ISM Manufacturing Survey - Factory Sector Activity Continues to Advance
The ISM manufacturing survey results for January indicate a growing factory sector. The composite index rose to 58.4 in January from 54.9 in the prior month. Indexes measuring prediction, new orders, employment, and supplier deliveries rose in January.
The sharp increase of the employment index (+3.1 points) is noteworthy. The employment index and change in factory payrolls has a significant positive correlation. Factory employment has been declining every month since July 2006, with the exception of one single-monthly gain in November 2007. Factory employment was down 27,000 in December. The January employment report, scheduled for publication on February 5, should give more insights about hiring conditions. The production index also posted a hefty 6.5 point increase in January. Industrial production has risen 4.7% from the cycle low mark in June 2009.
ISM Manufacturing Survey - January 2010
Moderate Gain in Consumer Spending Likely During Q1
Consumer spending after adjusting for inflation inched up 0.1% in December. In the fourth quarter, real consumer spending increased 2.0%, with support from the "clash for clunkers" program. Expenditures on durable goods fell, while outlays on non-durables and services advanced in January. Going forward, consumer spending projected to post another moderate increase in the first quarter of 2010.
The personal rate in December was 4.8% of disposable income, putting the annual average at 4.6%. The upward trend of the saving rate points to deleveraging that is under way. The 2009 saving rate is the highest since 1998 and the increase of the saving rate posted in 2009 is the largest annual gain on record in fifty years. 
Personal income recorded a 0.4% gain in December, after a 0.5% increase in November. Wages and salaries moved up only 0.1% in December, with transfer payments, largely adjustments to social security payments, accounting for the overall increase in personal income. In 2009, nominal personal income fell 1.4% inclusive of a 3.3% drop in wages and salaries and a hefty 12.3% jump in transfer payments (see chart 5). 
Unemployment insurance benefits as a percent of GDP in 2009 is the second largest in the past fifty years (see chart 6).
Senior Loan Officers Survey Suggests Bankers are Less Stringent but Demand for Loans is Weak
Financial headwinds are holding back the pace of economic recovery. This mantra has been repeated frequently in recent months. The latest Senior Loan Officers Survey now paints an improvement in credit conditions from the supply side. Bankers are not tightening standards but loan demand is weak. Chart 7 indicates that bankers are no longer tightening underwriting standards for both large and small firms. 
Fewer firms reported increasing spreads on loans in the latest survey compared with the survey results of November (see chart 8). 
But, demand for loans remained weak (see chart 9) 
Fewer banks in January reported tightening underwriting standards for commercial real estate compared with the responses in November, while demand for these loans continued to be weak.
In the household sector, the demand for mortgage loans (see chart 11) and other consumer loans was weak (see chart 12). 
Chart 13 indicates that bankers have eased mortgage loan underwriting standards from the latter part of 2008.
Consumer loans excluding mortgages are also being extended under less stringent standards compared with the situation a year ago (see chart 14).
More importantly, bankers are more willing to lend to consumers (see chart 15). Essentially, demand for loans remains significantly weak while bankers have lowered underwriting standards as economic conditions have improved.
