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US economic indicators

The FOMC is expected to cut the federal funds rate sharply again

Mon, Mar 17 2008, 10:39 GMT
by BHF-Bank Economics Department

BHF-Bank

• NY Empire and Philadelphia Fed index are expected to show further contraction in March

• Industrial production and leading indicators are both likely to have fallen in February

• Housing starts and building permits will probably have continued to decline in February

The Q4 current account deficit is likely to rise from $178.5bn to about $185bn, in line with the widening of the trade deficit. In addition, the surplus on investment income could have fallen back, after having increased to more than $20bn in the 3rd quarter.

The Philadelphia Fed index has been negative since December, whereas the New York Empire manufacturing index indicated contraction for the first time in February. We expect both indices to have remained below zero in March. At –12, the New York Empire manufacturing index could have remained almost unchanged. The Philadelphia Fed index might have improved somewhat, but, at –20 after –24, it would still be significantly negative. The fact that the future index also entered negative territory last month indicates that manufacturing activity will remain weak in the first half of 2008 at least.

Industrial production is likely to have fallen by 0.3% mom in February: first of all, at 48.3, the ISM manufacturing index is showing contraction. In addition, aggregate manufacturing hours have declined, and utility output is likely to have gone down, after having contributed positively in January. Capacity utilization could have fallen to 81.1%, 1.3 points lower than its cyclical high in August 2006.

Leading indicators will probably have dropped by 0.4% mom in February. This would be the fifth consecutive decline, and the eighth decrease in the last 12 months. Jobless claims, consumer expectations, vendor performance, building permits and the stock market will have been the main negative contributors, and real M2 is likely to have been the only significantly positive factor. Despite having improved, the annualised 6-month rate will remain markedly negative, at –2.8%. According to the Conference Board, a rate below –2.5% is a strong recessionary signal.

Producer prices (PPI) rose sharply by 1.0% mom in January, particularly due to energy. Although average crude oil prices went up again significantly, oil prices in the relevant week including the 13th were only slightly higher than in the previous month. Food prices may have continued to go up albeit at a slower pace than in January. We forecast that PPI and core PPI will have both increased by 0.2% mom in February, which would reduce the annual rates to 6.7% and 2.1% respectively.

The NAHB index went up again by one point to 20 in February, and we expect it to have remained on this still very low level in March. Although the homebuilders’ index has stabilized somewhat, housing starts are expected to have declined further to just under 1000k. They have not been that low since May 2005. Building permits could have also declined again from 1061k to about 1020k, indicating that a turnaround in residential construction activities is not yet in sight.

In his congressional testimony, Fed president Mr. Bernanke emphasized downside risks to growth and promised that the FOMC would act in a timely manner to address those risks. Given that the stress on financial markets is intensifying due to the latest liquidity and solvency problems, and that private payrolls have now fallen for three consecutive months, the FOMC is expected to cut the federal funds rate again sharply. Financial markets have now priced in a decrease of at least 75 basis points to 2.25%, and, given the extent of the credit market difficulties, monetary policy makers are not likely to disappoint market expectations.

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Published on  Mon, Mar 17 2008, 10:45 GMT

Archive

• ISM indices (August): showing contraction again
  Published On Mon, Sep 1 2008, 09:22 GMT
• PCE core deflator (July): well above the Fed's comfort zone
  Published On Mon, Aug 25 2008, 08:54 GMT
• Leading indicators (July): a more marked decline than in June
  Published On Mon, Aug 18 2008, 08:54 GMT
• Industrial production (July): slower than June
  Published On Mon, Aug 11 2008, 11:28 GMT
• PCE core deflator (June): slightly higher, above the Fed's comfort zone
  Published On Tue, Aug 5 2008, 07:18 GMT

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