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US: Chicago PMI jumps higher

Mon, Sep 1 2008, 07:38 GMT
by KBC Market Research Desk

KBC Bank

In July, personal spending came out in line with the expectations at 0.2% M/M following a 0.6% M/M in June. Also the PCE deflator came out in line with the expectation at 0.6% M/M and 4.5% Y/Y. Personal spending based on chained (2000) dollars was -0.4% M/M, indicating a steep decline in real spending. More surprising were personal income figures, falling 0.7% M/M against an increase of 0.1% M/M in June and the consensus of -0.2% M/M. Personal income was holding up very well in the previous months due to the tax rebate checks, but this has now ended and therefore personal income fell more than expected, dragging the savings rate down.

The Chicago PMI came out unexpectedly strong in August (at 57.9) against 50.8 in July, the highest level since June 2007. Looking at the details, production (63.4 from 49.2), new orders (60.2 from 53.5) and orders backlog (63.0 from 45.7) jumped higher, while employment plunged from 45.9 to 39.2. Prices paid fell back from the sky-high level of 90.7 in July to 80.6 in August. This outcome is far above the consensus of 50.0 and at face value suggests a steep recovery in the fortunes of the sector in Chicago. While the news is a positive surprise, we should be a bit cautious as the Chicago PMI has shown in the past more surprises, which weren’t also backed up by other indicators or by subsequent readings in the Chicago PMI either. Therefore, we think the strength in the September isn’t representative for the whole sector, even if we should be open-minded and look closely to other indicators, especially Tuesday’s ISM report.

The final figure of the U. of Michigan confidence indicator came out at 63.0, which was substantially higher than the preliminary figure of 61.7. Both sub-indices, the current conditions and the expectations improved compared to the preliminary reading, which indicates that consumers are becoming more positive after oil prices declined. However, it is clearly too early to cry victory, the index had plunged extremely in previous months end the current revival has much too do with the lower gasoline prices. We expect household spending to remain very sluggish in the next few months.

EMU: Lower inflation, but business sentiment worsens

The EU economic confidence index dropped sharper than expected in August (88.8 from 89.5). Looking at the details, industrial (-10 from -8) and retail (-11 from - 9) confidence deteriorated while consumer confidence (-19 from -20), services confidence (3 from 1) and construction confidence (13 from -14) came out slightly better. Industrial sentiment weakened significantly with a slump in future production, orders, exports and employment. Overall, prices were lower, but still close to recent record high levels. The EU business climate indicator confirms this bleak picture of the euro zone economy, falling from -0.20 to -0.33.

The euro zone CPI estimate fell back to 3.8% Y/Y in August, after reaching its peak of 4.0% Y/Y in July. Although the consensus was looking for an unchanged 4.0% Y/Y; this is no complete surprise as national inflation data, released earlier this week, came out lower than expected. Nevertheless, it is a positive development that will be received favourable at the ECB, even if one shouldn’t immediately expect ECB reaction. Inflation remains too high and inflationary pressures are still in the pipeline (at least according to some influential ECB members. The unemployment rate stayed unchanged at 7.3% in July, after the May figure was upwardly (7.3% from 7.2%) revised last month.

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Published on  Mon, Sep 1 2008, 14:35 GMT