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W
EEKLY
E
CONOMIC
&
 
F
INANCIAL
C
OMMENTARY
 
May 22, 2009
U.S. Review Global Review
Leading Indicator Index
50607080901001108789919395979901030507095060708090100110Leading Indicator Year/Year Change: Apr @ -3.0%Leading Indicator Index: Apr @ 99.0
 
Euro-zone Exchange Rate
USD per EUR0.800.901.001.101.201.301.401.501.601.701999200120032005200720090.800.901.001.101.201.301.401.501.601.70USD per EUR: May @ 1.399
 
Greenback Takes It on the Chin
The dollar got smacked this week.For example, the euro rose to itshighest level vis-à-vis the greenbacksince the beginning of the year (seegraph at the left). The euro didreceive a bit of a boost from somestronger-than-expected data. Asshown in the top graph on page 4,both the manufacturing and servicesector PMIs posted sizeable gains inMay. Although the indices remainbelow the demarcation line thatseparates expansion fromcontraction, the data suggest thatthe Euro-zone economy is gettingcloser to the bottom.However, there is more to thedollar’s broad-based weaknessrecently than simply better-than-expected data in the Euro-zone. Notonly did the greenback fall about3 percent against the euro thisweek, but it also slipped 1 percentagainst the yen and about 4 percentversus sterling and the Canadiandollar. What is going on?
Please turn to page 4
 
Recent Special Commentary
A More Moderate Contraction
Signs continue to emerge whichsuggest the rate of decline ineconomic activity is moderating.Real GDP will still likely post adecline in the second and thirdquarters but the drops should beconsiderably less than what we sawin the past two quarters. Job lossesshould also moderate, although therecent spate of vehicle-assemblyplant shutdowns and dealerclosings may cause layoffs to spikeagain this summer.Recent economic reports supportthe notion that the contraction ismoderating. The Leading EconomicIndex rose 1.0 percent in April,marking its first increase in sevenmonths and most significant gainsince June of last year. Seven of theten indicators increased during themonth, with the most significantgains coming from stock prices, theinterest-rate spread and consumerexpectations.The large improvement in thefinancial components of the LEItakes some of the shine off April’sincrease. Still, the large aggregateincrease is hard to dismiss andconfirms other anecdotal reportsthat suggest conditions are eitherbottoming out or close to it.
Please turn to page 2
DateTitleAuthors
May-20Spending Without Jobs: The Strange Case of Today's RecessionSilvia & IqbalMay-14Global Chartbook - May 2009Bryson & QuinlanMay-14Confidence: Does Anybody Have Any?Silvia, York & WhelanMay-14Inventories: Rebalancing the Real EconomySilvia & Whelan
 
U.S. Forecast
ActualForecastActualForecast200820092005200620072008200920101Q2Q3Q4Q1Q2Q3Q4Q
Real Gross Domestic Product
1
0.92.8-0.5-6.3-6.1-2.4-0.21.72.92.82.01.1-3.01.6Personal Consumption0.91.2-3.8-4.32.20.11.21.33.03.02.80.2-0.51.3Inflation Indicators
2
"Core" PCE Deflator2.22.32.31.91.81.50.90.82.12.32.22.21.20.9Consumer Price Index4.24.35.21.5-0.2-1.4-2.7-0.33.43.22.93.8-1.21.0Industrial Production
1
0.2-4.6-9.0-12.7-20.0-16.2-4.80.13.32.31.5-2.2-12.6-0.2Corporate Profits Before Taxes
2
-1.5-8.3-9.2-21.5-30.0-28.0-26.0-10.017.615.2-1.6-10.1-24.25.3Trade Weighted Dollar Index
3
70.371.076.179.482.583.386.589.086.081.573.379.489.085.0Unemployment Rate4.95.46.16.98.19.29.810.35.14.64.65.89.310.5Housing Starts
4
1.051.030.880.660.520.480.510.552.071.811.340.900.510.74Quarter-End Interest RatesFederal Funds Target Rate2.252.002.000.250.250.250.250.254.255.254.250.250.250.5010 Year Note3.453.993.852.252.713.203.403.404.394.714.042.253.403.70
Data As of: May 13, 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
Coincident Index - 3-Month Moving Average
Composite of 4 Indicators-10%-8%-6%-4%-2%0%2%4%6%8%8890929496980002040608-10%-8%-6%-4%-2%0%2%4%6%8%3-Month Annual Rate: Apr @ -7.2% Year/Year Change: Apr @ -5.0%
 
Philadelphia Fed General Activity Index
Diffusion Index-60-40-2002040608991939597990103050709-60-40-200204060Philly Fed: May @ -22.612 Month Moving Average: May @ -26.2
 
(Continued from Page 1)
More Moderate Declines Today Point to Growth Later This Year
Critics of the LEI often point to the misleading signal the indexsometimes gives. While this is true, applying some simplecommon sense helps to understand this report. Rising stock pricesaccounted for 0.4 percentage points of April’s increase in the LEI.The increase reflects a 12 percent rise in the S&P 500 that month.The stock market has reversed a surprisingly large part of its lossesfrom last fall. Those losses have been a persistent burden oneconomic activity, adding to the drag on household wealth fromfalling home prices and depressing consumer spending. Even thepartial reversal we have seen since early March should have somepositive impact on consumer behavior, particularly sinceunanticipated changes in household wealth tend to have a largerimpact on consumer behavior than anticipated ones.While the leading index increased, there is little doubt the recessionis still on. The Coincident Index fell 0.2 percent in April, reflectingcontinued declines in nonfarm employment and industrialproduction. Income and business sales are both expected to postmodest increases for the month.Another way to determine how much weight to give the strongerLEI increase is to ask whether it is consistent with other economicreports. We believe it is, although most reports continue to pointmore to a lesser rate of deterioration than to an outrightturnaround in economic activity. This is the normal progressionthe economy moves through as it emerges from a recession.The Philadelphia Fed’s survey of manufacturing conditions rose 1.8points to -22.6 in May, returning the index to its highest level sinceSeptember. A reading of -22.6 is still very negative and points tocontinued contraction in the factory sector. The pace of decline islessening, however. More importantly, the improvement in theindex was broad based, consistent across nearly every componentand makes intuitive sense. The employment component rose 18.1points, which was the sixth largest monthly increase on record.The average workweek also increased, climbing 18.0 points. Bothseries remain in negative territory, at –26.8 and –23.2, respectively.There is no doubt employment conditions will remain negative forsome time, but here too there are reasons to hope that futuredeclines will be less negative. Weekly first-time unemploymentclaims declined by 12,000 and the four-week moving average of jobless claims declined for the fifth time in the past six weeks. Theclaims are still consistent with large job losses and risingunemployment, but the rate of deterioration in employmentconditions should soon begin to moderate.
Selected Current Data
2
Gross Domestic Product - CAGRQ1 - 2009-6.1%GDP Year-over-YearQ1 - 2009-2.6%Personal ConsumptionQ1 - 20092.2%Business Fixed InvestmentQ1 - 2009-37.9%Consumer Price IndexApril - 2009-0.7%"Core" CPIApril - 20091.9%"Core" PCE DeflatorMarch - 20091.8%Industrial ProductionApril - 2009-12.5%UnemploymentApril - 20098.9%Federal Funds Target RateMay - 220.25%
 
Initial Claims for Unemployment
Seasonally Adjusted, In Thousands250300350400450500550600650700868890929496980002040608250300350400450500550600650700 Year-over-Year Percent Change: May-16 @ 68.7%Initial Claims: May-16 @ 631.0 Thousand4-Week Moving Average: May-16 @ 628.5 Thousand52-Week Moving Average: May-16 @ 521.2 Thousand
 
 
U.S. Outlook Economics Group
Consumer Confidence • Tuesday
After 14 months of a consistently downward trend, consumerconfidence, as measured by the Conference Board, has shownrecent signs of stabilizing. Confidence currently stands about 55percent above its record low reached in February. Prospects of aneconomic recovery in the second half of the year coupled withsignificant gains in the stock market have lifted consumer spiritslately. While we expect a third consecutive monthly increase inMay, significant headwinds still exist for the consumer. Retailgasoline prices have risen around 16 cents in May and will likelycontinue to edge higher as we enter the summer driving months. Inaddition, the labor picture remains bleak with firms continuing toshed jobs. This in turn will keep upward pressure on theunemployment rate which we expect will rise above 10 percent byyear end. While confidence does appear to be turning, it isimportant to remember it is doing so from very depressed levels.
Previous: 39.2 Wachovia: 41.0Consensus: 42.3
Consumer Confidence Index
Conference Board2040608010012014016087899193959799010305070920406080100120140160Confidence Yr/Yr % Chg: Apr @ -37.6%Confidence: Apr @ 39.212-Month Moving Average: Apr @ 44.3
 
Durable Goods Orders • Thursday
For five out of the last six months, durable goods orders haveposted monthly declines as manufacturers attempt to aligndepleting sales with appropriate production levels. As the recessioncontinues, businesses and consumers are plainly putting off anybig-ticket purchases.While this series is notably volatile on a month-to-month basis, weexpect the downward trend in orders will continue in April with a1.1 percent decline. Despite signs of stabilization in some of theregional purchasing managers’ surveys and the national ISMmanufacturing survey, the environment for big-ticket durable goodorders is unsupportive, suggesting growth in orders is a ways off.
Durable Goods New Orders
Series are 3-Month Moving Averages-50%-40%-30%-20%-10%0%10%20%30%9394959697989900010203040506070809-50%-40%-30%-20%-10%0%10%20%30%3-Month Annual Rate: Mar @ -37.2% Year-Over-Year Percent Change: Mar @ -25.2%
 
Previous: -0.8% Wachovia: -1.1%Consensus: 0.5%
GDP • Friday
The advance reading of first quarter real GDP declined 6.1 percentas U.S. economic activity was weighed down by an acceleratingretrenchment in business investment coupled with significantdeclines in government spending and inventory investment.Updated data from the first quarter suggest GDP will be revisedslightly higher. The trade data were better than expected inFebruary and March likely resulting in a two-tenths contribution toQ1 GDP.We expect the fourth and first quarters to be the deepest dives ofthis recession. Recent economic data suggest some stabilization isoccurring with outright improvement in some areas of theeconomy. We see two more quarters of contraction before the U.S.economy is back in expansionary territory.
Previous: -6.1% Wachovia: -5.7%Consensus: -5.5%
Real GDP
Bars = Compound Annual Rate Line = Yr/Yr % Change-8%-6%-4%-2%0%2%4%6%8%9697989900010203040506070809-8%-6%-4%-2%0%2%4%6%8%Real GDP: Q1 @ -6.1%Real GDP: Q1 @ -2.6%
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