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Deepening recession in manufacturing
New orders for durable goods dropped 8.5 percent in September after posting more modest declines in the previous two months.
Excluding the volatile transportation sector, orders fell 5.5 percent, still a pretty sharp decline given somewhat less weakness the past
couple of months. As a result, new orders plunged at a 17.8 percent rate in the third quarter, less than the first quarter pace but faster
than the second quarter when it was beginning to look like perhaps new orders were bottoming out.
New orders for nondefense capital goods, a barometer of capital goods spending, declined 10 percent in September and
plummeted at a 34.3 percent annualized rate in the third quarter. The chart above shows a disconcerting picture of the manufacturing
sector - five straight quarterly declines for total orders, three phenomenally large declines in nondefense capital goods orders. This
does not bode well for industrial production, which has already posted declines in the past year. The third quarter figures almost
ensure another two or three months of declines in industrial production.
Housing stumbles
Sales of existing single-family homes plunged 11.7 percent in September following a 6.5 percent gain. This put existing home sales
5.2 percent below year ago levels. In contrast, sales of new single-family homes decreased only 1.4 percent in September after a 2.9
percent drop in August. Sales were down 4.2 percent from year ago levels. Monthly data tends to fluctuate more wildly than quarterly
figures. The chart below depicts the quarterly pattern for total home sales and mortgage rates.
Note that the pace for the entire third quarter of 2001 was higher than the year-ago pace. Yes, home sales are down from their highs
of the first half of this year, but still remain relatively strong despite the overall weakness in the stock market and the recession in
manufacturing. It is likely that the worsening picture in the job market may dampen housing in the next several months, but economists
have been predicting a slowdown in home sales for several years. But what has happened instead? A more robust housing sector
has emerged even with rising rates in 1999 and 2000.
Labor market deteriorates
The Conference Board's help wanted index dipped down to 52 percent, only a tick below last month's level of 53 percent. The index
may be bottoming out, but the levels now stand lower than they were during the 1990-91 recession and the subsequent meager job
market recovery of 1992 and 1993. At the same time new jobless claims are rising rapidly, though levels were worse in the early
1990s. Economists are predicting that the unemployment rate will post a 0.3 percentage point gain in October to 5.2 percent
(released next Friday).
Employment cost index inches higher
The employment cost index rose a mostly as-expected 1 percent in September, resulting in a 4.1 percent year-over-year change in
this total compensation measure. If worries of an economic recession weren't so high, the upward tilt in this index would have been
bearish for the markets. Wages and salaries did moderate a bit during the quarter, but benefit costs jumped to their fastest pace in
more than a year. Given the weakness in the economy, it is likely that this index will begin showing more restrained increases going
forward.
Markets at a Glance • Recap of US Markets • The Economy • The Bottom Line • Looking Ahead
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