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2009(I) GDP Release, The April Job Report, and Other Recent Economic Releases: Any Signs of Hope?

POV 05.11.2009


When the history of the current economic tsunami is written decades from now, the first quarter of 2009 may be viewed as the pivotal point in the annals of major financial institutions and in the overall economic cycle. The bad news is that the economic results from the first three months were depressingly poor (see the discussion of those results below.)  Yet, a closer inspection of those results combined with a glimpse of the early indicators in the second quarter, gives some, albeit faint, indication of the beginnings of a recovery.

2009(I) Results: The Contraction Was Broad-Based

The initial estimate from the government of the first quarter gross domestic product showed a slowing in the economic decline with a negative 6.1 percent gross domestic product compared with the negative 6.3 percent in the fourth quarter. Those headline statistics were somewhat misleading: While the fourth quarter GDP decline of 6.3 percent certainly was steeper, the first quarter decline of 6.1 percent was broader. Recall the GDP equation is:

GDP= C+I+G+(X-M)

where C is consumer spending, I is Investment Spending, G is government spending, X is exports, and M is imports.

Three of the four major components of GDP created the 6.1 percent decline in the first quarter GDP. Only consumer spending registered positive numbers; but that component, which traditionally accounts for two-thirds of GDP, showed a disturbing trend when spending was examined on a month-to-month basis.

Business Investment Plummets: Is Commercial Real Estate the Next Shoe to Drop?

Business investment, which historically has been the bedrock in an economic recovery, plummeted 37.9 percent in the first quarter compared to 21.7 percent in the fourth quarter. Many companies slashed inventories to bare-bones levels in order to reduce carrying costs. Equipment and software investment fell 33.8 percent compared with the 28.1 percent decline in the fourth quarter. Investment values in nonresidential structures—primarily commercial real estate—nosedived by 44.2 percent compared with only a 9.4 percent drop in the fourth quarter.

The decline in business investment was viewed by many as pointing to a quicker recovery than the third or fourth quarter recovery that many economists have been forecasting. Why the seemingly contradictory conclusion? The reasoning is based on the premise that even a small gain in consumer spending will translate into quick and substantial sales and profit gains for businesses that have also been cutting administrative and sales overhead. That is sound reasoning, but it is predicated on sustained consumer spending. Moreover, it does not address the huge 44.2 percent decline in commercial real estate which is expected to hit regional and community banks harder than the financial services goliaths.

Exports Plunge

Exports collapsed during the first quarter, falling 30 percent compared with the 23.4 percent decline in the fourth quarter. This component of economic expansion or contraction is tied to the value of the dollar. Some of the huge decline could be blamed on the stronger dollar, but the major force driving exports lower was the global economic recession which reduced demand worldwide. The International Monetary Fund has forecasted that 2009 will mark the first downturn in world trade since the onset of the Great Depression.

Federal, State and Local Governments Curtail Spending

While the prospects of federal budget deficits cloud even the most optimistic voices, government spending in the first quarter declined at the Federal, state and local levels. The biggest impact came from the pullback in spending by Uncle Sam as a result of the lower defense spending and the delay in stimulus dollars moving from paper into real disbursements to individuals and businesses.

On the state level, lower tax receipts from individuals and businesses hit by the recession depressed spending by the states, which lack the luxury of deficit spending that Uncle Sam enjoys. Lower tax revenues due to lower real estate values and fewer real estate transactions decreased spending by local jurisdictions.

A Troubling Trend in Consumer Spending

Those big declines left consumer spending as the only component in positive territory for the first quarter and the only muscle to pull the economy from the recession trough. While the numbers for consumer spending looked good, the trend was troubling.

The GDP report showed real personal consumption expenditures increased 2.2 percent in the first quarter, in contrast to a decrease of 4.3 percent in the fourth quarter. Spending on durables surged 9.4 percent compared to the 22.1 percent plunge in the fourth quarter. Unfortunately, those first quarter consumer spending statistics were misleading. While spending for the quarter increased, most of the gains came in January. The month-to-month pattern of consumer spending for February and March revealed ongoing weakness. Worst still, consumer spending declines were more pronounced as the quarter unfolded.

The separate release of the monthly report on personal income and outlays showed real consumer spending, adjusted for price changes, declined 0.2 percent in March after increasing 0.1 percent in February and advancing even more in January. That report suggested the consumer spending trend was down not up.

One reason for the decline was that real disposable personal income (DPI), which is income adjusted for inflation and taxes, was flat in March. Moreover, personal savings as a percent of disposable income rose to 4.2 percent in March compared to 4.0 percent in February. While an increase in the savings rate is a long-term positive force for the nation’s economic foundation, in the near-term the economy needs consumers to spend more and save less.

Early Second Quarter Results for 2009 are Promising

One cause for optimism as of this writing early in the second quarter is the reversal of the monthly declines in certain key indicators.  For example, the Institute of Supply Management’s (ISM) two key indicators of the health of the manufacturing and service sectors are showing signs of recovery. The ISM Manufacturing Index which stood at a level of 50.0% late last summer and had plummeted to a low of 32.6% in December 2008 has increased steadily during the early months of 2009 to 40.1 for April, 2009.  Similarly, the ISM Service Index is showing signs of recovery by increasing in April to 43.7% from the March level of 40.8%. Admittedly, while the gain is a welcome sign that the recession may be bottoming, the Index is well below the level of an expanding economy. Our point is any positive news is good news.

Consumer confidence as measure by the Conference Board’s Consumer Confidence Index and The Expectations Index soared in April. The confidence index jumped 12 points from 29.5 to 39.2, and the expectations index, a measure of how shoppers feel about the economy over the next six months, exploded to 49.5 from a 30.2 level in March!

The May Job Report:  Evidence of a Recovery?

We delayed the release of this alert to be able to include the employment results from early May. The latest jobs report shows signs of a weak economy, but also one that may have already begun to recover.  The reader should recall that during past recessions the U.S. unemployment rate continued to rise even after the official ending month of the recession. This phenomenon is most likely the result of employers requiring proof of lasting sales increases before they end their layoffs and begin the process of adding to their staffs. The job report confirmed the optimism stimulated by indicators released earlier in the week.

Nonfarm payroll employment continued to decline in April with a loss of 539,000 jobs, but the decline was less than the revised loss of 699,000 jobs in March and the projected decline of 600,000 jobs. The unemployment rate rose from 8.5 to 8.9 percent, which was in line with projections. Since the recession began in December 2007, 5.7 million jobs have been lost. In April, job losses were large and widespread across nearly all major private-sector industries. Employment in manufacturing fell by 149,000 over the month, with widespread job losses among many sectors. Construction employment declined by 110,000 in April, with losses spread throughout the sector. Over the past 6 months, job losses have averaged 120,000 per month, compared with 46,000 per month from December 2007 through October 2008.

The professional and business services industry lost 122,000 jobs in April. This sector has shed an average of 139,000 jobs per month since October 2008.  Half of the April decline occurred in temporary help services. Employment in retail trade fell by 47,000 in April with 14,000 job losses in department stores, 9,000 losses in automobile dealers and 8,000 in building material and garden supply stores. Wholesale trade employment was down by 41,000 over the month, with much of the decrease among durable goods wholesalers.

Employment in financial activities declined by 40,000 during the month of April. Job losses occurred throughout the sector, including real estate, rental and leasing. Healthcare was among few sectors in the private sector that had job increases. Healthcare employment grew by 17,000 in April. Job gains in health care have averaged 17,000 per month thus far in 2000, down from an average of 30,000 per month during 2008. 

Outlook for the Recovery

As the second quarter unfolds, the big debate is centering on the recovery—when will it be, how fast will it be and how strong will it be. The second quarter is projected to post only slightly negative growth of 1.0%. That would mean that the first quarter could be the last of the big blowout negative numbers.

Third quarter estimates are for minimal positive growth of 0.5 percent to 1.1 percent growth, an anemic pace, but one that lands on the positive side of the economic ledger. While future quarterly GDP growth faces a variety of pitfalls—including the rising cost of money for the government, the specter of inflation, the impact of crumbling commercial real estate values and the continued weakness abroad in demand for US products and services—the events of the first quarter 2009 may prove to be the turning point in the saga of the breakdown of the financial markets and the collapse of economic growth.