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US economic indicators

Leading indicators will still signal economic recession in April

Mon, May 19 2008, 09:50 GMT
by BHF-Bank Economics Department

BHF-Bank

• FOMC minutes will include downward revision of the 2008 growth projections

• Existing home sales are likely to have fallen noticeably again

Leading indicators have fallen in eight of the last twelve months, but in March they went up slightly by 0.1% mom, particularly due to the growth in real M2. This component will have had a neutral impact on leading indicators in April, but the stock market recovery and the steepening of the yield curve will have contributed positively, and building permits went up unexpectedly. However, consumer expectations plummeted and manufacturing working hours declined sharply. We thus expect leading indicators to have at best remained stable in April. The 6-month annual rate will be a little less negative, but at –2.3%, it would still indicate very slow or falling growth.

Producer prices went up by 1.1% mom in March, but ex food & energy they only increased by 0.2% mom. As oil prices continued to rise, we expect PPI to have gone up again in April, but the increase in gasoline prices will have been softened by the seasonal adjustment factor. Despite the demand slowdown, upward inflationary pressure did not recede in April, as the ISM prices paid component rose slightly again and import prices ex petroleum increased by 2.2% in the last two months. We thus expect PPI to have increased by about 0.5% mom (6.7% yoy) in April, and core PPI could have gone up by 0.2% mom again, raising the annual rate to 2.9%.

At the April meeting, the FOMC lowered the fed funds rate again to combat economic weakness, but only by 25 basis points. This time the statement did not contain the warning that downside risks to growth remained, thus indicating that the fed funds rate might be left unchanged at 2% after the next meeting. The FOMC minutes will highlight monetary policy makers’ assumption that the rate reductions by a total of 325 basis points since September should help to promote moderate growth and mitigate the risks to economic activity. A further indication that interest rates could remain unchanged is the fact that two dissenters would have preferred no rate cut in April, presumably because of the high inflation rates at present and uncertainty about the inflation outlook. The FOMC minutes will include the adjusted quarterly economic projections of the Fed. Compared to the January projections in the graph on the left, the growth projections are likely to be revised downwards, even though, according to the latest edition of the San Francisco Fed’s Fed views, GDP growth rates could reach an annualised 1.5 – 2 % qoq in the second half of the year, boosted by the fiscal stimulus. Despite the fact that PCE inflation averaged 3.4% in the first three months of 2008, the PCE inflation projection might not be revised upwards, as Fed views is expecting a sharp deceleration during the course of the year. The forecasts for core PCE inflation, currently at 2.1%, and for the unemployment rate, which actually fell to 5.0% in April, might not be revised either.

Initial jobless claims increased by 6k to 371k in the week ending 10 May, slightly above the 4-week moving average which has been hovering around 365k for three weeks. We expect jobless claims to have gone up slightly again to 375k in the week ending 17 May.

Given the fact that the downward trend in pending home sales (which are regarded as an indicator of future existing home sales) accelerated in February and March, we forecast that existing home sales will have fallen markedly again, from 4.93m to about 4.80m in April. Financial markets will also focus on the ratio of the inventory of homes to current sales, which had risen from 9.6 to 9.9 in March.

• Download Full US Economic Indicators

Published on  Mon, May 19 2008, 09:57 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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