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W
EEKLY
E
CONOMIC
&
 
F
INANCIAL
C
OMMENTARY
 
 January 16, 2009
U.S. Review Global Review
CPI vs. Core CPI
 Year-over-Year Percent Change0%1%2%3%4%5%6%9294969800020406080%1%2%3%4%5%6%CPI: Dec @ 0.1%Core CPI: Dec @ 1.8%
 
Central Bank Policy Rates
0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%20002001200220032004200520062007200820090.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%US Federal Reserve: Jan @ 0.25%ECB: Jan @ 2.00%Bank of England: Jan @ 1.50%
 
ECB Cuts Rates Yet Again
As widely expected, the EuropeanCentral Bank cut its main policyrate by 50 bps at its meeting thisweek. The two-week repo rate nowstands at 2.00 percent, matching thelow set in 2003-04. As we discussbelow, we believe the ECB willneed to ease policy even further.In explaining the decision to cutrates in the post-meeting pressconference, ECB President Trichetreferenced the “significantslowdown” that is underway in theEuro-zone. “Downturn” wouldprobably be a better word todescribe what is transpiring atpresent in the Euro-zone economy.As shown in the top chart onpage 4, the purchasing managers’indices for the manufacturing andservice sectors have plunged intodeep recession territory over thepast few months. Indeed, “hard”data from November confirm justhow weak the Euro-zone economyis at present. Industrial production
Please turn to page 4
 
Recent Special Commentary
That Deflating Feeling Lingers
Falling energy prices and dramaticdiscounting by retailers pulled theheadline inflation figures muchlower during December. Fallingprices make last month’s retail salesand inventory figures, as well asNovember’s trade data, muchharder to interpret. There is noquestion real GDP declinedsubstantially during the fourthquarter. Our own estimate calls fora 5.3 percent decline at an annualrate and most forecasts call for adrop somewhere between a five andsix percent annual rate.We have noted previously that wedo not believe the economy willendure a sustained problematicperiod of deflation. We areexperiencing deflation, however,with prices of many goods,commodities, and assets falling.Wages and salaries are also beingcut, although falling prices maytemporarily offset some of thisimpact. In fact, real hourly earningshave soared in recent months as theheadline CPI declined.The Consumer Price Index fell forthe third straight month and theyear-over-year growth rate fell tonearly zero. The drop in energyprices and a global recession havecombined to push inflation lower.
Please turn to page 2
DateTitleAuthors
January-16A Holiday Season for the Record BooksVitner & YorkJanuary-15Global Chartbook - January 2009Bryson & QuinlanDecember-18Inflation Chartbook - December 2008Vitner, York & WhelanDecember-16Global Chartbook - December 2008Bryson & Quinlan
 
 
U.S. Forecast
ActualForecastActualForecast200820092005200620072008200920101Q2Q3Q4Q1Q2Q3Q4Q
Real Gross Domestic Product
1
0.92.8-0.5-5.3-4.0-1.9-0.50.92.92.82.01.2-2.31.0Personal Consumption0.91.2-3.8-4.0-1.20.00.61.13.03.02.80.3-1.31.2Inflation Indicators
2
"Core" PCE Deflator2.22.32.31.81.41.10.91.22.12.32.22.21.11.6Consumer Price Index4.24.35.31.80.3-0.6-1.51.83.43.22.93.90.02.5Industrial Production
1
0.4-3.4-8.9-9.2-9.8-4.2-2.00.43.32.21.7-1.6-6.60.9Corporate Profits Before Taxes
2
-1.5-8.3-9.2-17.5-25.0-24.0-20.0-14.017.615.2-1.6-9.1-21.05.2Trade Weighted Dollar Index
3
70.371.076.179.485.789.892.193.386.081.573.379.493.381.2Unemployment Rate4.95.36.06.87.58.18.79.05.14.64.65.88.39.4Housing Starts
4
1.051.030.880.670.560.600.640.662.071.811.340.900.610.80Quarter-End Interest RatesFederal Funds Target Rate2.252.002.000.250.250.250.250.254.255.254.250.250.251.0010 Year Note3.453.993.852.252.703.003.103.104.394.714.042.253.103.80
Data As of: January 14, 2009
1
Compound Annual Growth Rate Quarter-over-Quarter
3
Federal Reserve Major Currency Index, 1973=100 - Quarter End
2
Year-over-Year Percentage Change
4
Millions of Units
 
I
NSIDE
 
U.S. Review 2U.S. Outlook 3Global Review 4Global Outlook 5Point of View 6Market Data 7
 
U.S. Review Economics Group
U.S. Review
U.S. CPI - Housing
Both Series are 3-Month Moving Averages-1%0%1%2%3%4%5%6%7%8%929496980002040608-1%0%1%2%3%4%5%6%7%8%Housing 3-Month Annual Rate: Dec @ -0.8%Housing Year-over-Year Percent Change: Dec @ 2.8%
 
U.S. CPI - Energy
Both Series are 3-Month Moving Averages-80%-60%-40%-20%0%20%40%60%80%100%120%929496980002040608-80%-60%-40%-20%0%20%40%60%80%100%120%Energy 3-Month Annual Rate: Dec @ -64.6%Energy Year-over-Year Percent Change: Dec @ -8.4%
 
(Continued from Page 1)
Pipeline Inflation Has Cooled Off Considerably
Excluding food and energy prices, the core CPI was essentially flatin December. Shelter costs, which are 43 percent of the core CPI,rose just 1.9 percent last year. With housing still declining, we donot look for inflationary pressure here in the coming year.Inflationary pressures continue to ease further back in theproduction pipeline. The Producer Price Index declined 1.9 percentin December, its fifth consecutive drop. Though energy pricesaccount for much of the pullback, food prices fell 1.5 percent inDecember, the largest drop in nearly three years. Prices for freshvegetables plunged at nearly a 15 percent annual rate and prices forbeef and veal, milk and canned fruit and juices all moved lower.Excluding food and energy items, the PPI rose 0.2 percent andfinished the year with a 4.3 percent gain, which was the largestincrease since 1988. Core inflation has moderated considerably inrecent months, however, and will likely continue to decline incoming months. Prices are falling further back in the productionpipeline. Prices for intermediate goods fell 4.2 percent in Decemberand prices for raw materials and crude goods fell 5.3 percent. Bothseries have fallen for five months in a row. Excluding food andenergy items, intermediate and core goods prices are down less butstill declined considerably. Prices for core intermediate goodsplunged at a 24.6 percent annual rate in the fourth quarter, whileprices for core crude goods plummeted at an 82.6 percent pace.The remarkable declines in energy and commodity prices willmake it much more difficult to interpret recent trade figures, retailsales and inventory data. All have plummeted recently but priceeffects account for much of the drop. Put differently, the volumeof imports fell less than the reported record 12 percent drop forNovember and the volume of retail sales probably did not fallnearly as much as the headline 2.7 percent plunge in retail sales.While price changes will make it more difficult to interpret recenteconomic data, it clearly can be done. Inflation-adjusted tradefigures show the nation’s trade gap shrinking by $6.1 billion to$39.5 billion. Real retail sales, deflated by the CPI, look like theydeclined about two percent in December. Consequently, cutbacksin consumer spending were a huge drag on fourth GDP and therecent wide monthly swings in the trade deficit will likely havelittle effect on the fourth quarter figures. Inventories remain a hugewild card, however. While inventories have declined in recentmonths, the drop has not kept pace with declines in sales. Theinventory/sales ratio has surged in recent months and inventoriesof imported automobiles have piled up at many major ports.
Selected Current Data
2
Gross Domestic Product - CAGRQ3 - 2008-0.5%GDP Year-over-YearQ3 - 20080.7%Personal ConsumptionQ3 - 2008-3.8%Business Fixed InvestmentQ3 - 2008-1.7%Consumer Price IndexDecember - 20080.1%"Core" CPIDecember - 20081.8%"Core" PCE DeflatorNovember - 20081.9%Industrial ProductionDecember - 2008-7.8%UnemploymentDecember - 20087.2%Federal Funds Target RateJan - 160.25%
 
Business Inventories
Total Inventory-to-Sales Ratio1.201.251.301.351.401.451.501.551.609294969800020406081.201.251.301.351.401.451.501.551.60Total Inventory to Sales Ratio: Nov @ 1.41
 
 
U.S. Outlook Economics Group
Housing Starts • Thursday
Housing starts fell to just a 625K unit pace in November, anothernew all-time low, as builders continued to cut back in the face oftighter credit and a weaker economy. Building permits continuedto fall as well, down more than 100K units to just a 616K annualpace.We expect housing starts increased to a 640K unit pace inDecember as low mortgage rates fueled a surge in refinancings andmortgage applications. However, this up tick does not alleviate thedownward trend in starts and permits. With new homecompletions running north of a one million unit pace, thedownward trend in starts should continue to feed into lowercompletions and eventually less inventory.
Previous: 625K Wachovia: 640KConsensus: 605K
Housing Starts
Seasonally Adjusted Annual Rate - In Millions0.50.70.91.11.31.51.71.92.12.30001020304050607080.50.70.91.11.31.51.71.92.12.3Housing Starts: Nov @ 0.625 Million
 
Initial Jobless Claims • Thursday
Initial jobless claims are solidly in recession territory with a fourweek moving average of 518,500. Continuing claims are alsoincreasing as it becomes even more difficult to find work. Weexpect the pace to continue as the economy sheds jobs.In December, nonfarm employment fell 524,000 and theunemployment rate rose to 7.2 percent, changes consistent withpast recessions. Since the recession began a little over a year ago,the economy has shed roughly 2.5 million jobs. While the bulk ofthose earlier losses were in manufacturing and in housing-relatedindustries, job losses have broadened and intensified. Layoffannouncements suggest further weakness in the pipeline aspayrolls still include recent layoffs. The extraordinary cutbacks innonfarm payrolls during the fourth quarter are likely to carry overinto the first half of 2009.
Initial Claims for Unemployment
Seasonally Adjusted, In Thousands250300350400450500550600868890929496980002040608250300350400450500550600 Year-Over-Year Percent Change: Jan-10 @ 66.3%Initial Claims: Jan-10 @ 524.0 Thousand4 Week Moving Average: Jan-10 @ 518.5 Thousand52 Week Moving Average: Jan-10 @ 426.4 Thousand
 
Previous: 524KConsensus: 553K
FHFA(OFHEO) Home Price Index • Thursday
Home price declines continued to accelerate across much of thenation in October. Home prices fell 1.1 percent with the Pacific andSouth Atlantic both declining 2.0 percent. While the worst declinesare still concentrated in the former bubble markets, even relativelystable markets are seeing price declines.Unfortunately price declines may continue for some time even insome of the worst hit markets. We do not expect prices to stopfalling nationally before late this year or early 2010 as a deeprecession further inhibits the ability to buy a home.
Previous: -1.1%Consensus: -1.2%
Home Prices
 Year-over-Year Percentage Change-20%-16%-12%-8%-4%0%4%8%12%16%20%24%979901030507-20%-16%-12%-8%-4%0%4%8%12%16%20%24%Median Sale Price: Nov @ $180,800Median Sales Price 3-Month Mov. Avg.: Nov @ -10.3 %FHFA (OFHEO) Purchase Only Index: Sep @ -7.0 %S&P Case-Shiller Composite 10: Sep @ -18.6 %
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