NEWS / Foreign Exchange

Today??™s Economic Reports Highlight Weak Spots of Economy

Although today??™s economic reports do not capture headlines, they shed light on weak spots in the economy and confirm that a significant moderation in the pace of economic activity is underway. The Mortgage Bankers Association??™s Mortgage Purchase Index dropped 2.0% to 402.9 during the week ended March 30. The Mortgage Refinance Index fell to 2098.3 from 2197.7 in the prior week. Recent developments in the housing market support expectations of further weakness in home sales. Tighter lending standards should hold back sales of homes despite the aggressive sales strategies homebuilders have put in place. As chart 1 suggests, the bounce back in mortgage purchases earlier in the year was probably only a temporary event.

The Non-Manufacturing ISM survey results show a moderation in the pace of activity. The Business Activity Index dropped 52.4 in March from 54.3 in the prior month. The new orders index declined to 53.8 from 54.8 in February, marking the fifth monthly drop in the last six months. The level of this index, with the exception of the August 2006 reading, is the lowest since April 2003. The employment index fell to 50.8 during March from 52.2 in February, with this reading the lowest since July 2004. The general tone of respondents??™ comments pointed to slowing economic conditions in March.

Factory orders rose 1.0% in February following a 5.7% decline in the previous month. Orders of durable goods are now estimated to have risen 1.7% compared with the 2.5% gain published last week. Shipments of factory goods fell 0.5% in February, after a 1.7% decline in January. The basic message, as indicative in charts 3 and 4, is that factory activity has slowed considerably over the past year. On a year-to-year basis, orders and shipments of factory goods dropped in February. We have to track back to 2003 to see comparable weakness in orders and shipments of factory goods. The ISM manufacturing survey results of March also pointed out that a significant weakening is underway in the factory sector.

Inventories at the nation??™s factories have held steady for two straight months. The inventories-shipments (or sales) ratio rose to 1.25 in February, up from 1.16 a year ago. The upward trend of inventories-sales ratio (see chart 5) is troubling and warrants a close watch.