Markets & Finance

Vital Signs: Housing and Autos Loom in '07


On tap: December employment figures and business activity reports, November construction spending and factory orders data

Two of the key issues heading into 2007 are how the housing recession and problems among U.S. auto makers will impact the rest of the economy. Some softer economic numbers have begun to turn up in places outside of just housing construction and auto production. Business sentiment has slipped a little, factory orders are declining and inventories have risen. This week's data may provide some clues on whether a broader weakening is occurring.

So far, businesses have kept hiring workers, albeit at a modest pace. The consensus among economists polled by Action Economics is that nonfarm payrolls in December grew by 110,000 workers. That's a bit below the average monthly gain of 149,000 so far in 2006. Weakness in the labor market has been largely confined to construction and manufacturing. More of the same can be expected for those sectors, as home builders have yet to put a real dent in housing inventories and the Institute for Supply Management's December factory activity report is expected to remain pretty weak.

The ISM's non-manufacturing index is forecast to remain at a pretty strong level, which bodes well for further hiring in service sector. However, recent construction spending reports show that non-residential building has eased after being on a torrid pace. It is not clear yet whether the declines in non-residential construction spending are a sign of some rise in businesses caution. If so, it could imply lower levels of hiring early on in 2007.

This week also brings the Census Bureau's full report on manufacturing activity. New orders in November are expected to be up from October, but aircraft orders will make up a huge part of that gain. The durable goods data for manufacturing in November show a rebound in computer orders, but fresh softness in other areas. The markets will also be looking at the new orders indexes for both ISM reports to get some early indication of whether the broad-based slide in November factory orders outside of aircraft was just a blip.

An important part of manufacturing is light vehicles, where the news on sales isn't expected to be great. Sales likely rebounded in December, but the level will probably remain modest. Plus, the rise should be incentive driven. The good news is that auto inventory levels are coming down.

All financial markets will be closed on Monday, Jan. 1 in observance of the New Year's holiday. The stock and bond markets will also be closed on Tuesday, Jan. 2 to observe National Day of Mourning for former president Gerald R. Ford.

Here's the weekly economic calendar, from Action Economics.

Economic Reports

Report

Date

Time

For

Median Estimate

Last Period

ISM (Manufacturing)

Wednesday, Jan. 3

10 a.m.

December

49.5

49.5

Construction Spending

Wednesday, Jan. 3

10 a.m.

November

-0.3%

-1.0%

Factory Orders

Thursday, Jan. 4

10 a.m.

November

1.8%

-4.7%

ISM (Non-manufacturing)

Thursday, Jan. 4

10 a.m.

December

58.0

58.9

Nonfarm Payrolls (Thousands)

Friday, Jan. 5

8:30 a.m.

December

$110.0

$132.0

Manufacturing Payrolls (Thousands)

Friday, Jan. 5

8:30 a.m.

December

-10

-15

Unemployment Rate

Friday, Jan. 5

8:30 a.m.

December

4.5%

4.5%

Average Hourly Earnings

Friday, Jan. 5

8:30 a.m.

December

0.3%

0.2%

Hours Worked

Friday, Jan. 5

8:30 a.m.

December

33.9

33.9

FOMC MINUTES - Tuesday, Jan, 2, 2 p.m. EDT

The Federal Reserve will release the minutes of the Open Market Committee meeting held on Dec. 12. The minutes will draw lots of attention as some investors and economists believe the economy is decelerating, which should produce enough slack in the economy to reduce inflation pressures. However, the central bank continued to put more emphasis on potential inflation risks in its press release that immediately followed the meeting. Right now, the financial markets reflect investor expectations that the Fed will reduce interest rates next year.

ISM SURVEY- Wednesday, Jan. 3, 10 a.m. EST

The Institute for Supply Management's factory activity index is expected to remain unchanged. In November, the index slipped to 49.5%, the first reading below 50% since April of 2003. The index stood at 51.2% in October and 52.9% in September. A headline reading below 50% implies that factory activity contracted during the month, but some analysis of the index over the years suggests that industrial production on a yearly basis doesn't start to slide until the index dips down around 47%.

The new orders and production indexes also hit their lowest points since April of 2003, falling to 48.7% and 48.5%, respectively. In addition, the inventories index remained below 50% for a third straight month, as manufacturers try to pare down stockpiles after slower demand led to a buildup of goods in warehouses.

One bright spot was the continued strength in the index tracking orders from abroad. That index stood at 56.9% in November, from 57.8% in October, and 55.3% in the prior month. The export orders index reflects the continued strength in demand for American-made capital goods.

VEHICLE SALES - Wednesday, Jan. 3

Vehicle sales probably improved a little in December. According to WardsAuto.com, sales likely reached a modest annualized rate of 16.6 million units. Domestic auto makers are expected to ratchet up incentives in order to boost yearend sales. In November, light vehicle sales cooled to a pace of 16.0 million, from 16.1 million in the prior month.

Sales in 2006 are on pace to be the weakest since 1998. One good sign for auto makers is that inventory levels are coming down. According to WardsAuto.com, end-of-month inventories for November were the lowest in five years.

MORTGAGE APPLICATIONS - Wednesday, Jan. 3, 7 a.m. EST

The Mortgage Bankers Association releases its weekly mortgage application volume figures for home buying and refinancing activity during the week ending Dec. 29. Activity retreated further as mortgage rates rose.

The purchase index dropped 10.6%, to 390.2 in the week ended Dec. 22. In the previous week, the index fell to 436.5, from 463.8 in the week ended Dec. 8. The refi index plunged to 1604.6, an 18.5% weekly fall. For the week ended Dec. 15, the index dipped to 1968.8, from 2304.4.

The four-week moving average for the purchase index slowed to 429.3 in the week ended Dec. 22, from 433.4 through the week ended Dec. 15. At the same time, the four-week average for the refi index stood at 1966.9, from 2003.1 in the prior period.

The slowdown in activity is being driven by rebounding mortgage rates. The average 30-year fixed-rate mortgage stood at 6.12% in the week ended Dec. 22, from 6.1% in the prior period.

ICSC-UBS STORE SALES - Wednesday, Jan. 3, 7:45 a.m. EST

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the period ending Dec. 30. Weekly sales got brisker as Christmas arrived. During the week ended Dec. 23, weekly sales rose 2%, after a 1.6% jump in the prior week, and a 1% gain in the week ended Dec. 9. Even with the improved weekly performance, the increase from a year ago cooled down to a rate of 1.7%, from 2.4% in the prior week.

CONSTRUCTION SPENDING - Wednesday, Jan. 3, 10 a.m. EST

Construction outlays kept crumbling, according to economists surveyed by Action Economics. In October, spending fell a larger-than-expected 1% as both residential and non-residential outlays dipped. Private residential spending posted a 1.9% monthly decline and the plunge from the same period a year ago was 9.4%.

Another decline in permits issued for new construction point to further erosion in residential construction over the coming months. Non-residential outlays eased for a second straight month, but were still growing at a yearly pace of 16.4% in October. The manufacturing category dropped 3.1% in October as factory activity slowed.

JOHNSON REDBOOK INDEX - Wednesday, January 3, 8:55 a.m. EST

This weekly measure of retail activity will report on sales for the fifth and final fiscal week of December, ended Dec. 30. Sales during the first four weeks of the month were off 1.6% compared to November. For the full month of November, sales ended up 0.1% better than October.

JOBLESS CLAIMS - Thursday, Jan. 4, 8:30 a.m. EST

Jobless claims inched up to 317,000 in the week ended Dec. 23. In the prior week, claims rose to 316,000, from 306,000 in the week ended Dec. 9. Despite the small weekly rise, the four-week moving average dipped to 315,750, from 326,000 in the week ended Dec. 16.

Continuing jobless claims for the week ended Dec. 23 climbed to 2.53 million, from 2.51 million in the week ended Dec. 16, and 2.47 million in the previous week. The currnet level is the highest since the end of January, 2006. The rise in continuing claims may be an indication of slower hiring activity.

ISM NON-MANUFACTURING SURVEY - Thursday, Jan. 4, 10 a.m. EST

The Institute for Supply Management issues its December report on business activity for the non-manufacturing sector, which is made up largely of service sector businesses. Economists expect the index to edge lower. In November, the index climbed to 58.9%, from 57.1 in October, and 52.9 in the prior month. Only 11 out of 18 industry sectors said that activity increased in November.

The details of the November report were also upbeat. The November new orders index rose to 57.1%, from 56.5% in October. The employment and orders backlog indexes bounced back in November as well. Meanwhile, more respondents said that their inventories declined during the month and fewer thought their inventory levels were too high. Those responses may be reflecting a general inventory adjustment that's going on after warehouses filled up during the second half of the year.

MANUFACTURERS' SHIPMENTS, INVENTORIES, AND ORDERS - Thursday, Jan. 4, 10 a.m. EST

November factory orders increased 1.8%, say economists polled by Action Economics. New orders for durable goods were already reported to have grown 1.9% for November. However, the gain was concentrated in the transportation sector. Defense aircraft orders jumped 40%, while non-defense aircraft orders rose by 7.2% and motor vehicle orders edged up 0.2%. Outside of the transportation sector, orders fell 1.1%. Durable goods orders outside of the very volatile transportation sector are on track to post a quarterly decline for the first time since 2003.

Total factory orders plummeted a surprising 4.7% in October, following a 1.7% rise in September. The October drop was focused among civilian aircraft, computers, and construction machinery. However, the durable goods data for November indicates that the weakness may have spread.

Inventories within durable goods grew a little more during November. The slowdown in economic activity has led to a buildup in inventories that's larger than desired. In October, total factory inventories climbed 0.4%, after two straight monthly gains of 0.6%. Manufacturing output will likely ease as factories try to pare down stockpiles.

MEETING OF NOTE

Friday, Jan. 5, 1:30 p.m. EST - Federal Reserve Board Chairman Ben Bernanke speaks at a joint luncheon of the American Economic Association and the American Finance Association as part of the groups' annual meetings in Chicago.

EMPLOYMENT REPORT - Friday, Jan. 5, 8:30 a.m. EST

Payrolls probably grew at a modest level in December. Nonfarm businesses added 132,000 jobs in November, after an increase of 79,000 workers in October, and a solid 203,000 in September. The unemployment rate is expected to hold at 4.5%, after climbing to that level in November from 4.4% in October.

Factory payrolls are expected to decline for a sixth straight month as factory activity appears to be softening. Two areas to keep an eye on are construction and services. The housing downturn has led to falling residential construction payrolls, but nonresidential construction eased in October and September as well. Meanwhile, most job gains in recent months have come in the service sector.

Another important area to watch is wages. Average hourly wages have grown at a solid clip. In November, the monthly gain was 0.2% and the increase from a year ago was 4.1%. As inflation pressures show signs of subsiding and wage growth holds up so far, real wage gains should remain healthy. Solid inflation adjusted wage growth should keep consumer spending going at a decent clip.

MEETING OF NOTE

Saturday, Jan. 6, 9 a.m. EST - Federal Reserve Board Governor Randall Kroszner presides over a session on government-sponsored enterprises and home mortgage finance at the annual meeting of the North American Economics & Finance Association in Chicago.


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