Philly Fed economic index plummets

posted at 12:50 pm on August 18, 2011 by Ed Morrissey

Two economic indicators hammered the markets today, causing new worries of a second recession.  The biggest bombshell came from the Philadelphia Fed’s economic index, which dropped from an anemic +2 in July all the way to -30.7 in August:

Manufacturing in the Philadelphia region unexpectedly contracted in August by the most in more than two years as orders plunged and factories shed workers.

The Federal Reserve Bank of Philadelphia’s general economic index plunged to minus 30.7 this month, the lowest since March 2009, from 3.2 in July. The August gauge exceeded the most pessimistic projection in a Bloomberg News survey in which the median estimate was 2. Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

Stocks extended their decline after the figures showed weaker demand from consumers and companies in the U.S. and abroad is posing a risk to the industry that spearheaded the recovery. Fewer customer inventories may indicate producers will see a smaller decrease in orders should the U.S. economy falter.

Leading the drop was a fall in new orders in the region, which pushed the Philly Fed’s orders index from +0.1 to -26.8.  The shipment index also fell from +4.3 to -13.9.  Their employment index also fell from +8.9 to -5.2, a number which indicates that the next jobs report won’t be very good for the Obama administration.

On top of that, existing home sales fell 3.5% in July to a new low for 2011, and this year now lags last year:

The number of people who bought previously occupied homes dropped in July. The third decline in four months suggests the depressed housing market won’t help the U.S. economy recover this year.

Home sales fell 3.5 percent last month to a seasonally adjusted annual rate of 4.67 million homes, the National Association of Realtors said Thursday. That’s far below the 6 million that economists say must be sold to sustain a healthy housing market.

And this year’s pace is lagging behind last year’s total sales. The 4.91 million last year were the weakest sales figures in 13 years.

The dismal report on home sales contributed to a rough day on Wall Street. Stocks plummeted in morning trading on fears that the global economy is slowing. The Dow Jones industrial average fell 500 points within the first hour of trading.

The Fed says that the risks of recession have risen in the past six months, but that it’s still “quite low“:

Despite “anemic” U.S. growth so far this year, the risk of a double-dip recession is “quite low”, a top Federal Reserve policymaker said on Thursday.

“The risk of a recession is somewhat higher than it was six months ago. That said, I think the risk of a recession is still quite low,” William Dudley, the president of the Federal Reserve Bank of New York, told New Jersey business leaders.

Dudley said that only some of the restraints on growth, such as high oil prices and Japan’s earthquake in the first half of the year, can be considered temporary.

He’s heartened by the fact that the Treasuries market appears to be booming despite its recent downgrade from S&P.  In fact, the 10-year Treasury note fell below a 2% yield for the first time ever as investors sought shelter in American sovereign debt.  That has other economists more worried about the double dip than Dudley:

The data added to concerns that the U.S. economy will head back into recession at the same time as the country’s rising debt load and record deficit leaves the government and the Federal Reserve with fewer options to stimulate the economy.

“It looks pretty bad across the board,” said Gus Faucher, director of macroeconomics at Moody’s Analytics in West Chester, Pennsylvania.

The data sparked a frenzy of buying that sent benchmark 10-year note yields as low as 1.97 percent, smashing through the previous low yield of 2.038 percent.

In other words, Obamanomics isn’t working, and we’re not going to fix the problem with another short-term stimulus.  The Chinese learned that lesson the hard way:

To shield its economy from the fallout of the 2008 financial crisis, Beijing orchestrated a massive economic stimulus. It invested billions in infrastructure projects and encouraged banks to open the credit spigot to fund construction of apartments, office towers and retail centers.

The strategy catapulted China past Japan to become the world’s second-largest economy; its growth helped keep the global slump from deepening. China splurged on Australian iron ore, Chilean copper and Saudi Arabian oil to fuel its construction boom. While the U.S. economy was mired in recession, with negative year-over-year growth in gross domestic product in 2008 and 2009, China’s economy expanded by more than 9% annually over the same period.

But like taking steroids, there were side effects. The burst of credit has fueled inflation, which is proving painful for average Chinese. Soaring prices for pork, vegetables and other staples have authorities worried about the potential for social unrest. So has a property bubble that has put home ownership out of reach of millions, exacerbating the gulf between rich and poor.

Meanwhile, the nation’s debt levels have reached new heights. A national audit released in June found outstanding loans to local governments, among the biggest players in the building binge, amounted to $1.65 trillion, or nearly a third of China’s GDP. …

But the big concern inside and outside of China is a so-called hard landing. If Europe and the U.S. fall back into recession and demand for Chinese-made goods declines, Beijing won’t be able to juice its economy like it did the last time around.

“It’s a lesson on the limits of stimulus. The more you do it, the less and less you’ll get out of it,” said Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management in Beijing. “You’ve already tapped all the good investments out there. A second time, you’d just be shoveling money out the door…. It will just compound their problems.”

Actually, this article reminds me of Paul Krugman’s space-invaders scenario.  China did what Krugman suggested — built a whole lot of assets that weren’t needed.  Now they have empty malls, apartment buildings, and public venues with no use for them at all except as curiosities.  In spending capital on useless assets, China now has no capital to use in a second downturn, and has no ability to convert the assets they built into more effective liquidity for more flexible policies.

Short-term gimmicks are the problem, not the solution.  We need deregulation in order to stimulate investment and a tax system that rewards innovation and expansion, not crony capitalists.


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causing new worries of a second recession

How can that be? Obama said just yesterday that there was no way!

katablog.com on August 18, 2011 at 12:54 PM

And yet the Yahoo News headline:

International fears lead to stock market decline.

Yeah international…since US housing sales, US unemployment numbers and US Philadelphia Fed numbers are all based on events that happened in France, Germany and Russia.

angryed on August 18, 2011 at 12:54 PM

Ed, Zero Hedge tracks the Philly Fed Index with the Non-farm payroll numbers. They track pretty closely, which causes him to make another freaky deaky chart comparison.

Weight of Glory on August 18, 2011 at 12:55 PM

My great hope for the future is that, one day, “you’re such a Krugman” will enter the vernacular as the most severe possible insult someone’s intelligence.

Inkblots on August 18, 2011 at 12:57 PM

WeightOfGlory:

Yaowuza!!

angryed on August 18, 2011 at 12:58 PM

Drag that giant hearse back out and hit the streets again, PBHO, time to remind doltish Americans that everything is just fine.

Bishop on August 18, 2011 at 12:58 PM

Short-term gimmicks are the problem, not the solution.  We need deregulation in order to stimulate investment and a tax system that rewards innovation and expansion, not crony capitalists.

Yep.

Count to 10 on August 18, 2011 at 12:59 PM

Don’t worry, people. 0bama is enjoying his vacation, and that’s all that really matters.

UltimateBob on August 18, 2011 at 1:00 PM

This is all the GOP’s fault! They are sabotaging the economy just so Obama will lose the election.

WashJeff on August 18, 2011 at 1:00 PM

Second recession? I know I’m an economic dunce, but can someone please tell me when the first recession ended? Clearly I missed it. Must have been on a job interview that day.

Extrafishy on August 18, 2011 at 1:04 PM

More bad luck. Dang.

betsyz on August 18, 2011 at 1:05 PM

Is there anything going up besides unemployment, the debt and the price of gold?

darwin on August 18, 2011 at 1:09 PM

Second recession? I know I’m an economic dunce, but can someone please tell me when the first recession ended? Clearly I missed it. Must have been on a job interview that day.

Extrafishy on August 18, 2011 at 1:04 PM

Technically the recession did end in 2009. A recession is 2 quarters of negative GDP growth. Since Q2 2009 GDP growth has been positive.

But that’s like saying you were in a comma in 2009 and have been getting better ever since. Your’re still in a comma, but instead of having 0% chance of ever waking up, your chance of waking up is 5%.

angryed on August 18, 2011 at 1:09 PM

He’s heartened by the fact that the Treasuries market appears to be booming despite its recent downgrade from S&P. In fact, the 10-year Treasury note fell below a 2% yield for the first time ever as investors sought shelter in American sovereign debt

Stuart Varney said as much yesterday. Foreign investors still see the US debt as a safe investment. God knows why….

UltimateBob on August 18, 2011 at 1:09 PM

Is there anything going up besides unemployment, the debt and the price of gold?
darwin on August 18, 2011 at 1:09 PM

The number of gun-owning Americans.

Bishop on August 18, 2011 at 1:12 PM

SECOND Recession?

Hello…….the last one hasn’t ended.

Phony inflation numbers since 2005, Unemployment numbers about as reliable as a three legged stool, sorry here in Possum Holler it’s still Fall 2008.

PappyD61 on August 18, 2011 at 1:12 PM

The index is signalling disappointment that the cause of all of this gloom won’t be out of office until January of 2013.

Vashta.Nerada on August 18, 2011 at 1:14 PM

In my neighborhood, two houses that had been for sale for 2+ years finally did sell. Though now there are two more for sale. One of the ones bought was by a real estate agent looking for a fixer-upper to flip. Only one has a family moving in. Plus one of the new for sale ones is also vacant. Very soft market in Toledo. And this is a very heavily Democrat/union part of Ohio. I think Dear Liar’s support is going to be discouraged here.

rbj on August 18, 2011 at 1:15 PM

Please interpret the chart over at zerohedge (I’d like to email it/post it on FB).

http://www.zerohedge.com/news/scariest-chart-ever-philly-fed-versus-non-farm-payrolls

PappyD61 on August 18, 2011 at 1:16 PM

Why does everyone keep pointing to the earthquake in Japan as the reason it sucks right now?

I thought all those broken windows were supposed to help the economy, not hurt it?

ButterflyDragon on August 18, 2011 at 1:18 PM

i’m sure dear leader’s speech is gonna fix everything

/

cmsinaz on August 18, 2011 at 1:24 PM

The third decline in four months suggests the depressed housing market won’t help the U.S. economy recover this year.

Was someone suggesting otherwise?

To shield its economy from the fallout of the 2008 financial crisis, Beijing orchestrated a massive economic stimulus. It invested billions in infrastructure projects and encouraged banks to open the credit spigot to fund construction of apartments, office towers and retail centers. [...]
“It’s a lesson on the limits of stimulus. The more you do it, the less and less you’ll get out of it,” said Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management in Beijing. “You’ve already tapped all the good investments out there. A second time, you’d just be shoveling money out the door…. It will just compound their problems.”

Here’s an idea, how about an infrastructure bank?

BKeyser on August 18, 2011 at 1:26 PM

Your’re still in a comma, but instead of having 0% chance of ever waking up, your chance of waking up is 5%.

angryed on August 18, 2011 at 1:09 PM

So, my chance of waking up is on par with the economy’s? Thanks all the same, but I think I’ll stay unconscious…at least till November, 2012. Wouldn’t want to miss the fun.

Extrafishy on August 18, 2011 at 1:32 PM

Deregulation is a foreign word when one is trying to become a dictator.

Just think how happy everyone would be, if Democracy, which is so hard, were abolished, and things were done by the magic wave of Obuttheads hand. Just think if the constitution were shredded, and government wasn’t constricted or confined to it. Just think if a ruling was made that only the Dem party was allowed to rule.

No doubts this man is going to work hard from now til November to make these scenarios come to fruition.

capejasmine on August 18, 2011 at 1:32 PM

Wow, this is a big f’n deal, right Joe?

forest on August 18, 2011 at 1:41 PM

Two economic indicators hammered the markets today, causing new worries of a second recession. The biggest bombshell came from the Philadelphia Fed’s economic index, which dropped from an anemic +2 in July all the way to -30.7 in August.

The Obama Recession, you bone it, you own it.

Chip on August 18, 2011 at 1:41 PM

Blame those dern Tea Partiers.

petefrt on August 18, 2011 at 1:42 PM

I’m just glad we paid so much extra to give Obama’s bus all the luxuries.

After all, he must have been in it for nearly several hours.

Adjoran on August 18, 2011 at 1:43 PM

Blame those dern Tea Partiers.

petefrt on August 18, 2011 at 1:42 PM

Yepper, they caused a new recession over in Germany too, and a basketball fight in China.

forest on August 18, 2011 at 1:47 PM

Dark Parallels, Not With Carter But With FDR By WALTER WILLIAMS

People are beginning to compare Barack Obama’s administration to the failed administration of Jimmy Carter, but a better comparison is to the Roosevelt administration of the 1930s and ’40s.

Roosevelt’s agenda was not without its international admirers. The chief Nazi newspaper, Volkischer Beobachter, repeatedly praised

“Roosevelt’s adoption of National Socialist strains of thought in his economic and social policies” and “the development toward an authoritarian state” based on the “demand that collective good be put before individual self-interest.”

FDR’s very own treasury secretary, Henry Morgenthau, saw the folly of the New Deal, writing:

“We have tried spending money. We are spending more than we have ever spent before and it does not work. … We have never made good on our promises. … I say after eight years of this administration we have just as much unemployment as when we started … and an enormous debt to boot!”

NMRN123 on August 18, 2011 at 1:49 PM

FDR’s very own treasury secretary, Henry Morgenthau, saw the folly of the New Deal, writing:

“We have tried spending money. We are spending more than we have ever spent before and it does not work. … We have never made good on our promises. … I say after eight years of this administration we have just as much unemployment as when we started … and an enormous debt to boot!”

NMRN123 on August 18, 2011 at 1:49 PM

Sounds like an America hating racist Tea Party terrorist to me.

angryed on August 18, 2011 at 1:53 PM

I don’t understand this stuff as well as I should and this makes me nervous. Any chance that where Porkulous was spent will get more scrutiny?

Cindy Munford on August 18, 2011 at 1:53 PM

Cindy Munford on August 18, 2011 at 1:53 PM

From whom?

Holder?
The MSM?
Boehner?
McConnell?

I could see Ron Paul looking into it. But he’s a crazy old man don’t you know?

angryed on August 18, 2011 at 2:08 PM

Remember when the MSM tried to talk the Bush economy DOWN?

Now they (esp the AP) continually try to talk the economy UP.

When are these “intellectual elites” going to learn that the economy doesn’t work that way?

GarandFan on August 18, 2011 at 2:15 PM

When are these “intellectual elites” going to learn that the economy doesn’t work that way?

GarandFan on August 18, 2011 at 2:15 PM

Actually, it can work that way.

When Obama was at the height of his 2008 campaign he started the “worst time since the Great Depression” talk and the media picked up the ball and ran with it.

When people keep getting bludgeoned over the head with how bad it is, they tend to save their money and not spend it. Which in turn will affect the economy.

When Obama stated he couldn’t guarantee SS checks in August and scared the hell out of a good percentage of Americans, I know for a fact many, many people who did not spend anything the last half of July because they were afraid they were not going to see a check in August.

That data ripples through the various reports that get handed out and is used by the markets to gauge whether to buy or sell.

Yes, media influence and talking an economy up or down will definitely have an effect.

ButterflyDragon on August 18, 2011 at 2:43 PM

Uh oh, is it time for another 3:00 freak-out at the NYSE?

forest on August 18, 2011 at 3:01 PM

Is there anything going up besides unemployment, the debt and the price of gold?

Heck yes Debbie Downer – inflation is up and doing well!

katablog.com on August 18, 2011 at 3:12 PM

And this is just his FIRST term

KMC1 on August 18, 2011 at 3:36 PM

Debt, over-extended credit, massive government entitlements, shifting jobs to cheap foreign labor markets, and forcing working Americans to accept less has really worked well for us, hasn’t it now?

And this is just his FIRST term

KMC1 on August 18, 2011 at 3:36 PM

Even President Cainperrypalinpaul Romneygingrichbachmann couldn’t get us out of this mess.

Dr. ZhivBlago on August 18, 2011 at 4:35 PM

Stuart Varney said as much yesterday. Foreign investors still see the US debt as a safe investment. God knows why….

UltimateBob on August 18, 2011 at 1:09 PM

It’s because we’re that tallest midget :-)

MJBrutus on August 18, 2011 at 5:06 PM

What frakking idiot would go after a new home with this buffoon in the White House?????

john1schn on August 18, 2011 at 11:28 PM

Any talk of recovery or Double Dip is laughable. Recovery assumes that real Economic recovery in the midst of heavy spending, taxes, and regulatory is even possible. Double Dip presumes that we left one resession and have entered another. Both are pure hyperbole and Government political propaganda.

Egfrow on August 19, 2011 at 12:18 PM