The long and winding recession continues to play its tune, and recent indicators on orders, production, and inventories point in the direction of another steep drop in real output during 2009.

Next week, the leading ISM indicators will indicate continued contraction in activity during February, while weak motor vehicle sales will do little to alleviate the auto inventory overhang. Ongoing compression of output and hours is precipitating further layoffs, and we expect payroll employment to decline by a large 750,000 in February, pushing up the unemployment rate to near 8%. Construction activity will decline in January, pulled down by another sharp drop in residential construction.

We will have to bite the bullet until the credit supply gets a more solid boost from the Fed's incipient TALF program, and more income—and potentially, spending—is released from the fiscal-stimulus package in the second quarter.

KEY U.S. DATA RELEASES THIS WEEK

Monday, March 2 – Personal Income, Consumption, and Prices (Jan.)

Personal Consumption, Nominal

• Global Insight: +0.5%
• Consensus: +0.4%
• Last Actual: -1.0% (Dec.)

Personal Consumption, Real

• Global Insight: +0.2%
• Last Actual: -0.5% (Dec.)

Core PCE Price Index

• Global Insight: +0.1%
• Consensus: +0.1%
• Last Actual: 0.0% (Dec.)

Personal Income

• Global Insight: +0.1%
• Consensus: -0.2%
• Last Actual: -0.2% (Dec.)

What to Look For

• Personal income to rise by 0.1%.
• Real consumption to rise by 0.2%.
• Core PCE deflator to edge up 0.1%.

Implications

Wage and salary income is falling as employment declines. But cost-of-living increases will boost Social Security payments, and rental income should jump again because of declining mortgage payments. These increases will be enough to keep personal income in the black (barely) in January. With respect to consumption, retail sales jumped during January. In addition, harsh winter weather probably boosted spending on energy. Light-vehicle sales fell to their lowest level since 1982, though, and spending on non-energy services will be weak again, just as in December. Overall, we expect a 0.5% gain in consumer spending for January; adjusted for inflation, the increase will be 0.2%. Finally, the core consumption deflator is expected to rise a very modest 0.1%. Year-on-year, its growth will be 1.6%. By midyear, we expect declining consumer spending to drive core PCE inflation below 1% year-on-year.

Monday, March 2 – Construction Spending (Jan.)

Construction Put in Place

• Global Insight: -1.4%
• Consensus: -1.5%
• Last Actual: -1.4% (Dec.)

Construction excl. Residential Improvements

• Global Insight: -1.6%
• Last Actual: -1.9% (Dec.)

What to Look For

• Total construction spending to decline by 1.4%.
• Single-family housing likely to decline as much as 9%.

Implications

Spending on single-family residential units may have dropped as much as 9% in January, given the recent sharp decline in single-family housing starts. We expect a fourth-straight monthly drop in both nonresidential construction and multi-family residential construction, but a small gain in public construction. Added up, construction spending likely dropped 1.4% in January. Excluding residential improvements, the drop will be 1.6%.

Monday, March 2 – ISM Manufacturing Index (Feb.)

• Global Insight: 34.0
• Consensus: 34.0
• Last Actual: 35.6 (Jan.)

What to Look For

• The index is expected to slide down further, to a level of 34.0.

Implications

Regional manufacturing surveys from New York and Philadelphia were extremely weak, but those reports were tempered by a mild bounce in Chicago. Manufacturing output is still in the process of contracting at a high rate, with collateral damage to services as demand for transportation services has cratered. Overall, the economic patient is still in critical condition, and we will have to bite the bullet until more income—and potentially, spending—is released from the fiscal-stimulus package in the second quarter.

Tuesday, March 3 – Motor Vehicle Sales (Feb.)

• Global Insight: 9.4 Mil.
• Consensus: 9.6 Mil.
• Last Actual: 9.6 Mil. (Jan.)

What to Look For

• Sales are expected to slide down further in February to new cyclical lows.

Implications

Light-vehicle sales will continue to post their lowest monthly results since the early 1980s. Sales remain below the 10-million-unit annual rate, and both retail demand and fleet demand are very weak.

Wednesday, March 4 – ISM Nonmanufacturing Index (Feb.)

• Global Insight: 39.0
• Consensus: 41.0
• Last Actual: 42.9 (Jan.)

What to Look For

• The overall index is expected to slide to 39.0.

Implications

The ISM index for nonmanufacturing is expected to decline sharply by about 4 points in February, to 39.0. Sharp reductions in production have caused freight activity to decline at double-digit rates in early 2009. In addition, firms continued to shed workers at a high rate, and we expect another month of major reductions at financial services firms. The main positive element is further reductions in fuel costs, particularly diesel fuel, which should take some pressure off transportation services and related surcharges.

Thursday, March 5 – Productivity (Final Q4)

Nonfarm Business Productivity

• Global Insight: 0.0%
• Consensus: +1.5%
• Last Actual: +3.2% (Preliminary Q4)

Unit Labor Costs

• Global Insight: +5.0%
• Consensus: +3.5%
• Last Actual: +1.8% (Preliminary Q4)

What to Look For

• Productivity to be revised down and unit labor costs revised up.

Implications

We expect productivity growth to be revised down to zero and unit labor costs growth to be revised up to 5.0%, based on the downward revisions to fourth-quarter real GDP.

Friday, March 6 – Employment Report (Feb.)

Nonfarm Payrolls

• Global Insight: -750,000
• Consensus: -645,000
• Last Actual: -598,000 (Jan.)

Unemployment Rate

• Global Insight: 8.0%
• Consensus: 7.9%
• Last Actual: 7.6% (Jan.)

Average Hourly Earnings

• Global Insight: +0.2%
• Consensus: +0.2%
• Last Actual: +0.3% (Jan.)

What to Look For

• Payrolls are expected to decline a sharp 750,000.

Implications

Surging initial and continuing claims for unemployment insurance suggest that February was the worst month yet for the labor market. We expect total payroll employment to fall 750,000—which would be the steepest decline in almost 60 years—and the unemployment rate to rise from 7.6% to 8.0%.