Bottom of Economic Cycle Nowhere in Sight

(RTTNews) - The latest shock to have hit consumers is the rapid deterioration in the labor market, which saw a loss of 1.5 million jobs in the fourth quarter alone. Economists estimate nearly a million-job cut in the first quarter. Consumers, who were holding tight to their purse strings due to the turmoil in the real estate and the financial market, are now confronted with a debilitated labor market, which is facing the prospect of rapid job losses and falling income levels.
Belying hopes that heavy discounting would boost sales, real private consumption fell by 0.3%-0.4% month-over-month in December. Quite promptly, consumers have now become cautious, especially with respect to their outlays. Testifying to this fact, retail sales declined for the sixth straight month in December, with sales dropping 2.7% month-over-month.
A drop in gasoline sales was responsible for much of the weakness. That said, almost all major categories showed declines for the month. Core retail sales, excluding autos, building materials and gas fell 1.4%, marking the biggest decline since September 2001. To make matters worse, October and November sales were revised downwards.
Based on the weak consumer data, Danske Bank lowered its GDP forecast for 2008 to show a 1.1% decline. The firm also lowered its GDP forecast for 2009 to a 1.5% contraction compared to a 0.5% anticipated initially.
The Labor Department's import and export prices report revealed a smaller-than-expected decline in import prices for December. However, non-oil import prices fell a bigger-than-expected 1.1%.
Meanwhile, the Fed's Beige Book showed that all districts reported weaker activity. While holiday sales were reported to be weak, residential and commercial real estate activity was weak across almost all districts. The Beige Book also revealed that vehicle sales were either weak or down in all districts, while manufacturing activity remained weak in almost all districts. Credit conditions continued to remain tight and labor market conditions deteriorated, with most districts reporting pay freezes or reductions in overall compensation.
Business inventories at the end of November were down 0.7% month-over-month, according to a report released by the U.S. Commerce Department. Business sales declined 5.1% from the previous month and were down a steeper 8.9% from the year-ago period. The total business inventories to sales ratio at the end of November was 1.41 compared to 1.24 in the year-ago period.
Inflation data highlighted deflation risks. Producer prices fell 1.9% month-over-month in December, showing a decline for the fifth straight month. Suggesting further easing in pipeline inflation, intermediate goods and crude prices fell 4.2% and 5.3%, respectively. Excluding food and energy prices, the core producer price inflation rate was 0.2%. Meanwhile, the consumer price index rose 0.1% in 2008, the smallest increase since 1954. The core reading fell to a 1.8% rate for the year after peaking at 2.5% in September.
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