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W
EEKLY
E
CONOMIC
&
 
F
INANCIAL
C
OMMENTARY
 
 January 30, 2009
U.S. Review Global Review
Real GDP
Bars = Compound Annual Rate Line = Yr/Yr % Change-4%-2%0%2%4%6%8%96979899000102030405060708-4%-2%0%2%4%6%8%Real GDP: Q4 @ -3.8%Real GDP: Q4 @ -0.2%
 
Japanese Industrial Production Index
 Year-over-Year Percent Change-25.0%-20.0%-15.0%-10.0%-5.0%0.0%5.0%10.0%199719992001200320052007-25.0%-20.0%-15.0%-10.0%-5.0%0.0%5.0%10.0%IPI: Dec @ -21.7%3-Month Moving Average: Dec @ -13.9%
 
Deep Recession in Japan
Data released this week suggestthat the Japanese economy, whichhad already contracted in theprevious two quarters, fell off a cliffin the fourth quarter. It seems likelythat Japan is mired in its deepestrecession since the end of theSecond World War.Industrial production, which haddropped 8.5 percent in Novemberrelative to the previous month, fellanother 9.6 percent in December.On a year-over-year basis, IPplunged more than 20 percent inDecember, surpassing the previousrecord decline of 18 percent setduring the deep recession thatfollowed the first oil price shock inthe mid-1970s (see graph at left).Net exports have been an importantdriver of Japanese economic growthover the past few years, and Japanis clearly feeling the effects of theglobal downturn. As shown in thetop chart on page 4, the volume of Japanese exports nosedived by
Please turn to page 4
 
Recent Special Commentary
Poor Momentum Going into 2009
U.S. real GDP declined at anannualized rate of 3.8 percent in thefourth quarter. Although thedecline was the largest contractionsince the first quarter of 1982, it wasnot nearly as bad as the 5.5 percentplunge the consensus expected. Thereal surprise was the unexpectedincrease in real inventories, whichrose $6.2 billion in the fourthquarter following a $30 billiondrawdown in the third quarter.Inventories made a positivecontribution to GDP growth equalto 1.3 percentage points in thefourth quarter. Consumer spendingplunged at a 3.5 percent pace in thequarter as spending on big-ticketitems like motor vehicles and homeelectronics plummeted. Businessesalso cut back on new plant andequipment outlays. Within fixedinvestment spending, purchases ofequipment and software plungednearly 28 percent -- the sharpestquarterly decline in fifty years. As ifto rub salt in the wound, grossexports plunged nearly 20 percent, aby-product of recession in mostforeign countries. However, grossimports also tanked (down nearly16 percent), so there was littleoverall effect on GDP from netexports.
Please turn to ae 2
DateTitleAuthors
January-28State Employment: December 2008Vitner, York & WhelanJanuary-27Employment: Digging Under the HeadlinesSilvia, York & WhelanJanuary-26Florida's Labor Market Takes it on the ChinVitner & YorkJanuary-16A Holiday Season for the Record BooksVitner & York
 
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
Initial Claims for Unemployment
Seasonally Adjusted, In Thousands250300350400450500550600868890929496980002040608250300350400450500550600 Year-over-Year Percent Change: Jan-24 @ 60.7%Initial Claims: Jan-24 @ 588.0 Thousand4 Week Moving Average: Jan-24 @ 542.5 Thousand52 Week Moving Average: Jan-24 @ 435.8 Thousand
 
Consumer Confidence Index
Conference Board2040608010012014016087899193959799010305072.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%Confidence Yr/Yr % Chg: Jan @ -56.8%Confidence: Jan @ 37.7 (Left Axis)Unemployment Rate: Dec @ 7.2% (Right Axis)
 
(Continued from Page 1)
Economic Weakness Has Carried Over Into The First Part of 2009
Nominal GDP essentially reflects revenue growth for the overalleconomy. The shortfall in nominal GDP matches up with the topline revenue figures reported by many major corporations andhelps explain why so many firms have been slashing payrolls.Businesses simply do not have the money coming in to continueoperating the way they were previously.Layoff announcements moved to the forefront once again thisweek, as a number of firms including Caterpillar, Home Depot,Pfizer and Starbucks announced cutbacks this week. Most weremade in conjunction with earnings of merger announcements andin some cases the cutbacks were simply rehashing or enlargingpreviously announced moves. Earnings have largely come in onthe low side of expectations and many firms have reducedexpectations or stated that they had less visibility of future salesand earnings trends.Economic weakness has clearly carried over into the first part of2009. Weekly first-time claims for unemployment insurance rosean additional 3,000 in the latest week, bringing the figure up to588,000. The small increase confirms last week’s larger bounceback and removes any doubts that earlier reported declines inunemployment claims simply reflected holiday timing distortions.Consumer Confidence also weakened in January. There was somehope that the inauguration of President Obama might generate aslight bump. Instead, the overall figures fell 0.3 points to a recordlow 37.7, as consumers continue to express worries about thecurrent state of the economy. The employment component of theseries actually improved slightly, with the proportion of consumersexpressing optimism about employment prospects rising 0.7percentage points to 7.2 percent and those stating that “jobs arehard to get” falling 0.4 percentage points to 41.1 percent.Despite the improvement, the employment component of theConsumer Confidence Index remains consistent with a furtherincrease in the unemployment rate. Our forecast calls for the jobless rate to rise 0.3 percentage points to 7.5 percent. We expectnonfarm employment fell by another 575,000 jobs in January,continuing the carnage seen in the fourth quarter.Another key report out this week showed new home salesplummeting 14.7 percent to a paltry 331,000 unit rate. That is thelowest sales figure for the series, which dates back to 1963. Onepossible contributing factor is that many potential first-timehomebuyers are awaiting the more favorable incentives that areincluded in the economic stimulus package.
Selected Current Data
2
Gross Domestic Product - CAGRQ4 - 2008-3.8%GDP Year-over-YearQ4 - 2008-0.2%Personal ConsumptionQ4 - 2008-3.5%Business Fixed InvestmentQ4 - 2008-19.1%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 - 300.25%
 
New Home Sales
Seasonally Adjusted Annual Rate - In Thousands3005007009001100130015008991939597990103050709300500700900110013001500New Home Sales: Dec @ 331,0003-Month Moving Average: Dec @ 375,000
 
 
U.S. Outlook Economics Group
Personal Income • Monday
Personal income fell 0.2 percent in November and spendingdropped 0.6 percent. However, real consumer spending rose 0.6percent, with the core PCE deflator up 1.9 percent year-over-year,the lowest since 2004. Falling prices helped to offset losses in realconsumer spending. The saving rate rose to 2.8 percent.With employment and hours worked down sharply in recentmonths, personal income will likely remain under pressure, whichmeans lower interest rates and lower gasoline prices will provideless relief to shell-shocked consumers. We expect personal incomeand spending will fall 0.1 and 0.8 percent, respectively. The savingrate should continue to increase as consumers pull back on makingpurchases in the face of weaker economic growth and less access tocredit.
Previous: -0.2% Wachovia: -0.1%Consensus: -0.3%
Personal Income
Both Series are 3-M Moving Averages-10%-5%0%5%10%15%929496980002040608-10%-5%0%5%10%15%Personal Income 3-M Annual Rate: Nov @ -0.2%Personal Income Year-over-Year Percent Change: Nov @ 2.9%
 
ISM Manufacturing • Monday
December’s ISM manufacturing index came in at 32.4, well withinrecession territory and consistent with levels of the 1980-82recessionary period. Weakness remains in new orders, productionand employment. Prices paid fell sharply to 1949 lows andsuggests lower inflation ahead.We expect January’s ISM manufacturing index will remain inrecession territory at 33.7. The regional purchasing manger reportsincluding Empire, Chicago and Philadelphia, were are all down,suggesting continued weakness in the headline number. Motorvehicle production is also down and will continue to be aheadwind for the ISM in coming months. New orders and orderbacklogs should also continue their declines, indicating moreweakness in the pipeline.
ISM Manufacturing Composite Index
Diffusion Index303540455055606587899193959799010305073035404550556065ISM Composite Index: Dec @ 32.412-Month Moving Average: Dec @ 45.6
 
Previous: 32.4 Wachovia: 33.7 Consensus: 33.0
Employment • Friday
Nonfarm employment fell by 524,000 in December with broaddeclines in manufacturing, construction, and services. Aggregatehours declined for the ninth month in a row, signaling continuedweakness in output.We expect jobs fell another 575,000 in January, which would bringthe total number of jobs lost since the onset of the recession to morethan three million. While the bulk of early losses were inmanufacturing and in housing-related industries, job losses havebroadened and intensified over the last several months. The risingunemployment rate is consistent with weakness in consumerspending and continued drops in consumer sentiment. We expectthe unemployment rate will reach 7.5 percent in January, thehighest rate since 1993. The string of disappointingannouncements by major companies should continue to putdownward pressure on nonfarm employment for months to come.
Previous: -524,000 Wachovia: -575,000Consensus: -500,000
Nonfarm Employment Growth
 Yr/Yr Percent Change vs 3-Month Percent Change, Annual Rate-5%-4%-3%-2%-1%0%1%2%3%4%5%919395979901030507-5%-4%-3%-2%-1%0%1%2%3%4%5%3-Month Annual Rate: Dec @ -4.4% Year/Year Change: Dec @ -1.9%
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