"US Economy in Brief", March 2009

"A year after the collapse of Bear Stearns and six months after the demise of Lehman Bros., the global economy is still adjusting to the shock of the loss of easy credit, and perhaps of innocence.Just as you'd expect, some of the adjustments are pretty far along. Most have further to go:

• Home building has been shrinking for about three years, with new construction down nearly 80% from the peak.

• The manufacturing sector, which had less overproduction to cut, has been contracting for 18 months, with output down 13%.
• Household borrowing has swung from adding $1 trillion in new debt every year to actually paying down debt in the last quarter of 2008.

The adjustments have been painful, but necessary. That pain has gotten us closer to the bottom, closer to the time when we can think again about rebuilding the economy. Inventories in housing and manufacturing remain far too high, but production of homes and cars has already been cut far below the pace needed for normal growth and replacement. U.S. economic data to be released in the coming week are expected to show further declines in the output from manufacturing and housing as businesses struggle to bring output back into line with sales. The weekly calendar also brings the latest report on the consumer price index.

Housing: Starts on new homes probably fell another 3% in February to a seasonally adjusted annualized rate of 452,000, according to the economists surveyed by MarketWatch. The report will be released at 8:30 a.m. Eastern on Tuesday. Starts have plunged more than 39% in just the past three month to January's level of 466,000. Starts have reached record lows in each of the past four months. The stock of unsold new homes would take more than a year to sell at the current sales pace. Builders are competing against a flood of foreclosures, short sales and desperate owners of older homes. Home builder sentiment is extremely depressed. "Falling household net worth and tight credit conditions will also weigh on demand," said David Rosenberg, a top economist for Bank of America/Merrill Lynch. Still, some economists believe starts may have increased slightly in February, as warmer-than-usual weather may have pulled some building forward. "In March, however, the slide will continue," said economists for IHS Global Insight. "A bottom in construction activity may be closer than many expect," wrote economists for Wachovia. "However, once we reach a bottom, the recovery may be extremely weak and agonizingly slow."

Manufacturing: Industrial production is expected to decline 0.8% in February after plunging 1.8% in January. The figures will be released on Monday at 9:15 a.m. Eastern. Hours worked in manufacturing fell 2% in February, signaling another big loss in output. Detroit could make a positive contribution for a change. Production of motor vehicles collapsed in January as most of the automakers shut down for much of the month in a bid to work down their inventories. Production rose from 3.7 million annualized in January to "still awful" 4.5 million annual rate in February, Global Insight economists said. Outside of autos, "manufacturing will suffer yet another dismal month of loss," they said. The global downturn has hit U.S. exporters hard. Export volumes fell a record 8.6% in January, although it looks worse than because of a drop in auto parts exported to plants in Mexico and Canada. Output of machinery, high-tech and aircraft could be hit by the drop in global sales. Warm weather probably cut into utility output.

Inflation: For the second month in a row, rising gasoline prices pushed up the consumer price index, economists said. The consensus forecast looks for the CPI to rise 0.3%. Core prices, which exclude food and energy to get a better gauge on underlying inflation, probably rose just 0.1%. The report will be released at 8:30 a.m. on Wednesday. Core inflation is running about 1.7% per year, and could fall to 0.5% by the end of the year, wrote economists for Citigroup Global Markets. "Given the size of the output gap and the years it probably will take to eliminate it, the inflation rate likely will continue to slide in 2010 toward zero."

-Rex Nutting is Washington bureau chief of MarketWatch.
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