For the first time in 11 years, the Dow Jones Industrial Average has fallen below 7,000. Since the beginning of the year, the Dow has fallen more than 24 percent. From its summer highs, it is down close to 47 percent. If the recession turned into a depression, US equities could fall below 3k. After the Great Depression of 1929, stocks fell as much 90 percent from its highs. Currencies and equities have taken a serious beating as the recession deepens and AIG reports the largest loss ever for a US corporation. Investors continue to flock into the safety of the low yielding US dollar and Japanese Yen. Although the US economy is still very weak, investors expect the country to recover first especially as the problems in Europe raises the risk of massive capital outflow. The potential for the being the first country to recover is confirmed by the mild improvements in the ISM manufacturing, personal income and personal spending data. For the first time since June 2008, manufacturing conditions have deteriorated at a slower pace. This improvement came from left field since deterioration was reported by nearly all of the regional indices. However the data is not without weakness as the uptick came primarily from production, and supplier deliveries; employment and new orders continued to contract.
Underlying Weakness in Personal Income
All of today's US economic reports contained underlying weakness. For the first time in 6 months, consumer spending has increased. Personal spending, which is different from the retail sales report rose 0.6 percent in the month of January thanks to beginning of the year discounting. Personal income also rose 0.4 percent, but the improvement is a bit distorting because only government workers have seen pay increases. There was also cost of living adjustments for Federal transfer payments like social security and unemployment benefits. The headline number is distorting because the private sector saw their incomes dwindle for the third consecutive month. Fears about job security has boosted the US personal savings rate to the highest level since March 1995. We expect this trend to continue which means that higher savings should cut into consumer spending.