U.S. December Income, Consumption& Prices Fell While Savings Rose

The Institute for Supply Management (ISM) reported that its January Composite Index of Activity in the manufacturing sector improved slightly to 35.6 from it's December low of 32.4. The latest was still near the lowest level since the recession year of 1980. The break-even level for this diffusion index of factory sector activity is a level of 50.you

During the last twenty years there has been a 64% correlation between the level of the Composite Index and the three-month growth in factory sector industrial production.

It is appropriate to correlate the ISM index level with factory sector growth because the ISM index is a diffusion index. It measures growth by using all of the positive changes in activity added to one half of the zero change in activity measures.

The separate index of prices paid also improved moderately to 29.0. That, however, was not much above the lowest level since 1949. During the last twenty years there has been a 79% correlation between the price index and the three-month change in the PPI for intermediate goods.

The latest increase in the composite index recouped only a bit of the declines during the prior five months. That suggests the recent 10% rate of decline in industrial output will continue.

The new orders index during January improved slightly as 15% of survey participants reported higher orders but 52% reported that orders fell. The export order index improved, but only at the margin as economic weakness outside of the U.S. continued. It was still near the lowest level in this index's short twenty year history. During the last ten years there has been a 53% correlation between the index and the q/q change in real exports of goods in the GDP accounts.

The value of construction put in place during December dropped another 1.4%. The decline followed a 1.2% November drop which was double the decline originally estimated. These declines pulled overall construction down 5.2% for the full year 2008 which was the weakest performance since 1991. It followed a 2.7% decline during 2007. Last month's decline about matched Consensus expectations.

Residential building activity led the latest monthly decline with a 3.2% drop which pulled 2008 activity off by roughly one-quarter from the full year from 2007. That was a record decline for the series which extends back to 1965. Single-family construction activity fell 8.1% last month after a 6.1% November drop. It pulled the full-year level down 39.0% after a 26.8% drop during 2007. Building activity on multi-family units also fell hard. The 3.2% December decline lowered activity by 8.5% for the full year, about the same as the 2007 drop. Spending on improvements, however, recouped a 2.0% November fall but still ended the year posting a 7.2% decline.

During the last twenty years there has been an 84% correlation between the q/q change in the value of residential building and its contribution to growth in real GDP.

The value of nonresidential building activity has remained firm relative to the residential sector. Though the 0.4% December slip was the fifth in the last six months, activity rose 15.3% for the full year or about the same as during 2007. Spending on office construction rose 8.3% for the year, but that was roughly half the growth during the prior three years. Building in the multi-retail sector, however, fell 3.8% for the year after a 17.0% gain during 2007 and a 28.3% surge during 2006. Spending on health care facilities rose 8.1% for the year, about as it has since 2003. Building activity of educational facilities rose 10.2% last year after a 22.9% 2007 gain

Public construction fell 0.8% in December. But for the year activity rose a firm 7.1% after a 12.3% 2007 rise. Office building led the gain with 30.8% rise for the full year while the value of spending on educational facilities rose 7.8%. Spending on highways & streets rose 5.1% the full year, about as it did in 2007. The value of construction on highways & streets is roughly one-third of the value of total public construction spending.

The more detailed categories of construction represent the Census Bureau’s reclassification of construction activity into end-use groups. Finer detail is available for many of the categories; for instance, commercial construction is shown for automotive dealers and parking facilities, drugstores, building supply stores, and both commercial warehouses and mini-storage facilities. Note that start dates vary for some seasonally adjusted line items in 2000 and 2002, and that constant-dollar data are no longer computed.

South Korea announced today that its January exports fell 32.7% below a year ago, the largest year to year percentage decline on record. Except for September 2007, when exports fell 1.1%, Korea's exports have shown double digit year to year percent increases in practically every month since July 2002 until November of last year when double digit declines began to appear, as shown in the first chart.

Imports have also declined, but at a somewhat slower pace with the results that the ten year stretch of South Korean trade surpluses begun in 1998 has come to a stop. There was a $12.7 billion trade deficit in 2008, compared with a surplus of $14.6 billion in 2007. Annual data for exports, imports and balances of trade from 1998 through 2008 are shown in the second chart.