Economic Highlights for the Week Ending February 8, 2008

MONDAY, February 4th
The Federal Reserve’s Senior Loan Officer Survey showed weaker demand and tighter lending standards for both residential and commercial mortgages, from nontraditional to prime, in January. A net 52.9% of respondents reported tighter credit standards on prime mortgages, compared to 40.8% in the previous survey and well above the 15% reported in Q207. Additionally, most respondents expect further deterioration in credit quality in 2008.
TUESDAY, February 5th
The ISM non-manufacturing index fell sharply in January to 41.9% from a reading of 54.4% in December. The service sector has long been a stable support to economic growth but the latest data indicate contraction the service industries and are consistent with recession in the overall economy.
The service sector encompasses almost 90% of the economy so today’s steep plunge into receding territory spooked the financial markets and increased rate cut expectations. Fed funds futures were pricing in a 76% probability today that the Fed would cut the fed funds rate by a half point before the next FOMC meeting, March 18. Just yesterday, 80% of bets were placed on the Fed cutting by a quarter-point the next time they meet in March.
WEDNESDAY, February 6th
Productivity grew at a 1.8% rate in the fourth quarter better than an expected rate of 1.0%. The gain in productivity last quarter was a result of strong output but fewer hours worked to achieve that output. Unit labor costs rose just 2.1% last quarter and were up a mild 1.0% over the past year. Stronger productivity without higher labor costs is good news for inflation.
The MBA mortgage applications index gained 3.0% to 1086.6% for the week ending February 1. The purchase index jumped 12% during the week while the refinance index fell 1.0%. Refinancing applications accounted for 69.2% of all mortgage applications. Lower rates continue to drive total mortgage application activity which remains 72.4% above its year ago level.
THURSDAY, February 7th
Chain store sales at stores open at least one year rose just 0.5% in January according to an index compiled by the International Council of Shopping Centers. This was the weakest January on record for the ICSC and follows a downbeat holiday shopping season. Apparel, department and furniture stores posted big declines last month while drug stores and wholesale clubs reported strong gains. With consumer finances under pressure, the outlook for same store sales remains weak.
Consumer credit increased in December by a very modest $4.5 billion after an outsized increase of $17.1 billion in November. It brings the annual rate of growth in consumer credit down to 2.1%. Consumers used both revolving and non-revolving forms of credit modestly in December. Credit usage is expected to slow further as consumers deal with tighter credit, weaker housing and sluggish job growth.
Jobless claims fell 22k to 356k for the week ending February 2. The downshift in initial claims is not surprising given the huge run-up last week. Nevertheless, the level of claims remains elevated indicating acceleration in the pace of layoffs.
The NAR’s pending home sales index fell 1.5% in December to 85.9%. The index has dropped 24.2% from a year ago. Declines in the index suggest further weakening in existing homes sales in the months to come.
FRIDAY, February 8th
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12182.13 12743.19 -561.06 or -4.40%
NASDAQ 2304.85 2413.36 -108.51 or -4.49%
WEEK IN ADVANCE
Amid much uncertainty and volatility in the financial markets, market players, economists and analysts will look to the data in the coming weeks for a handle on the economic outlook and monetary policy. Retail sales data in the week ahead stands out among the reports as most critical because two-thirds of all economic activity is based on consumer spending.

Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco