Swimming Upstream

THE BE YOUR OWN ECONOMIST ® BLOG

The Lehmann Letter ©

President-elect Obama is doing all he can to build confidence that his administration will hit the deck running on January 20, 2009. His economic team is in place and he has made clear that stimulating economic recovery, not deficit reduction or balancing the budget, is his first priority.

Good for him. Everyone wishes him well.

But the statistical news remains grim. Yesterday the Bureau of Economic Analysis (BEA) confirmed that GDP fell in the third quarter. The announcement also said (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm): “Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) decreased $14.6 billion in the third quarter, compared with a decrease of$60.2 billion in the second quarter.” As a matter of fact, corporate profits were lower than at any time since the fourth quarter of 2005, almost three years ago.

The BEA also reported that consumption expenditures dropped by one percent in October (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm): “Personal income increased $42.4 billion, or 0.3 percent, and disposable personal income (DPI) increased $45.1 billion, or 0.4 percent, in October, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $102.8 billion, or 1.0 percent.” Despite income growth, consumers reduced spending. That’s a clear sign of the fear and uncertainty that grips households. They’d rather build their balance sheets than spend their income.

Today the Census Bureau released new-home sales data for October (http://www.census.gov/const/newressales.pdf): “Sales of new one-family houses in October 2008 were at a seasonally adjusted annual rate of 433,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 5.3 percent (±15.0%)* below the revised September of 457,000 and is 40.1 percent (±9.9%) below the October 2007 estimate of 723,000.”

Home sales are 40% below last year’s level and about a low as they were in the 1900-91 recession. Almost 20 years of gains are gone.

The Census Bureau also reported (http://www.census.gov/indicator/www/m3/adv/pdf/durgd.pdf): “New orders for manufactured durable goods in October decreased $12.7 billion or 6.2 percent to $193.0 billion, the U.S. Census Bureau announced today. This was the largest percent decrease in new orders since October 2006 and followed two consecutive monthly decreases including a 0.2 percent September decrease…..Nondefense new orders for capital goods in October
decreased $2.4 billion or 3.6 percent to $65.6 billion.”

Durable-good manufacturing has stalled, especially new orders for nondefense capital goods. This is a leading indicator of business capital expenditures.

There you have it: Profits, consumer spending and business capital expenditures are all down sharply. The new president is doing what he can to instill confidence in the forthcoming administration, but he’s clearly swimming upstream.

© 2008 Michael B. Lehmann