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Both ISM indices will probably show ongoing contraction in March

Mon, Mar 31 2008, 10:18 GMT
by BHF-Bank Economics Department

BHF-Bank

• Deterioration in labour market conditions is likely to have continued in March

The Chicago PMI plummeted by seven points to 44.5 in February, well below the expansion threshold. As this indicator is quite volatile, it could have bounced back somewhat, but at 46.5 it would still indicate economic contraction in March.

The ISM manufacturing index fell to 48.3 in February, the second reading below 50 in three months. In March, the results of the first two manufacturing indices were not encouraging: the New York Empire manufacturing index declined from –11.7 to –22.2, the lowest level since the introduction of this index in July 2001. At –17.4, the Philadelphia Fed index was less negative than in the previous month, but its subcomponents were slightly weaker. In addition, the relatively low level of the small business optimism index, which often tends to be the forerunner, indicates that the ISM could have dropped further. We forecast that the ISM manufacturing index will have declined to about 46.5 in March.

After having fallen sharply to 44.3 in January, the ISM non-manufacturing index recovered to 49.3 in February, still indicating contraction in the US economy. Given the weakening of the retail sector and the fact that the housing market correction has intensified, we expect the ISM non-manufacturing index to have declined to about 47.5 in March, not much higher than its manufacturing counterpart. As the graph shows, the both indices tend to move together over time.

Construction spending fell considerably by 1.7% mom in January, and this time all categories contributed to the decline. Given the economic weakness, non-residential construction spending can no longer even out the decrease in residential spending, and we thus expect construction spending to have gone down again by 1.0% mom in February.

Given the low levels of the consumer confidence indices, the demand for durable consumer goods will remain subdued for some time. We forecast that domestic vehicle sales will have declined to 11.5m in March. This would be the lowest level since the summer of 1993.

Factory orders in February are likely to have been dragged down by durable goods orders, which declined by 1.7% mom. However, we expect orders for non-durables to have risen moderately in February, partly due to price increases. Overall, factory orders could have fallen by –0.6% mom.

The development of ADP private employment figures had been better than the official estimates by the Department of Labor, but in February, ADP also reported a decline of 23k. We expect private jobs to have decreased by about 40k in the March ADP report.

Private non-farm payrolls fell for the third consecutive month in February, and total non-farm payrolls declined by 63k. The negative trend is likely to have continued, given the increase in economic uncertainty because of the financial market crisis deepening. We forecast that non-farm payrolls will have gone down by about 70k in March. The unemployment rate had unexpectedly fallen in February to 4.8%. However, this was not so much an indication of economic strength as the result of a number of discouraged workers leaving the labour force. However, this is unlikely to have had the same effect in March, and we thus forecast that the unemployment rate will have gone up again to at least 5%. As the graph shows, the “jobs hard to get” component in the consumer confidence would even indicate a higher rate. If average hourly earnings rose by 0.2% mom, the annual rate would decline from 3.7% to 3.5%.

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Published on  Mon, Mar 31 2008, 10:24 GMT