Week of February 1, 2008
Income, Spending Edge Past Forecasts
Consumer spending posted only a narrow gain in December, another sign of a weak holiday shopping season and a
slowing economy, although readings on spending and personal income were a bit better than forecasts. Spending by
individuals rose 0.2%, well below November's 1% rise, which was revised slightly lower in the Commerce
Department report. Economists had forecast only a 0.1% gain in the month that included the key holiday shopping
period. The pickup in spending was due primarily to higher prices. In constant dollars, spending was unchanged in
the latest reading.
Personal income rose 0.5% in December, after a 0.4% rise the previous month. Economists had forecast another
0.4% rise. The rise in personal income outpaced the change in prices, leading to a 0.2 percent rise in real income in
the period. It was the first time since September that income gains had outpaced price increases.
Because income gains outpaced spending, consumers posted a narrowly positive savings rate in the month - 0.2
percent. That means the average household saved $2 on every $1,000 of after-tax income. In November, after-tax
income essentially matched spending, leaving a zero savings rate.
Fed Slashes Rates To Blunt Economic Slowdown
The Federal Reserve cut U.S. interest rates by a hefty half-percentage point on Wednesday (January 30) as part of an
ongoing aggressive effort to halt a sharp slowdown in an economy hit by a housing slump and a credit crunch. The
Fed's action takes the bellwether federal funds rate to 3 percent, the lowest since June 2005, and comes just eight
days after the central bank slashed rates by three-quarters of a point. The cumulative 1.25 percentage point
reduction in the interbank overnight rate in less than two weeks ranks among the most abrupt rate-cutting sprees in
the modern history of the U.S. central bank.
Consumer Sentiment 'Significantly' Below Last Year
U.S. consumer sentiment is "significantly" below last year's levels and "the risk that a recession develops remains
uncomfortably high," according to a survey by University of Michigan and Reuters. The index rose to 78.4 in
January from 75.5 in December. The mid-January reading was 80.5. In January 2007 the level had reached 96.9,
according to the survey. The current-conditions index rose to 94.4 in January from 91.0 in December. In January
2007 the reading was 111.3. The expectations index in January increased to 68.1 from 65.6 in December. Last
January the expectations index hit 87.6.
Consumer Confidence Falls In January
A key barometer of consumer confidence slipped in January, giving up modest gains posted in December, though
the decline was less severe than expected. The New York-based Conference Board said that its Consumer
Confidence Index fell to 87.9, down from 90.6 in December. Analysts had expected a decline of 87 points. A bleak
outlook for business conditions and a more negative opinion of the job market curbed consumers spending habits,
according to the Conference Board.
Economy Much Weaker Than Expected
Gross domestic product, the broadest measure of the nation's economic activity, grew at an annual rate of 0.6%,
adjusted for inflation, in the fourth quarter, according to the Commerce Department, down from 4.9% in the final
reading of growth in the third quarter. Economists had forecast GDP would slow to a 1.2%. The anemic growth in
the fourth quarter matched the slowest expansion in the economy in the last five years.
Factory Orders Strongest In Five Months
Orders to factories for big-ticket manufactured goods soared in December by the largest amount in five months,
welcome news for an economy buffeted by talk of recession. The 5.2 percent increase in orders was a surprise
finish for the manufacturing sector at year's end -- a segment of the economy considered to have had a poor year.
The increase in orders, as reported by the Commerce Department, was far larger than had been expected. The
strength came from a big increase in demand for commercial aircraft, but even excluding the transportation sector,
orders posted a solid 2.6 percent gain.
Construction Spending Plummeted In 2007
Construction spending fell by a record 2.6 percent in 2007 — mostly reflecting record cutbacks in home-building
projects by private companies. Private companies last year slashed residential projects by 18.3 percent, the largest
drop on records dating back to 1993. Such spending was flat in 2006 and was up by 13.5 percent in 2005. The 2.6
percent drop in total construction spending by both private builders and government last year came after a 5.3
percent increase in 2006 and a 10.6 percent jump in 2005, the department said.
Manufacturing Activity Rebounds
A key index of manufacturing activity registered stronger-than-expected growth in January. The Institute for Supply
Management's manufacturing index, which surveys supply executives in the manufacturing sector, rose to 50.7,
from 47.7 in December. Economists were expecting a reading of 48.8, according to Briefing.com. The tipping point
for the index is 50, with a reading above that reflecting growth in the sector. A reading below 50 represents a decline
in manufacturing. The index unexpectedly slipped in December, after 10 consecutive months of expansion, as
slowing demand for products caused a sharp drop in new orders and production.
Foreclosures Up 75% In 2007
The number of foreclosures soared in 2007, with 405,000 households losing their home. That's up 51 percent from
the 268,532 homes that were repossessed in 2006. Total foreclosure filings soared 97% in December alone
compared with December of 2006, according to RealtyTrac, an online seller of foreclosure properties. For the year,
total filings - which include default notices, auction sale notices and bank repossessions - grew 75%. More than 1
percent of all U.S. households were in some stage of foreclosure during 2007, up from 0.58 percent the year before.
Foreclosures Spike - And Will Get Much Worse
The risk of foreclosure is on a rapid rise nationally and, with a possible recession at hand, this spike in mortgage-
defaults could last for years. A report by First American Core Logic rates foreclosure risk for 381 metropolitan
areas, and found that the risk of foreclosure has jumped 22 percent from January, 2007, and 9 percent from three
The Core Logic report speculated that foreclosure risks may get a lot worse, and stay that way for a long time. In
the wake of recent speculation that the United States economy may be entering a recession -- or is already in one -
the report stressed that defaults continued rising for almost 2 years after the end of the last recession in 2001. Based
on that history, Core Logic expects that foreclosure risk will continue to increase over the next 18 months, at least.
New Home Sales: Biggest Drop Ever
New home sales posted the biggest drop on record in 2007, according to the government's latest look at the battered
housing market, as a year that saw a meltdown in the mortgage market and a drop in home values ended with yet
more signs of weakness. December sales came in at an annual rate of 604,000, the Census Bureau report showed,
down from 634,000 in November, which was also revised lower.
The weak December sales left full-year new home sales at 774,000, down 26 percent from the 1.05 million sales in
2006. That was the biggest drop since the government started tracking new home sales in 1963, surpassing the 23
percent decline posted in 1980.
Home Price Drop Is Biggest Ever
The housing market is only getting worse, according to the latest report from S&P Case/Shiller. Home prices were
down 8.4 percent in November compared with last year in its 10-city index, a record low. The 20-city index also fell
7.7 percent. The Case/Shiller report compares same-home sale prices. The industry considers it to be one of the
most accurate snapshots of housing prices.
Previously, the largest year-over-year decline on record was 6.3 percent in April 1991. The November report marked
the 11th consecutive month of negative returns for the index, and twenty-four months of decelerating returns.
Home Ownership In Record Plunge
The housing and mortgage meltdown caused the biggest one-year drop in the rate of homeownership on record,
according to government figures. The Census Bureau report showed that home owners accounted for 67.8% of
occupied homes in the fourth quarter, down 1.1 points from a year earlier. It's the largest year-over-year drop
recorded in the report. The ownership rate was also well below the 68.2% ownership rate in the third quarter of
2007. Homeownership rates, which have been tracked since 1965, hit a record high of 69.2% at the end of 2004.
The report also showed a record 2.18 million homes vacant and available for sale in the fourth quarter, up from the
2.07 million in the third quarter and the 2.1 million a year earlier. The fourth-quarter reading on vacant homes for
sale matched the previous record set in the first three months of 2007.
Refinancings Fuel Mortgage Application Surge
Mortgage application volume rose 7.5% during the week ended Jan. 25, according to the trade group Mortgage
Bankers Association's weekly application survey. The MBA's application index rose to 1,054.9 from 981.5 the
previous week. Application volume was pushed higher by a jump in refinance volume. Refinance application
volume increased 22.1%, while purchase volume tumbled 17.7%. Refinance applications accounted for 73% of total
Oil Pulls Back As Supplies Rise
Oil prices eased from their highs Wednesday (January 30) after the government said supplies of crude oil and
gasoline rose more than expected. U.S. light crude for February delivery rose 9 cents to $91.73 a barrel. Oil traded
up 59 cents at $92.23 a barrel just prior to the report's release, and was lower immediately after the release before
rebounding. In its weekly inventory report, the Energy Information Administration said crude stocks rose by 3.6
million barrels last week. Analysts were looking for an increase of 2.3 million barrels according to a Dow Jones
Gas Prices Fall 9 Cents To $2.98
Gas prices fell more than 9 cents per gallon of self-serve regular during the past two weeks to $2.98, national
surveys said Sunday. The surveys -- carried out Jan. 25 and Jan. 11 -- found the average retail price fell 9.43 cents in
two weeks, said Trilby Lundberg, publisher of the Lundberg Survey, which tallies prices at about 5,000 stations. Gas
prices had risen during the prior three weeks. She credited the reverse on slightly lower crude oil prices and
shrinkage in profit margins of refiners and retailers.
Jobless Claims Surge http://www.reuters.com/article/businessNews/idUSN3130858720080131?
The number of workers filing new claims for jobless aid surged last week to the highest since October 2005. The
Labor Department said initial claims for state unemployment benefits jumped by 69,000 last week to 375,000. It was
the biggest jump since September 2005 and the highest since October of that year, just after Hurricane Katrina
devastated the U.S. Gulf Coast. However, the Labor Department said the Martin Luther King Jr. Day holiday last
Monday may have made it difficult to adjust the data for seasonal variations, and analysts agreed.
U.S. Newspaper Help-Wanted Ads Rise In December
The number of help-wanted ads in U.S. newspapers rose in December. The Conference Board said its gauge
measuring help-wanted ad volume in the United States increased to 22 from 21 in November. The index was 33 a
year earlier. The lack of stronger job prospects is resulting in very cautious and nervous consumer attitudes and
spending patterns. Meanwhile, with corporate profits no longer rising strongly, business is turning cautious about
taking on relatively expensive labor.
Surprise Drop In Jobs In January
Employers trimmed jobs from their payrolls in January, according to a much anticipated government jobs report that
showed the first decline in employment in four years and raised new concerns about the risk of recession for the
weakening U.S. economy. There was a net loss of 17,000 jobs in the month. That was partly balanced by a sharp
revision higher for the December reading to a gain of 82,000 jobs from the original reading of only an 18,000
Government figures showed the first decline in payrolls since August 2003. But the drop was based on the
preliminary reading, which is subject to revisions. There have been a few months in the last four years, including
August 2007, when the preliminary payroll reading showed a decline that later revised to a gain.
Will Budget Fit The Boom?
There's a $632 million construction boom under way at Fort Knox to help prepare for 4,000 new workers coming to
the Army post over the next three years as part of a national military base realignment plan. Beyond sparing the post
from closure, the boom is expected to spin off new businesses, create new jobs and pump hundreds of millions of
dollars into the region's economy. Yet local officials also expect Fort Knox's growth will flood area schools with
new students, crowd existing roads and increase demands on water and sewer systems.
The bulk of the new permanent work force at Fort Knox will come from 3,400 members of an infantry combat
brigade team moving from Fort Hood, Texas, and 2,800 human resources workers now stationed in Indiana,
Missouri and Virginia. Meanwhile, about 3,650 workers will leave when the Armor Center and School heads to Fort
Benning, Ga., starting in 2009. When spouses and children are added, a total of 11,500 people are expected to move
to the region by 2011 -- nearly four times the population increase in Hardin County from 2000 to 2006.
Ford Hits Rough Road With Falling Truck Sales
The Ford Explorer had its worst sales month ever in January and demand for F-Series trucks fell 8 percent, the
automaker said in an announcement that offered no encouragement for sport utility vehicle sales. Ford sold 7,217 of
the Louisville-built Explorers last month, a 19 percent drop from a year earlier. Last year, the company sold a
monthly average of more than 11,000 of the SUVs, which are built at the Louisville Assembly Plant on Fern Valley
The Camry, assembled in Georgetown, Ky., had its best month ever, according to a Toyota sales report, with 31,601
sold in January, up slightly from 31,461 the year before.
Ford sales overall were down 4 percent, while Toyota sales dropped 2.3 percent. Of the major automakers, only
General Motors had a monthly increase. GM's sales of crossovers lifted its overall monthly sales 2.6 percent.
Louisville Gas Prices Averaging $2.90
Louisville gas prices were averaging $2.90 per gallon this morning (January 28), according to drivers posting prices
to courier-journal.com/gas. Prices were as low as $2.83 in neighborhoods south of downtown and up to $3 in the
Highlands. Oil prices were down $1.08 per barrel in New York Mercantile Exchange trading this morning at $89.63
amid expectations that a slowdown in the U.S. economy would temper demand.
Foreclosures Rose 23% In State In 2007
Nearly 75 percent more foreclosures were filed nationwide in 2007 than in 2006, but Kentucky's problem was less
severe, RealtyTrac reported. The state saw a 23.45 percent increase in foreclosures in 2007, including a 19.9 percent
decline in filings in the last three months of the year, compared with the same quarter in 2006. RealtyTrac said 5,105
Kentucky properties were in some stage of foreclosure at the end of 2007.
The Market Edge reported Tuesday that 21.1 percent fewer building permits were issued in the eight-county
Lexington area last year than in 2006. The totals were 3,787 in 2006 versus 2,987 in 2007.
Commonwealth of Kentucky
Office of State Budget Director
Governor’s Office for Economic Analysis