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W
EEKLY
E
CONOMIC
&
 
F
INANCIAL
C
OMMENTARY
 
March 13, 2009
U.S. Review Global Review
Retail Sales Ex-Motor Vehicles
3-Month Moving Averages-25.0%-20.0%-15.0%-10.0%-5.0%0.0%5.0%10.0%15.0%9697989900010203040506070809-25.0%-20.0%-15.0%-10.0%-5.0%0.0%5.0%10.0%15.0% Year/Year Percent Change: Feb @ -5.9%3-Month Annual Rate: Feb @ -17.3%
 
Chinese Industrial Production Index
 Year-over-Year Percent Change of 3-Month Moving Average0%5%10%15%20%25%1999200120032005200720090%5%10%15%20%25%Industrial Production: Feb @ 11.0%Chinese Industrial Production: Feb @ 4.4%
 
China Slowed Further in Q1
China released a slew of economicdata this week that gave investors asense of where the Chineseeconomy is at present. The badnews is that growth in industrialproduction appears to have slowedfurther in the first quarter. Thetiming of Chinese New Yearcomplicates the interpretation of IPdata in the first two months of theyear. Industrial production in January, when Chinese New Yearoccurred this year, dropped3.4 percent relative to the samemonth in 2008. In February, IPgrowth rebounded to 11.0 percent(New Year in 2008 fell in February).Taking the two months together, IPwas up only 3.8 percent, down fromthe 6.4 percent rate that wasregistered in the fourth quarter (seechart at left).The continued slowdown inChinese IP growth reflects, at leastin part, economic weakness in therest of the world. The value of
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Recent Special Commentary
Is This the End of the Beginning?
This week’s report that retail salesfell much less than the consensusestimate in February and theupward revision to the Januarysales figures raises the prospect thatthe worst of this recession mayactually be behind us. While such astatement might seem surprising, itis generally consistent with ourforecast, which has long noted thatlate 2008 and early 2009 wouldmark the darkest hours of thisrecession. Even if the worst isbehind us, the economy still faces along and arduous road to recovery.To paraphrase Winston Churchill,this week’s improved retail salesfigures, sharp decline in inventories,and positive bounce to the stockmarket do not likely mark the endof the recession, nor do they markthe beginning of the end. Perhaps,however, the apparent bottoming inretail sales combined with the sharpreduction in business inventorieswill mark the end of the beginningof this downturn. January’s sharp upward revision toretail sales lifted the overall increaseto 1.8 percent. This marks the firstincrease in overall retail sales inseven months and the largestincrease since January 2006.
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DateTitleAuthors
March-12Global Chartbook - March 2009Bryson & QuinlanMarch-02The Evolution of the Economy, Credit & Economic PolicySilviaFebruary-23This Is Not the End of AmericaVitnerFebruary-23Housing & Finance: Still Searching for a New EquilibriumSilvia
 
U.S. Forecast
ActualForecastActualForecast200820092005200620072008200920101Q2Q3Q4Q1Q2Q3Q4Q
Real Gross Domestic Product
1
0.92.8-0.5-6.2-7.2-2.0-0.40.82.92.82.01.1-3.31.2Personal Consumption0.91.2-3.8-4.3-1.60.00.11.23.03.02.80.2-1.61.1Inflation Indicators
2
"Core" PCE Deflator2.22.32.31.91.51.31.11.32.12.32.22.21.31.6Consumer Price Index4.24.35.21.5-0.3-1.2-2.30.13.43.22.93.8-0.91.7Industrial Production
1
0.4-3.4-8.9-12.1-18.0-7.2-2.50.43.32.21.7-1.8-9.91.7Corporate 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
70.371.076.179.486.889.492.093.586.081.573.379.493.588.1Unemployment Rate4.95.46.16.98.08.69.29.65.14.64.65.88.89.9Housing Starts
4
1.051.030.880.660.450.470.530.592.071.811.340.900.510.74Quarter-End Interest RatesFederal Funds Target Rate2.252.002.000.250.250.250.250.254.255.254.250.250.250.5010 Year Note3.453.993.852.253.003.003.003.104.394.714.042.253.103.50
Data As of: March 11, 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
Retail Sales
Month-over-Month Percent Change-3.5%-2.8%-2.1%-1.4%-0.7%0.0%0.7%1.4%2.1%2.8%3.5%20052006200720082009-3.5%-2.8%-2.1%-1.4%-0.7%0.0%0.7%1.4%2.1%2.8%3.5%Retail Sales: Feb @ -0.1%
 
ICSC/UBS Retail Chain Store Sales Index and Retail Gasoline
 Year-over-Year Percent Change, Current Dollars-4.0%-2.0%0.0%2.0%4.0%6.0%Apr-06Sep-06Mar-07Aug-07Feb-08Jul-08Jan-091.5002.0002.5003.0003.5004.0004.500Chain Store Sales: Mar @ -0.9% (Left Axis)Retail Gasoline: Mar @ $1.941 (Right Axis)
 
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The Darkest Hours of This Recession May Soon be Behind Us
Retail sales fell 0.1 percent in February but even that result wasbetter than expected. The overall sales figures are being distortedby swings in gasoline prices and seasonal distortions. Gasolineprices tumbled late last year and then bounced back in January andFebruary. Higher gasoline prices sent sales at gasoline stationssharply higher, with sales up 2.8 percent and 3.4 percent in Januaryand February, respectively.Seasonal distortions may also make the recent retail sales figureslook a little stronger than they truly are. Motor vehicle salesbounced back in January following several months where saleswere severely constrained. Sales at department stores and specialtychains also bounced back during the past two months even thoughnearly every major retailer continues to report sales are underintense pressure. How do we reconcile this discrepancy?The split between the Department of Commerce’s numbers and thechain store sales figures has a great deal to do with how thegovernment and retailers look at sales. The government figures arereported on a month-to-month basis and adjusted for seasonalfactors. Normally, sales plunge in January and February, comingdown from the holiday season. This past year sales plummeted allthroughout the fall, as the widening financial crisis kept shoppersin a dour mood. Since sales fell so sharply during the holidayseason, they did not fall as much as they normally do in Januaryand February. As a result, the seasonally adjusted figures showedan increase. Retailers tend to look at sales on a year-to-year basisand on this basis sales are down by both measures.Even though the recent trend in retail sales has been distorted byswings in gasoline prices and seasonal factors, the increased figuresstill reflect some improvement. Retailers, wholesalers andmanufacturers are slashing their inventories, which will eventuallyset the stage for a revival in orders and production. Businessinventories fell 1.1 percent in February, following a revised 1.6percent drop in January. Inventories will likely subtract around$100 billion from real GDP during the first quarter, which is one ofthe main reasons we have such a large drop in real GDP projectedfor the first quarter. After the first quarter’s big drop, however,declines in real GDP should be progressively less severe.First-time claims for unemployment insurance and continuingclaims both rose in the latest week. The four–week movingaverage through March 7 totals 650,000, up from 608,000 a monthearlier. Given the jump, nonfarm payrolls should post anothersharp decline for the month of March.
Selected Current Data
2
Gross Domestic Product - CAGRQ4 - 2008-6.2%GDP Year-over-YearQ4 - 2008-0.8%Personal ConsumptionQ4 - 2008-4.3%Business Fixed InvestmentQ4 - 2008-21.1%Consumer Price IndexJanuary - 20090.0%"Core" CPIJanuary - 20091.7%"Core" PCE DeflatorJanuary - 20091.6%Industrial ProductionJanuary - 2009-10.0%UnemploymentFebruary - 20098.1%Federal Funds Target RateMar - 130.25%
 
Total Business Inventories
Month-to-Month Percent Change-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%010203040506070809-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%Total Inventories: Jan @ -1.1%
 
 
U.S. Outlook Economics Group
Industrial Production • Monday
Industrial production fell 1.8 percent in January due to a big dropin auto production as well as weakness in machinery, computersand mining. Auto output plunged 23 percent and is down over 43percent compared to a year ago. Construction supplies fell,consistent with the housing correction. Capacity utilization levelsdropped again suggesting continued weak profits.We expect industrial production to fall 1.0 percent and capacityutilization to decline for the fourth consecutive month to 71.5percent in February. In particular, over the last year we have seenutilization declines in manufacturing, utilities and sharp declines incomputers. We should continue to see declines in these sectors aswell as soft profits and further layoffs. Businesses are striving tobring production back in-line with sales. So far, cutbacks have notbeen deep enough, as inventory-to-sales ratios have increased andproductivity has declined.
Previous: -1.8% Wachovia: -1.0%Consensus: -1.3%
Total Industrial Production Growth
Output Growth by Volume, not Revenue-20%-15%-10%-5%0%5%10%15%878991939597990103050709-20%-15%-10%-5%0%5%10%15%3-Month Annual Rate: Jan @ -13.8% Year-over-Year Change: Jan @ -8.0%
Both Series are 3-Month Moving Averages
 
Housing Starts • Tuesday
The pace of housing starts slowed by almost another 100,000 unitsin January to just 466,000 units. This marks the fourth all-time lowin as many months. Building permits fell ‘just’ 26,000 to 521,000units and now sit well above the starts level. Permits were helpedby the slight increase in multi-family dwellings.With an unusually cold February, especially in the South, housingstarts will remain depressed. Starts may see an uptick, but levelswill remain near historic low levels. Permits should also continue toremain at low levels, but the pace should stay well above starts,signaling a bottom in construction activity may be closer than manyexpect. However, once we reach a bottom the recovery may beextremely weak and agonizingly slow.
Housing Starts
Seasonally Adjusted Annual Rate - In Millions0.30.50.70.91.11.31.51.71.92.12.30102030405060708090.30.50.70.91.11.31.51.71.92.12.3Housing Starts: Jan @ 0.466 Million
 
Previous: 466K Wachovia: 475KConsensus: 450K
Consumer Price Index • Wednesday
The Consumer Price Index rose 0.3 percent in January, in-line withexpectations. Rising gasoline prices accounted for most of theincrease. Prices excluding food and energy items rose a larger-than-expected 0.2 percent. The increase was broad based but mostof the categories posting increases were down sharply in recentmonths.We expect headline consumer prices to increase 0.4 percent inFebruary due largely to an increase in gasoline prices. Retailgasoline prices increased roughly seven percent in February, butremain well below year ago prices. Core inflation, which excludesfood and energy, has seen virtually no growth over the last fewmonths as the economy contracted sharply. We continue to expectcore inflation to remain flat in February.
Previous: 0.3% Wachovia: 0.4%Consensus: 0.3%
CPI vs. Core CPI
 Year-over-Year Percent Change-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%929496980002040608-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%CPI: Jan @ 0.0%Core CPI: Jan @ 1.7%
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