Is this the Preamble to Additional Weakness in the Economy?
The ISM manufacturing survey shows further slowing of momentum in the factory sector of the nation. The decline of the Purchasing Managers’ Index (PMI) in October is the fifth drop in the last six months. The PMI dropped 1.7 points to 51.2 in October, the lowest since June 2003. Indexes tracking production (51.9 from 56.1), new orders (52.1 from 54.2), vendor deliveries (50.2 from 54.1), and prices (47.0 from 61.0) fell in October. Indexes tracking employment, inventories, exports, and imports advanced in October.
The PMI advanced one quarter has a strong positive (77.0%) correlation with the year-to-year change in GDP. Based on this relationship, further weakness in the PMI points to weak growth of the economy.
Housing Market Data – Purchase Index, Construction Outlays, and Pending Home Sales Continue to Point to Weakness
The Mortgage Purchase Index of the Mortgage Bankers Association dropped 6.8 points to 375.6 in the week ended October 27. This reading is the lowest since August 22, 2003. The Mortgage Refinance Index fell 81.2 points to 1709.2.
Home prices have fallen and mortgage rates are at their lows since the early-part of the year. There is a clear message here that the housing market is in more trouble than optimists about housing market would like to admit.
The Pending Home Sales Index (PHSI) of the National Association of Realtors fell 1.1% to 109.1 in September and is 13.6% below the reading of September 2005. This index indicates actual sales of existing homes a month or so ahead. The September decline bodes poorly for sales of existing homes in October. Sales of existing homes have dropped during seven out of the nine months in 2006.
Construction spending fell 0.3% in September after a downwardly revised steady reading in August (previously reported as a 0.3% increase). Residential construction expenditures fell 1.1% in September, the sixth straight monthly decline. Although this information is not new, the downward revision of residential construction outlays should reduce the growth of real GDP from the advance estimate of 1.6%, holding other things constant. Private non-residential construction expenditures and public construction expenditures rose in September.
Norway’s Central Bank Hikes Policy Rate, Indicates Faster Pace Of Tightening In Coming Months
As expected, Norges Bank raised its sight deposit rate another 25bp today, the sixth increase in 17 months, taking it to 3.25%. While the bank stuck with the same mantra about future rate hikes that it has used since mid-2005 – “The interest rate will thus continue to be raised in small, not too frequent steps” – it also indicated that tightening may be “at a somewhat faster pace than envisaged earlier.” The bank upped its forecast for the average deposit rate over the next three years, taking the 2007 forecast up 25bp to 4.00%, the 2008 up 50bp to 5.00%, and the 2009 forecast up 25bp to 5.25%.
The central bank’s core inflation measure remains well under control. CPI adjusted for taxes and energy rose just 0.5% on the year in September, far short of the 2.5% target. However, Norges Bank looks to inflation one-to-three years out when it sets rates, and it continues to see plenty of reason for concern about inflationary pressures. Real GDP growth in the world’s third-largest oil exporter has been rocketing along, driven in large part by the booming offshore oil and gas sector. Non-oil GDP climbed 1.1% on the quarter in Q2, up from 0.8% in Q1. Norges bank today upped its forecast for mainland (i.e., non-oil) GDP growth this year to 4.0% from the earlier 3.75%, and boosted its 2007 outlook to 3.25% from 2.75%.
In particular, the bank continues to flag concerns about the labor market, where employment is still rising rapidly and unemployment dropping (to just 3.4% in September). It is also fretting about wage growth and about rising inflation expectations.
The bank also continues to note the strong pace of increase in credit growth. Credit to households has climbed at an annual rate in excess of 12% every month since mid-2005.
Given the evidence of strong credit growth and an increasingly tight labor market, it is perhaps surprising that the central bank didn’t drop its reference to the need for “small, not too frequent steps.” Still, even if the bank doesn’t envisage successive rate hikes between now and March 2007, the pace of tightening clearly is picking up. This implies rate hikes at perhaps two of the next three meetings, which are set for December 13, January 24, and March 15.
