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US economic indicators

Consumer confidence is likely to have declined noticeably again in April

Mon, Apr 28 2008, 09:50 GMT
by BHF-Bank Economics Department

BHF-Bank

• Q1 GDP could have decreased slightly for the first time since 2001

• FOMC is likely to slow the pace of interest rate cuts

• PCE core deflator will probably only have gone up moderately in March
  

• ISM manufacturing index could have plunged to a four-year low in April

• Non-farm payrolls could have fallen by about 80k again in April

Since peaking in July 2007, the Conference Board’s consumer confidence has already fallen by about 50 points to 64.5, but it is unlikely to have bottomed out yet: we already know that the University of Michigan’s preliminary April consumer sentiment plunged to a 26- year low, and the weekly ABC consumer comfort index has also continued deteriorating. Consumer credit conditions have worsened due to rising credit card defaults, and unemployment is increasing rapidly. High energy and food prices are also weighing on consumers. We thus forecast that consumer confidence will have fallen to about 60.0 in April.

The US growth rate could have turned negative in the first quarter for the first time since 2001: due to the job losses in the first three months, personal consumption weakened. The negative contribution from residential investment could have been even bigger than in the fourth quarter, and this time, corporate investment in equipment and structures could have declined too. Even if foreign trade, government defense outlays and inventories have made positive contributions, these will not be enough to offset this. The growth in inventories is probably only due to weak sales. All in all, we forecast that GDP will have declined by an annualised 0.2% qoq in Q1. The annual rate is likely to have remained slightly above 2%, but it will also deteriorate significantly during the course of the year. The personal consumption core deflator, which was revised down to 2.5% qoq in Q4, could have fallen to 2.1% qoq in the first quarter.

The FOMC is likely to cut rates again after its meeting on Wednesday, as an insurance against a deeper recession. Financial markets are now putting the odds of a 25 basis point cut only at 80%. The central bank could indeed slow the pace of its rate cuts; since last September, it has already lowered the fed funds rate by 300 basis points, and the effects of these cuts are yet to be seen. Furthermore, several central bankers are worrying about inflation and are not convinced that weakness in the economy will be sufficient to bring inflation rates down. As the graph indicates, the real fed funds rate would stand at zero, if the personal consumption core deflator were taken into account, and it would actually reach –2% if the consumer price index were used. We do not expect major changes to the statement: The committee could still state that downside risks to growth remain, but at the same time emphasize the need to observe inflation developments carefully as the uncertainty about a moderation in inflation has increased.

Growth in personal income is expected to have slowed to 0.3% mom in March, but personal spending (PCE) could have gone up a little more than in February, by 0.2% mom. This would be in line with the recent increase in retail sales, but in real terms, spending could have fallen slightly. Just like core CPI, the PCE core deflator is only likely to have increased by 0.1% mom, as medical care costs did not go up as much. The annual rate might remain at 2.0%, the upper limit of the Fed’s comfort zone.

The results of the first regional manufacturing surveys for April have been mixed so far: The New York Empire manufacturing index bounced back from –22.2 to +0.6, but the Philadelphia Fed index declined markedly to –24.9, and the Richmond Fed index also deteriorated. We expect the ISM manufacturing index to have weakened considerably in April as well, from 48.6 to 46.0. The fact that small business optimism, which is often regarded as a forerunner, fell to a historic low in March, raises the risk of it being even lower. The Chicago PMI, which is due to be released the day before, might have declined from 48.2 to 46.0 too.

Durable goods orders fell by 0.3% mom in March, particularly due to weak vehicle orders. But non-durable goods orders are likely to have been supported by the rise in energy prices, and we thus expect total factory orders to have risen by 0.4% mom in March.

Construction spending could have fallen by about 0.6% mom in March. Due to the sharp decline in housing starts, the fall in residential construction spending could have been even more pronounced, and we also expect a decline in outlays for commercial construction.

Initial jobless claims went down unexpectedly by 33k to 342k in the week ending 19 April, but given the weakness in most of the economic indicators, we expect them to have bounced back to about 375k in the week ending 26 April, slightly above the current 4-week moving average.

Unexpectedly, the ADP report had shown a slight rise in private payrolls in March and thus diverged considerably from the official figures of the Department of Labour. The ADP report has been developing more favourably for some time, but we are expecting both series to have converged again, and the April ADP report could show a decline of 75k.

We also expect non-farm payrolls to have decreased by about 80k in April. This would be the fourth consecutive fall. Given the weak assessment of labour market conditions in the consumer confidence report, we also forecast that the unemployment rate will have risen to 5.2%. If average hourly earning have gone up by 0.3% mom again, the annual rate would stay at 3.6%.

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Published on  Mon, Apr 28 2008, 10:03 GMT

Archive

• PPI and CPI surge on energy in June, core rates remain moderate
  Published On Mon, Jul 14 2008, 12:06 GMT
• UMI consumer sentiment could remain at a long-term low in July
  Published On Tue, Jul 8 2008, 06:16 GMT
• June ISM indices are likely to have deteriorated
  Published On Mon, Jun 30 2008, 11:21 GMT
• June consumer confidence indices are likely to decline further from long-time lows
  Published On Mon, Jun 23 2008, 09:30 GMT
• First regional June PMIs are likely to remain in negative territory
  Published On Fri, Jun 20 2008, 06:22 GMT

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