Manufacturing in the dumps
The NAPM survey inched up to 41.9 in February after reaching a low in this cycle of 41.2 percent in January. Any level below 50 percent on this diffusion index means that the manufacturing sector is declining - which it has ever since mid 2000. We depict the purchasing managers index of Chicago in this chart as well to show how well the two series move over time. The PMAC Survey is considered a leading indicator of the NAPM Survey since it is reported a day earlier. But it is important to note that the Chicago index tends to decline more sharply and increase more dramatically than the national index. In any case, the upward trend exhibited in both series in February doesn't meet a reversal in manufacturing activity. At best, one could say the activity declined at a slower rate than the previous month. The index will have to get much closer to 50 percent for manufacturing to show real improvement. Incidentally, any level below 44 percent is considered an indication that the economy as a whole is contracting. However, the index has been below 44 percent for only two months; a longer time frame would be needed to declare a recession at this point.

Other manufacturing indicators also showed signs of weakness. New orders for durable goods dropped 6 percent in January, entirely reversing the gains of the previous two months. The aircraft component is behind this volatility. However, there is no question that the overall trend in durable goods orders is down. The chart below depicts year-over-year changes in total durable orders and nondefense capital goods orders, which are a leading indicator of capital spending. The scale for nondefense capital goods on the right is twice the scale on the left because changes are more dramatic for the subcomponent. In any case, total durable goods are already showing a 5.6 percent decline from a year ago, and nondefense capital goods are up a mere 2.9 percent from year ago levels. This weakness in orders will put downward pressure on industrial production in the next several months.

The manufacturing sector is in recession. Fed chairman Alan Greenspan has mentioned the term "inventory correction" several times. Indeed, fourth quarter real GDP figures did reveal that inventories were built at a slower pace in the fourth quarter relative to the third quarter. More inventory correction will become evident in the current quarter.

Consumer confidence tanks
It doesn't matter which confidence measure you read, they are all headed south. Earlier in the week, the Conference Board reported that its consumer confidence index dropped nine points in February to 106.8. The University of Michigan's consumer sentiment index dropped commensurately to 90.6 in February. Consumer confidence is now at its lowest level since the spring of 1996. It is difficult to measure a concept like optimism. And if we think back, U.S. consumers were pretty happy in the mid-1990s as the stock market was marching ever higher. So it is more important to look at monthly changes in consumer confidence. The drop in optimism from just six months ago is pretty phenomenal. It is the steepness of the decline in confidence that has Federal Reserve officials worried about the consumer sector.

Housing dives in January
New and existing single-family home sales both dropped in January. In the case of new single-family homes, it was simply a reversal to the previous month's gain. In contrast, existing family home sales were down in December as well. Yet home sales have been remarkably healthy these past several months even as consumer confidence has fallen, the manufacturing sector is in recession, and stock prices have gone nowhere but lower. The answer to the housing question lies in the chart: mortgage rates are down 150 basis points from their peak at mid-year 2000. Lower mortgage rates help to reduce monthly payments (as long as home prices aren't increasing in proportion).

The current sales pace won't necessarily lead to a spurt in furniture and appliance spending, but it will help to maintain a floor on retail sales in these areas. Home sales would have to surpass the current range in order to boost in the retail sector.

While the home sales market appears in relatively good shape, total construction expenditure data tells a slightly different story. Total construction expenditures rose 1.5 percent in January after a 1 percent gain in December. As indicated in the chart above, spending is up 3 percent from a year ago. But the red line, reflecting construction expenditures in the residential sector is down 2.7 percent from a year ago. This reflects the fact that housing starts, however stable, are still inching lower rather than higher. The bulk of the construction activity is in the nonresidential sector. This component surged 5.8 percent in January - and is up a whopping 17.5 percent from last January! Given the overall slowdown in economic activity, one has to wonder whether a glut of commercial buildings is on its way.

Old news is last
The Commerce Department released its preliminary estimate of real GDP, a meager growth rate of 1.1 percent in the final quarter of 2000. This is a slight downward revision from the advance estimate showing a 1.4 percent rate of growth. Revisions were minor in consumer spending, business fixed investment and net exports. Real final sales grew at a 1.5 percent rate rather than a 1.6 percent rate. The downward revision in GDP was centered on inventories. A slower rate of inventory building is a drag on GDP growth. This is good news, in the sense that a drop in demand necessitates an inventory correction. A quicker response time could possibly reduce the disruptions in the economy.