Gdp - Investment

Investments

Moody’s Economy.com predicts a 1.1% drop in investment Gross Domestic Product (GDP), over a 2.9% drop in 2007. Given the recent sub-prime mortgage debacle and similar collaterized debt in the corporate market, the 1.1% drop is understated given the tightness in corporate lending and the government's short term stimulus package. The stock market dropped in tandem with recent events over the past few weeks including a one day 309 point drop in the Dow Jones Industrial Average. Non-Residential, Inventory Change, and Residential are the key indicators for the $1.8 Trillion annual business investment (15% of US GDP) and implications upon the economy.

Nonresidential

The Philadelphia Federal Reserve’s Business Outlook Survey for the month of January came in at -20.9, it’s lowest number since October 2001(median of 0 versus 50 for PMI) 1. The index is closely watched in terms of early delivery and blend of manufacturing and business sectors and if a large percentage change occurs investors correlate similar changes to the PMI. The Dow Jones Industrial Average dropped 306 points on January 17, 2008 after the publishing of this report as investors concerns about growth weighed heavily on the market. On the other hand, the PMI for January came in at 50.7%, close to the 6 month average of 50.2%. (The following should be in consumption side?) U.S. service sector contracted in January for the first time since March 2003 coming in at 41.9, from 54.4 for December -- far lower than the forecast 52.5. Any reading below 50 indicates contraction. The ISM data have "recession written all over it," said Jim Paulsen, chief investment strategist at Wells Capital Management. "It's not that it's weak. It's a complete collapse in the number, one of the lowest readings this statistic has ever had." 2 The non-manufacturing ISM reported a reading a 44.6 for January. Non-manufacturing business contracted for the first time since March 2003, the ISM said, and components of the index were as bad if not worse — new orders contracted for the first time since October 2001, and employment contracted for the first time since February 2002.3

The fallout of the sub-prime mortgage debacle has had a similar effect on corporate loans used to finance giant buyouts. Prices of “Leveraged loans”, used by companies with low credit ratings to raise money, recently encountered double digit declines. Investors are demanding steep discounts as a result of price drops and banks are reluctant to oblige. $17.6 billion in loans for First Data Corp. were sold into the market at a 4% discount last fall now trade at a steep 11.5% discount to par.4 The Altman-Z score, a market standard for predicting bankruptcy, predicts $53 billion in high-yield debt defaulting in 2008, up from $5.5 billion in 2007. Altman projects high-yield debt (junk bonds) to default by a rate of 4.64% this year, a nine-fold increase from 2007 of .51%, which was the lowest rate since 1981. The tightness in debt markets will make it harder for companies to seek loans in the market.

Inventory Change

The outlook for inventories and inventory to sales ratios show a build that is not encouraging for the economy. "Wholesale inventories increased 1.1% at a seasonally adjusted $411.60 billion, after rising a revised 0.8% during November, the Commerce Department said Friday. Originally, inventories in November were seen 0.6% higher. The 1.1% increase in December inventories exceeded Wall Street analyst expectations for a 0.3% climb. The increase was the biggest since a matching advance in August 2006. The amount of wholesale goods on hand relative to sales increased during December. The inventory-to-sales ratio measures how many months it would take for a firm to deplete its current inventory. The ratio rose to 1.09 from 1.07 in November. On a year-to-year basis, sales were 10.6% higher, while inventories rose 6.1% since December 2006." 5 Ensuing technologies have enabled manufacturerers and distributors with the tools to keep inventories low exacerbate the impact of the inventory build. The pileup of goods does not encourage future production given the decline in sales.

Residential

Moody’s is predicting a decreased 19.2% year over year change from 2007 to 2008. This coincides with Toll Brother’s, a leading US homebuilder, quarterly revenue decline of 22% in 1Q2008 from the prior year quarter. Toll’s backlog of homes fell 42% to $2.4 billion in 1Q2008 and the number of singed contracts fell 46%. Toll said its backlog fell to $2.4 billion, down 42% from