyTrac, “With the amount of inventory we have left, it tells me in the best-case scenario we’re probably looking at 2014 before we start to see home price appreciation on a national basis.”

More than a few people are looking at falling home prices and are wondering what it will take to get housing demand boiling again. Many consider mortgage rates as a key driver in home sales, however as I learned more than a few years ago it’s job creation that is a far greater stimulus on regional housing demand.
No jobs equates to a tepid housing demand in a normal economic environment.

With that as a cue, early in May we received an “OK” April employment report that saw better than expected private sector job creation in the month, but the overall unemployment rate ticked back up to 9.0 per cent in April from 8.8 per cent in March. While there have been a few reports out touting an improved job market, one has to wonder then why average weekly jobless claims rose to 435,000 in May from 406,000 in April. Keep in mind too that states, which are running budget deficits and need to close the gap given the requirement to balance their budges, are more likely than not going to make cuts to get there. Don’t forget the Federal budget issues. All in all, I would not rule out further public sector job cuts as those budgets get scrutinized.

No wonder the National Association for Business Economics recently cut its 2011 GDP forecast.
While the NABE reduced its real gross domestic product (GDP) forecast for 2011 to up 2.8 per cent from its February prediction of up 3.3 per cent, that revision largely reflected weaker-than-expected growth in the first quarter of 2011. Keep in mind that it was only several months ago that economists raised their GDP forecasts for 2011.

With economic data in April and May trending lower, how long until the NABE and other forecasters start to revisit their expectations for the second quarter of 2011 as well as the back half of the year?

This column originally appeared May 26 in The Washington Times.