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Industrial production (Oct): Moderate rise

Mon, Nov 16 2009, 10:53 GMT
by BHF-Bank Economics Department

BHF-Bank

• Retail sales (Oct): up due to a rebound in auto sales

• First manufacturing indices (Nov): mixed picture

• Industrial production (Oct): moderate rise

• Consumer prices (Oct): another slight increase at the core level

• Housing starts (Oct): modest recovery

• Leading indicators (Oct): seventh consecutive increase

In September, vehicle sales fell significantly, but at –1.5% mom, the drop in total retail sales was not as sharp as expected. Domestic vehicle sales rebounded from 6.80 to 7.94m. We thus predict that retail sales will have gone up by about 1.0% mom in October. Rising unemployment and low credit supply and demand indicate that nominal retail sales less autos will only have increased slightly, especially as average gasoline prices remained unchanged from the previous month.

The New York Empire manufacturing index unexpectedly jumped by almost 16 points to 34.6 in October, thus correctly predicting the improvement in the national ISM manufacturing index to 55.7. However, the October level is not sustainable, in our view, and the New York Empire manufacturing index could thus have corrected to about 25.0 in November.
In contrast to the New York Empire, the Philadelphia Fed index fell by 2.6 points to 11.5 in October. We expect the gap between the two indices to narrow somewhat, as the Philadelphia Fed index might have remained unchanged in November.

Business inventories are likely to have fallen markedly again in September, by about 0.9% mom. We already know that wholesale inventories went down by 0.9% mom, and factory inventories by 1.0% mom. Retail inventories will probably have continued their downward trend, too. The pace of inventory depletion is slowing, and this is boosting growth.

After five quarters of declines, some in double-digits, industrial production went up by an annualised 5.2% in the 3rd quarter. Given the jump in the ISM production component from 55.7 to 63.3 and the rebound in leading indicators, industrial production could well have risen further in October. However, aggregate manufacturing hours declined by 0.4% mom, and “cash for clunkers” ended, which could have led to a setback in the car industry. But utility output increased markedly, according to industry figures. We predict that total industrial production will have risen by 0.1% mom in October, after 0.7% mom in September. The capacity utilisation rate could have increased to 70.6%, well below the long-term average of a good 80%.

After having surged by 1.0% mom in September, leading indicators could have risen by 0.5% mom in October: the steepness of the yield curve will have had the biggest positive impact, followed by the decline in jobless claims, higher stock prices and presumably also building permits and new orders. Lower consumer expectations and supplier deliveries are likely to have made negative contributions. The annual rate could have improved further from 2.9% to 4.4%, which would be the highest level since February 2005.

Energy prices rose markedly in October, which will have had a major impact on inflation data. Import prices rose 0.7% mom, and we expect producer prices to have gone up by 0.6% mom, and consumer prices by up to 0.3% mom in October, although average gasoline prices remained more or less stable. However, given the high degree of spare capacity in the economy and dampened consumer spending due to elevated unemployment and wealth losses, we expect core inflation rates to have risen by 0.1% mom only. In September, core CPI rose by 0.2% mom, but this was mainly due to the tobacco tax hike.

After having fallen to a low of 8 in January, the NAHB housing market index had recovered to 19 by September. But in October, the upward trend was interrupted when the index fell slightly to 18. We expect the NAHB index to have remained unchanged in November. Numbers under 50 indicate that more builders view sales conditions as poor than good.

Housing starts only improved marginally in September, as a rise in single-family starts was almost cancelled out by a drop in multi-family starts. This pattern could be reversed in October, but as building permits decreased in September, we predict that total housing starts will have risen moderately from 590k to 595k in October. As the graph indicates, the current level of the NAHB index indicates that building permits could have gone up somewhat, and we expect them to have increased to about 590k.

Initial jobless claims fell another 12k to 502k in the week ending 7 November – much lower than the yearly average so far of 590k. The 4-week moving average improved for the 10th consecutive week, falling to 519.8k. We expect initial jobless claims to have remained more or less unchanged in the week ending 14 November. However, the statistics could have been distorted somewhat by the national holiday (Veteran’s Day), which took place that week.

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Published on  Mon, Nov 16 2009, 10:53 GMT