U.S. Congress Joint Economic Committee; Chairman, Sen. Charles Schumer; Vice Chair, Rep. Carolyn Maloney

WEEKLY ECONOMIC DIGEST: The Economy Remains Stalled, Facing Strong Downdrafts

May 5, 2008

ECONOMIC NEWS: Job Losses Continue, Food and Energy Prices Soar

Employment declines continue. Last week, the Bureau of Labor Statistics (BLS) reported that nonfarm payroll employment decreased by 20,000 jobs in April and the unemployment rate was essentially unchanged at 5.0 percent. In the first four months of this year, payroll employment has declined by over 60,000 jobs per month, netting 260,000 job losses for 2008 so far. Perhaps not coincidentally, consumer confidence has also declined over this period. (See Chart) Job losses continue to occur in construction, manufacturing, and retail trade. Additionally, more than half of the unemployed -- 52.7 percent -- were job losers. Those who are losing jobs are losing them for longer periods. The median duration of unemployment in April was 9.3 weeks, up from 8.1 in March. Moreover, part-time work is increasing, as individuals are seeing their hours cut back or because they are unable to find full-time jobs. The number of Americans working part-time in nonfarm positions for economic reasons is now 5.1 million, up 824,000 from one year ago.

Consumer price inflation steady.   The personal consumption expenditure (PCE) price index rose by 3.5 percent at an annual rate in the first quarter of 2008, down slightly from the 3.9 percent rate recorded in the last quarter of 2007.  Both food and energy prices increased more rapidly that the overall index.  The PCE food price index rose 4.8 percent, up from 3.6 percent in the previous quarter.  PCE energy prices increased 18.6 percent, down from 24.9 percent.  The PCE index less food and energy rose by 2.2 percent in the first quarter, down from 2.5 percent in the last quarter of 2007.

IN FOCUS: The Economy Remains Stalled, Facing Strong Downdrafts

GDP grew by only 0.6 percent at an annual rate in the first quarter of 2008, repeating the performance of the fourth quarter of 2007.  (See Snapshot)  Compared to potential growth, which the Congressional Budget Office estimates at 2.8 percent, this is a dismal showing.

Several factors helped to keep GDP growth low.  Consumer spending -- the single largest component of total demand -- increased at an annual rate of one percent, slowing markedly from 2.3 percent in the previous quarter.  Residential fixed investment declined by 26.7 percent, reflecting the continuing crisis in the housing market.  Nonresidential fixed investment declined by 2.5 percent as businesses reduced their spending on plant, equipment and software.
Growth in net exports and increased inventory accumulation by business were the principal factors offsetting the consumption slowdown and investment declines.  Without these sources of demand, GDP growth would have been negative.  Final sales to domestic purchasers, which excludes net exports and inventories, declined by 0.4 percent at an annual rate.

The slowdown in economic activity is clearly reflected in the labor market. The economy shed 20,000 nonfarm payroll jobs in March.  Jobs lost during 2008 now total 260,000.  The Federal Reserve, responding to these developments in the real economy, as well as to continuing problems in the credit markets, lowered the target Federal funds rate by ¼ percent at the meeting of the Federal Open Market Committee (FOMC) on April 30.  The target rate is now at 2 percent, and is down 3.25 percent from its level in August 2007.

The Fed’s assessment of the risks to the economy remains distinctly downbeat.  A statement released by the FOMC indicated the Fed’s belief that the recent substantial easing of monetary policy, combined with efforts to foster liquidity in financial markets, should help to produce “moderate growth over time and mitigate risks to economic activity.”  However, the statement voiced continuing concerns about household and business spending, financial market stress, “tight” credit conditions, and the continuing contraction in the housing market.

The Fed’s concerns about risks are clearly visible in economic data.  Housing is a very clear example.  The Case-Shiller 20-city index of housing prices has fallen 14.8 percent since its peak in 2006.  As prices fall, many potential buyers stand on the sideline.  At current sales rates, home builders have an 11 month supply of new homes, the largest inventory level since 1981. 

In addition, many mortgage holders are recognizing that their homes are now “underwater” or worth less than the value of their mortgage loans.  For example Credit Suisse has estimated that in December 2007, thirty percent of subprime borrowers – approximately 1.5 million households – were in a “negative equity” position.  Negative equity significantly raises mortgage default rates, which implies that the supply of houses is likely to increase as foreclosures rise.

Given these and other indicators of downside risk, the somewhat sobering assessment by the Fed seems very understandable

THE WEEK AHEAD

 
Wednesday, May 7           
Productivity and Costs (1st Quarter Preliminary)
    Pending Home Sales (March 2008)
    Consumer Credit (March 2008)
Thursday, May 8
  Wholesale Trade Report (March 2008) 
Friday, May 9   US International Trade in Goods and Services (March 2008)

ECONOMY AT A GLANCE

MONTH QUARTER YEAR
KEY INDICATORS Apr Mar Feb Q1 2008 Q4 2007 Q3 2007 2007 2006
Real GDP (% growth) - - - 0.6 0.6 4.9 2.2 2.9
Unemployment (% of Labor Force) 5.0 5.1 4.8 4.9 4.8 4.7 4.6 4.6
Labor Productivity Growth (%) - - - #N/A 1.9 6.3 1.8 1.0
Labor Compensation Growth (%) - - - 3.0 3.4 3.1 3.4 3.1
CPI-U Inflation Growth (%) n.a. 3.7 0.0 4.3 5.0 2.8 2.9 3.2
Core CPI-U Inflation Growth (%) n.a. 2.4 0.0 2.5 2.5 2.5 2.3 2.5
 
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