I’ll be referring to a set of charts labeled “Nonfinancial Developments” that we posted this morning. Needless to say, we haven’t learned a great deal about the real economy in the past seven days; but in what we’ve seen thus far, there is nothing at least to challenge our view that the economy is growing sluggishly. The first chart in the package presents a few shreds of evidence gathered from the high-frequency indicators that we monitor. The top two panels show unemployment insurance. Initial claims for unemployment insurance remained elevated through mid-month, and we think that level of claims is consistent with ongoing declines in payroll employment. The middle left panel plots a weekly index that aggregates sixteen components of industrial production for which we have weekly data on physical product. The gray bars indicate a monthly aggregation of that weekly indicator. As you can see by the red line in that chart, there has been some softening in March. A significant share of the softening is concentrated in two areas: utilities and domestic motor vehicles. In the middle right panel I’ve plotted domestic motor vehicle production. As you can see there, not only is production likely to be down for March, but also schedules currently suggest significant cutbacks in production in the second quarter. We think that is likely to be a significant drag on second-quarter GDP, although I should note that it’s no more of a drag than we had anticipated in the Greenbook forecast.
I don’t put much stock in the chain store sales data, but in the spirit of heightened surveillance I’ll offer them up to you. [Laughter] I think the major piece of information one might take away from those data is that we’re not seeing a significant move in either direction, which is roughly consistent with the moderate growth in consumer spending that we have projected. I’d note that some press reports suggested a bit of a fallout in retail sales late last week as the war commenced, but most retailers were reporting over the weekend that sales had returned to their recent pace. I don’t know how much stock to put in those reports either, for that matter.
We have been in contact with motor vehicle manufacturers. Their forecasts seem to be converging to something on the order of a 15¾ million to 16 million unit pace for total motor vehicle sales. That also is, roughly speaking, in line with the Greenbook projection. We’ve also received Conference Board data on consumer sentiment for March, which is plotted in the bottom right panel. It showed a little further erosion, similar in its general pattern to what we saw in the preliminary Michigan survey. Obviously, none of this new information at this point is giving us any hint as to what might have happened in the wake of the start of the war. Almost all of it is a reflection of pre-war information.
Chart 2 presents a few highlights in the domestic energy markets. The Department of Energy today announced its weekly measure of the retail price for gasoline, which was off about 4 cents. As you can see in the top left panel, there is a long way to go to restore margins with crude oil prices. Should crude oil prices remain where they are, we would expect gasoline prices to decline quite sharply through the end of the summer and then to decline at a more moderate pace through the end of 2004. So this should be the beginning of some unwinding of the recent spike in gasoline prices. However, I would note, as you can see in the top right-hand panel, that inventories are quite lean right now relative to their seasonal norms, and that could induce significant volatility in gasoline prices going forward. Futures markets are expecting a significant drop in gasoline prices, but again, they are likely to be quite sensitive not just to news on crude oil prices but also to overall inventory positions. Natural gas prices retraced the spike that occurred at the end of February but remain relatively high, and futures markets expect those prices to stay at that recent level. We’re also dealing with very tight inventories on the natural gas side— so much so that some industry analysts are a little concerned about whether those inventories can be completely restocked prior to next year’s heating season. Again, with inventories tight, I think one could expect some volatility in those prices at the very least.
Chart 3 reports on housing. I reported at the FOMC meeting that starts had fallen off significantly and more so than we had expected. As you can see by looking at column two of chart 3, permits did not fall off, which certainly suggests that weather was an important factor in the decline in housing starts in February. We received data on existing home sales this morning and, as depicted in column 4, the published figure shows a slight decline. I’ve plotted in the bottom right-hand panel existing home sales using our seasonals, and by that measure they actually picked up a bit. On either set of seasonals, existing home sales still look relatively strong. But in general I’d say we’ve probably seen in some of the recent indicators just a bit of softness on the housing side, beginning with the report on February starts. Starts, the latest reading on new home sales—though we’ll get another reading this week—and consumer sentiment toward home purchases all declined just a little. I don’t want to make too much out of it, but the housing sector looks just a touch softer.
Chart 4 depicts last week’s information on the consumer price index. The top line, Column 1, was a touch higher than we had projected, with slightly higher food and energy prices. The core measure, on the other hand, was a touch lower than anticipated. Most of that was in lodging away from home, which is a very volatile component. But the major story here is that the pattern of disinflation still seems to be quite clear in the data, and as you know from our forecast, we expect that pattern to be extended going forward.
In terms of the longer-run outlook, I feel as if we’re dealing with more noise and volatility here than underlying readings. As Vincent noted, the stock market is roughly 7 percent higher than we had incorporated into the Greenbook forecast. Oil prices are lower. Working in the other direction, long-term interest rates are a bit firmer and, as Karen noted, the dollar is a little higher. Putting together all those factors, we probably would revise up our GDP forecast by a tenth or two. As I had indicated at the FOMC meeting, we were revising down the current quarter a little, so the forecast, on net, might end up a tenth higher than we had in the Greenbook. I’d call that no change. Basically, everything we’re seen so far is roughly in line with our expectations.