May 1, 2008

Broad-Based Softness in Early 2008

Recent reports reflect a fragile national economy. The economy grew slowly again in first quarter 2008, and more recent indicators suggest that economic activity has weakened in the second quarter amid increased upward pressures on food and energy prices that are causing inflationary pressures to edge up.

Second Straight Quarter of 0.6 Percent GDP Growth
Real GDP growth was a meager 0.6 percent in first quarter 2008, unchanged from fourth quarter 2007, yet slightly better than market expectations. In contrast to the previous quarter, an increase in inventory investment helped to offset negative contributions from residential and nonresidential investment (Chart 1). Increased imports and a downturn in personal consumption expenditures for goods were also to blame for the weak growth.

Payroll Employment Negative Throughout First Quarter
Nonfarm payroll employment declined by 80,000 jobs in March, which was the steepest overall monthly decrease in the first quarter. Job losses in January and February were also substantially revised upward by 54,000 and 13,000, respectively, to 76,000 each month (Chart 2). During the first three months of this year, payroll employment dropped by a total of 232,000 jobs. According to the Household Survey, the unemployment rate increased from 4.8 percent in February to 5.1 percent in March.

The weakness in March was largely due to significant job losses in construction (51,000), manufacturing (48,000) and professional and business services (35,000). Private payrolls fell another 98,000 in March, dropping by 286,000 jobs since the start of the first quarter. Service-sector job gains in the first quarter were a negligible 12,000, despite gains of 131,000 in education and health services. A downtrend in temporary help services suggests that service payroll employment may weaken further in the coming months.

Housing Market Continued to Slump
Construction indicators declined further in March. Housing starts fell 11.9 percent to 0.95 million annualized units, led by a 24.6 percent decline in multifamily starts. Housing permits fell another 5.7 percent in March and are now 59 percent below their September 2005 peak. Sales of new single-family homes also decreased in March, falling 8.5 percent and are now sitting 62.1 percent below their peak in July 2005. Despite further decreases in median existing-home prices, existing-home sales fell again in March, offsetting the slight increase in February and suggesting that the continuing drop in house prices has yet to stop home sales from declining (Chart 3).

Financial Market Still Stressed
Conditions in short-term money markets have not improved much since March, with LIBOR spreads approaching levels seen before the Fed created the Term Auction Facility in December. Despite consecutive cuts in the federal funds rate, some short-term interest rate spreads between private and Treasury securities have remained almost unchanged at elevated levels. On the other hand, mortgage rates and long-term corporate bond yields have fallen in recent weeks, with spreads between corporate and Treasury bond yields declining notably (Chart 4).

Inflation Edged Up in March
Hurt by upward pressures on import and commodity prices, inflation rates picked up in March. Overall and core CPI posted 4 and 2.4 percent rates, respectively, compared with 12 months ago. Overall and core PCE also rose in March, posting 3.2 and 2.1 percent year-over-year rates, respectively (Chart 5). Although short-term inflation expectations have edged up due to surging energy and food prices, long-term inflation expectations remain contained.

—Jessica J. Renier

About the Author Renier is a research assistant in the Research Department at the Federal Reserve Bank of Dallas.