ISM Manufacturing Survey – Significantly Weak Factory Conditions, Exports Index Posts New Record Low
The ISM manufacturing index dropped to 38.9 in October, the lowest since September 1982 (see chart 1). Survey results for October indicate that factory conditions have turned weaker than data suggested in the past few months. The charts tell a very compelling story (see chart 1-3).
Indexes tracking production and new orders dropped sharply in October to new cycle lows (see table 1 and charts 2 and 3).
The export orders index plunged to 41.0 in October from 52.0 in September. The expected strength in exports needs to be revised given the weakness of this index.
Senior Loan Officer Survey: Credit Conditions Remain Strongly Unfavorable
The Senior Loan Officer Opinion Survey of October 2008 shows further tightening of loan underwriting standards for both big and small firms (see chart 5). Eighty three percent of respondents indicated imposing tighter lending standards for large firms compared with 57.6% in the July survey.
The number of respondents indicating that cost of funds for both large and small firms were higher in October was larger compared with July (see chart 6). The number of respondents reporting tighter lending standards and higher cost of funds are at record highs of this survey, which started in 1990.
Non-residential investment expenditures, one of the few components showing growth in the third quarter, advanced at an annual rate of 7.9% in the second quarter after an 18.5% jump in the second quarter. However, the outlook is not encouraging. Non-residential investment expenditures are most likely to show noticeable weakness in the quarters ahead given slowing economic conditions, a drop in demand for loans, and tighter lending standards (see chart 7).
Although mortgage lending standards were tightened further, underwriting standards for credit cards and other consumer loans appear to have peaked (see chart 8).
At the same time, the number of banks willing to extend new credit lines for consumers declined further in the October survey.
All said, the latest Senior Loan Officer Survey conveys the message that credit conditions remain highly unfavorable for economic growth.
India: Reserve Bank Is Still Behind the Curve
Over the past two weeks, the unpredictable actions of the Reserve Bank of India (RBI) have become, well, predictable. Saturday’s surprise cut to the repo rate comes almost two weeks after another intra-meeting easing, and oddly, a little more than a week after RBI policymakers had their regular meeting and actually held the benchmark rate steady. As this global credit crunch creates crises on a seemingly daily basis, we are increasingly distressed that the RBI has not quite picked up the rhythm that the rest of the world seems to be following.
The details of this weekend’s surprise easing are fairly straight-forward. The repo rate was trimmed by 50 basis points, to 7.50%, after being cut by 100 basis points two weeks ago, and the RBI also reduced the reserve requirement ratio by one percentage point, to 24%, effective this coming Saturday. This loosening should free up significant liquidity into a market that has been running dry of late, and is quite likely not the last measure to be seen this month. The Reserve Bank did note that inflation was still a concern and would be monitored, but keeping the markets stable took priority. Inflation is disturbingly high, but recent figures suggest prices have peaked for now.
We have noted before that while the RBI is committed to maintaining price stability through proactive monetary policy, its actions over the past few years have been more reactive. At least in its recent history of controlling inflation, the above chart seems to suggest that the RBI has not kept ahead of price pressures. If anything, we feel that the Bank has given most of its attention to supporting the rupee – perhaps at a level stronger than what might be justified. While a strong rupee can keep imported inflation at bay, it is not an answer unto itself. Now, as the ongoing crisis develops, the RBI has had to shift to attend to increasingly illiquid markets – all to the detriment of the rupee.
We believe that for the remainder of the year, the RBI will be on an easing bias, cutting rates and the reserve ratio again before year-end and perhaps as early as this month. Unfortunately, we do not think that monetary authorities will try to coordinate actions along with regional interests in order to steady market volatility, and any ‘surprise’ actions will only be several days after most other countries have made a surprise move. There is evidence that consumer inflation has peaked for the year and could dip below 10% by December, and we think this is possible. However, with the rupee coming very close to IR50/US$ and interest rates coming down fast, imported price pressures and a possible rebound in credit growth will make any lull in inflation short-lived. Unless domestic demand slows dramatically in 2009 – which is a possibility – there is a good chance that inflation will return to double-digits for most of next year, dampening economic growth and indeed keeping the RBI in a bind.
