Vital Signs: A Not-So-Great '08?

On tap for the week of Dec. 31: December employment and business activity data, November existing home sales and factory orders figures

When peering into the economic crystal ball for 2008, most analysts see the economy's fortunes tied to consumers and their willingness to keep shopping. If people are going to keep spending, however, they will need businesses to keep hiring. With housing wealth diminishing and financial markets in flux, the primary fuel for consumer spending will be job and wage growth.

The labor market does not appear to be entering the new year with much momentum. Following a solid November report, economists believe the rise in initial jobless claims during December means a pullback in hiring. The consensus forecast is a rise in December payrolls of just 70,000 jobs. That is not enough to keep the unemployment rate from rising. It also means less pressure on businesses to raise salaries and wages.

When the employment report comes out on Jan. 4, the markets will also take a look at who is hiring and firing. A silver lining in the gathering clouds over the labor market is the relative isolation of outright job cuts to manufacturing, residential construction and financial positions linked to the housing bust. Yet November payroll figures also showed some cracks in nonresidential construction payrolls and a downshift in rail and truck transportation hiring. These could be one-off declines or early signs of spreading weakness.

Fresh December figures on how business activity is holding up for both manufacturing and the service sectors will shed some light on future hiring trends. Export orders indices remain strong even as the overall orders measures drift lower. If demand abroad can hold up it could give businesses a reason to believe that the U.S. economy can avert an economic recession and bounce back in 2008.

But business decisions are also affected by current consumer spending. Fourth-quarter inflation adjusted spending doesn't look too bad so far. However, weekly retail sales figures showing a disappointing response to big post-holiday sales following a lackluster holiday shopping season could make businesses more apprehensive. Ultimately, companies will make hiring decisions based on their overall outlook for the economy. Those moves could compound the recent economic slowdown or help keep consumers shopping and get the U.S. economy back on track.

The bond market will close early on Dec. 31 and all financial markets will be closed on Tuesday, January 1 in observance of the New Year's holiday.

Here's the weekly economic calendar.

Report Date Time For Median Estimate Last Period
Existing Home Sales (million, annual rate) Monday, December 31 10:00 a.m. November 5.00 4.97
ISM (manufacturing) Wednesday, January 02 10:00 a.m. December 50.4 50.8
Construction Spending Wednesday, January 02 10:00 a.m. November -0.2% -0.8%
Factory Orders Thursday, January 03 10:00 a.m. November 1.2% 0.5%
Nonfarm Payrolls (thousands) Friday, January 04 8:30 a.m. December 70 94
Manufacturing Payrolls (thousands) Friday, January 04 8:30 a.m. December -17 -11
Unemployment Rate Friday, January 04 8:30 a.m.
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December 4.8% 4.7% Average Hourly Earnings Friday, January 04 8:30 a.m. December 0.3% 0.5% Hours Worked Friday, January 04 8:30 a.m. December 33.8 33.8 ISM (non-manufacturing) Friday, January 04 10:00 a.m. December 54.0 54.1

Source: Action Economics


Monday, December 31, 10 a.m. EST

The November existing home sales are expected to hold pretty steady after a poor October. Sales fell 1.2% to an annual pace of 4.97 million in October. The October decline was centered in condominiums, which fell to an annual sales rate of 600,000, from 660,000 in September. However, the annual sales pace of 4.37 million for single family homes was the lowest since early 1998.

The erosion in sales is causing a back up in the supply of homes for sale. The inventory of homes was 4.45 million, equivalent to 10.8 months worth of demand at the October level. Fewer sales and more homes on the market translates into further price declines both for existing and new homes. The October S&P/Case-Shiller Home Price Index of 20 cities showed a record 6.1% drop from a year ago. What's more, the weakness in housing is spreading with more cities reporting declining home prices. Until sales begin to improve and inventories of homes for sale are pared down, home prices will keep on falling. And the longer and steeper the price declines run, the greater the likelihood that the housing recession will negatively impact consumer spending via a decline in housing wealth.


Wednesday, January 2, 7:45 a.m. EST

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will present sales results for the week ended Dec. 29. The holiday sales season appeared to get a jolt with a 2.8% jump during the week ended Dec. 22. This came after a 1.4% gain in the prior week, and a 0.2% increase in the week ended Dec. 8. On a yearly basis, sales were up 2.8% in the week ended Dec. 22, a rebound from the 2.1% gain in the week ended Dec. 15.


Wednesday, January 2, 8:55 a.m. EST

This weekly measure of retail activity will report on sales through the first four fiscal weeks of December, ending Dec. 29. In the first three weeks, sales were down 0.7%. In November, spending was up 0.3%.


Wednesday, January 2, 10 a.m. EST

Manufacturers are reporting a virtual halt in output growth. Economists expect the December purchasing managers' index reading will be even a little lower than the November level of 50.8%. In October, the index slipped to 50.9%, from 52% in September. A reading above 50% indicates an increase in activity while anything below that threshold indicates factory activity is contracting.

A couple of key components did show some improvement in November. The new orders index inched up to 52.6%, from 52.5% in October. And the production reading bounced up to 51.9% in November, after a 49.6% level the month before, indicating an outright fall in output. However, payrolls appeared to shrink with a 47.8% November result.

The November boost in demand appears to be coming from abroad as the export orders index climbed to 58.5%. And in a sign that domestic conditions are deteriorating, the imports index stayed below the 50% level for a second straight period.


Wednesday, January 2, 10 a.m. EST

Construction outlays probably fell further in November, after a sharp 0.8% drop in October. Breaking down the October decline was a surprising 0.5% dip in non-residential spending to go along with 1.

4% plunge in the residential sector. Economists will be paying close attention to the November non-residential results for any further signs of weakening. There are mounting concerns that the credit market turmoil will cut off funding for some commercial projects and cool off what has been a very impressive run in non-residential building. This is an important trend to watch since the start of 2006, nonresidential construction has, on average, contributed 0.4% point to inflation adjusted economic growth each quarter.


Thursday, January 3

Vehicle sales in December most likely edged down from the annual sales rate of 16.2 million units in November. In October, sales came in at an annualized rate of 16.1 million units, after sales of 16.2 million in September. Right now, sales in 2007 are on track to be the weakest since 1998 and analysts believe 2008 will be even tougher for the auto makers. A weaker economy, softer labor market, tighter credit market, and elevated gasoline prices all look set to put a further chill on sales early next year.


Thursday, January 3, 7 a.m. EST

The Mortgage Bankers Association releases its mortgage Weekly Mortgage Applications Survey of home buying and refinancing application activity for the week ending Dec. 28. The interest rate for 30-year fixed-rate mortgages above 6% has depressed application activity. The average interest rate for a 30-year fixed-rate mortgage was 6.1%, from 6.18% for the week of Dec. 14.

The purchase index decreased 7.8 percent to 292.3 in the week ended Dec. 21 from 317.1 for the period ended Dec. 14. The fall in refinancing activity was a little steeper with an 8.5% drop to 1915.3 from 2093.6 during the previous week.

The latest drops pulled down the four-week moving averages. The refi index cooled down to 2412.5 from 2456.9 during the week ended Dec. 14. The moving average for the purchase index was 438.2 from 440.4.


Thursday, January 3, 8:15 a.m. EST

The ADP National Employment Report is a measure of nonfarm private employment using anonymous payroll data of around 383,000 businesses and close to 23 million workers. The monthly figures are prepared by Macroeconomic Advisers, an economic consulting firm. The report is used by economists to get a sense of how the labor markets are doing before the Bureau of Labor Statistics' employment report. The ADP numbers for November were positive with a total reported increase of 189,000 in private payrolls, after a gain of 119,000 in October and 61,000 the month before. The upward trend in hiring has pushed the six month average up to 96,700 new jobs per month, the best reading since June.

Meanwhile government figures showed a much smaller November increase in private payrolls of 64,000, after a gain of 132,000 the month before. But overall the ADP numbers this year have tracked pretty well with the official numbers. Through November, ADP reported 1.02 million new private sector jobs and the Bureau of Labor Statistics showed a gain of 1.07 million. The key going forward is whether renewed concerns about financial markets and a deepening housing recession will cause business pare back even further on hiring.


Thursday, January 3, 8:30 a.m. EST

The number of initial jobless claims inched up to 349,000 for the week ended Dec. 22. In the week ended Dec. 15 claims climbed to 348,000, after a reading of 334,000 in the prior period. The current level is above the average for all of 2007.

The four-week moving average did recede to 342,500 in the week of Dec. 22 from 343,500. Continuing jobless claims, which are a week behind the initial claims figures, reached a two year high of 2.71 million from 2.64 million in the week ended Dec. 8.


Thursday, January 3, 10 a.m. EDT

Factory orders probably edged up a little in November. The U.S. Census Bureau already reported that November durable goods orders fell short of the consensus forecast with a mere 0.1% gain.

However, the 20.9% surge in civilian aircraft orders, a very volatile category, caused the November tally to increase. Outside of transportation, orders were down 0.7%. Even more concerning was the measure of capital goods outside of aircraft, a key measure of business investment, which dropped 0.4% for the month after a 2.9% drop in October. Compared to a year ago, orders are off 2.3%.

The numbers raise concerns about corporate confidence. If businesses dial back on their investment outlays they are likely to hire fewer workers as well. That would put the economy in an even more fragile state.


Friday, January 4, 11:15 a.m. EST

Federal Reserve Board Vice Chairman Donald Kohn moderates a panel discussion entitled "Expertise and Macroeconomic Policy" that includes former Federal Reserve Vice Chairman Alan Blinder and former Fed economist Vincent Reinhart at the American Economic Association's annual meeting in New Orleans.

3:30 p.m. EST

Federal Reserve Board Division of Monetary Affairs director Brian Madigan moderates a panel discussion entitled "Central Bank Communication and Financial Markets" at the American Economic Association's annual meeting in New Orleans.


Friday, January 4, 8:30 a.m. EST

Hiring in December is expected be even weaker than November, when businesses and governments hired 94,000 workers. Economists will be looking not only at the general level of hiring but also the sources of job growth. Manufacturing and residential construction payrolls are likely to shrink further in December.

Right now the service sector is accounting for most of the jog growth. Private service-sector payrolls increased by 97,000 positions in November and accounted for 154,000 of the 192,000 jobs added in October. Within the service sector, professional services, health care and leisure and entertainment have been doing quite well. But there are some soft spots as well. Within finance, real estate and credit related positions have been pared due to the housing recession and financial market turmoil that's ensued. November payrolls also declined in ground and rail transportation. This is an area to watch as continued declines may be a sign of reduced need to ship goods and weaker economic activity.

The slower pace of hiring is expected to push up the unemployment rate to 4.8%, from 4.7% over the past 3 months and the recent low of 4.4% back in March. The slowdown in job growth and rise in unemployment may be putting some pressure on wage gains. The yearly gain in hourly wages was 3.8% for November. That was an improvement over the 3.6% pace of October, but down from the recent high of 4.3% in December of 2006. If hiring remains soft, wage growth will keep drifting lower. That would put added downward pressure on consumer spending and economic growth in 2008.


Friday, January 4, 10 a.m. EST

The Institute for Supply Management's December report on non-manufacturing business activity is expected to decline a notch. In November, the index fell to 54.1%, from 55.8% in October, and 60.7% back in June. The steady decline points to a deceleration in growth among service sector businesses. Both the new orders and employment indexes were tepid in November. The new orders index was 51.1%, while the jobs index was 50.8%. A reading of 50% implies no change in activity. Similar to manufacturers, service sector businesses see strong demand from abroad, with an export orders reading of 55.5%. Therefore, the main source of weakness is with domestic customers.

Meanwhile, in a sign that respondents are facing profit margin pressures on top of weaker demand, the price paid index zoomed up to 76.5% as nearly half the businesses reported an increase in the cost of goods and services they purchase. The main culprit was energy, as oil and gasoline prices climbed.


Saturday, January 5, 11:15 a.m. EST

Federal Reserve Board Vice Chairman Donald Kohn takes part in a panel discussion with Bank of Japan Deputy Governor Kazumasa Iwata and European Central Bank Vice President Lucas Papademos titled "Recent and Prospective Developments in Monetary Policy Transparency and Communications: A Global Perspective" at an event sponsored by the National Association of Business Economics in New Orleans.



ALCOA (AA), Apollo Group (APOL), Family Dollar (FDO), KB Home (KBH)

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