Economic Week in Review: Door slams on 2008 with more negative news

For economic news at least, the year’s final days were as downbeat as most of the others. The year’s end provided no pleasant surprises, and the sequel opened inauspiciously, as 2009’s first economic report indicated that manufacturing activity had contracted sharply. In the week’s only other report, consumer confidence reached a historic low. Near-term improvement isn’t expected in either category. On the brighter side, the stock market shrugged off the economic news and began the new year on a positive note. For the week, the S&P 500 Index rallied 6.8% to 931.80. The yield of the 10-year U.S. Treasury note rose 30 basis points to 2.46%. 

Markets suffer historic declines

The stock market endured profound losses in 2008. For the year, the S&P 500 Index sank 37.1%. It was the index’s second-worst loss since its founding in 1923 and its worst since 1931’s 43.1% swoon. When reinvested dividends are taken out of the equation, the index dropped 38.5%, its third-worst-ever decline behind 1937’s 38.6% plunge and 1931’s 47.1% fall.

The Dow Jones Industrial Average, not including reinvested dividends, retreated 33.8%, the third-worst loss in its 113-year history. Only 1931 (–52.7%) and 1907 (–37.7%) had steeper declines. The global pain was even sharper as the MSCI All Country World Index ex USA nosedived 47.0%.

The credit crisis also engulfed the bond market during a challenging period for all bonds except U.S. Treasuries. On the heels of the Federal Reserve’s intense interest rate cuts, the yield of the U.S. Treasury note dropped 179 basis points for the year to 2.25%.

Consumer confidence loses traction

Consumer confidence sank to a historic low of 38.0 in December after a slight rebound the previous month. The Conference Board index fell from last month’s downwardly revised reading of 44.7, failing to meet economists’ expectations of 45.0. Consumer outlook for business conditions and employment prospects both declined and were responsible for much of the index’s fall.

The consumer confidence in present conditions component dropped from 42.3 to 29.4, while the expectations component fell from 46.2 to 43.8. Expectations for the inflation rate declined from 5.9% to 5.8%. On a more positive note, consumers plan to buy homes, cars, and major appliances in the coming months.

Manufacturing down across board

U.S. manufacturing shrank for the fifth straight month in December and the overall economy contracted for the third month in a row, as no industry sectors experienced growth. The Institute for Supply Management (ISM) reported that its manufacturing index dropped to 32.4, its lowest level since 1980 and below both November’s 36.2 figure and economists’ forecasts of 35.5. 

Businesses have been trimming orders, inventories, and employees due to credit conditions and weak demand and confidence. Because of drops in energy and commodity prices, the prices-paid index fell to its lowest level since 1949. The ISM's overall economic index also dropped following the further decline of manufacturing payrolls.