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US economic indicators

Consumer confidence is likely to fall further in May despite the tax checks

Mon, May 26 2008, 09:02 GMT
by BHF-Bank Economics Department

BHF-Bank

• Durable goods orders could have declined again in April

• PCE core deflator will probably only have gone up slightly in April

As the graph shows, the Conference Board’s consumer confidence declined more than the University of Michigan’s (UMI) consumer sentiment in the first months of 2008, particularly due to the deterioration in labour market conditions, which play a major role in the Conference Board survey. Consumer confidence is likely to continue falling in May, from 62.3 to 60.0, as the housing market weakness, rising credit card defaults and high energy and food prices are also weighing on consumers. We expect UMI’s final May consumer sentiment to decline further to 59.0, the lowest reading in 28 years, as gasoline prices have hit a new record of over $3.7 per gallon – more than 7.5% above the April average. The tax checks, which are being mailed at present, could have a temporary positive impact on consumer spending in the 2nd and 3rd quarter, and could thus pose an upward risk to our forecasts. However, the latest weekly ABC consumer comfort poll decreased further by 2 points, despite the tax rebates.

The downward trend in new home sales accelerated sharply in February and March: they fell by a total of more than 13%. We do not think that new home sales have bottomed out yet, but, after dropping sharply, they could have stopped falling in April. It is already known that housing starts and building permits actually rose, but we forecast that new home sales will only have remained stable in April.

Initial jobless claims fell slightly in the week ending 17 May, but the 4-week moving average of initial jobless claims continued its upward trend and increased to almost 373k. Continuing claims have risen over the 3 million mark in mid-April for the first time since spring 2004. Given the weakness in labour market conditions, we expect jobless claims to have gone up again to 380k in the week ending 24 May.

According to the advance estimate, Q1 GDP went up by an annualised 0.6% qoq, the same modest rate as in the final quarter of 2007. Consumer spending’s contribution fell sharply from 1.6 to 0.7 percentage points, and only remained positive because of an unexpected acceleration in consumer expenditures on services; goods expenditures actually fell for the first time since the 4th quarter of 2005. Private domestic investment was very weak: in addition to another sharp decline in residential investment, investment in structures, equipment and software also decreased. But inventories contributed +0.8 percentage points, and government spending and net exports also had a positive impact. The advance GDP estimate for Q1 could show a slightly higher growth rate of 0.9% qoq, due to upward revisions in consumer spending and net exports in particular, compensating for a smaller contribution from inventories.

Compared to the year-end level, durable goods orders fell by almost 4 % in the first three months. The fact that the ISM new orders remained at 46.5, well below the expansion threshold, indicates that durable goods orders will have continued to decline. In addition, aircraft orders, which had contributed positively in March despite the fact that Boeing orders had already declined, are likely to have suffered a sharp setback, as Boeing announced that orders had dropped by more than 40% mom. Automobile orders went down noticeably in March, partly due to strike activity, but the continued decrease in domestic vehicle sales signals that there was no rebound in April. Capital goods orders ex aircraft might have declined again, albeit less sharply. All in all, we expect durable goods orders to have gone down by 1.0% mom in April. Durable goods orders ex transportation, which increased by 0.9% mom in March, are also likely to have fallen slightly by 0.3% mom.

The growth in personal income has slowed markedly in the last six months, with the annual rate declining from 6.4% to 4.0%. Personal income might have risen by a mere 0.1% mom in April, just like average hourly earnings. Personal spending (PCE) could have increased by at least 0.2% mom, since retail sales ex autos were 0.5% higher than in March. As the PCE deflator could also reach 0.2% mom, real personal spending would remain unchanged.

We expect the PCE core deflator to have increased by 0.1% mom only in April, the same moderate rate as core CPI. The annual rate could have remained at 2.1%, still above the Fed’s comfort zone. However, despite the upward pressure from high energy prices, slow growth could bring the PCE core deflator back to the upper level of the comfort zone.

The results of the first purchasing manager surveys for May have been mixed so far: the Philadelphia Fed index was less negative albeit remaining on a very low level, and the New York Empire manufacturing index returned to negative territory. At 48.3, we expect the Chicago PMI to remain below the expansion threshold in May.

• Download Full US Economic Indicators

Published on  Mon, May 26 2008, 13:14 GMT

Archive

• 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
• Consumer confidence likely to have eased in July
  Published On Mon, Jul 28 2008, 10:01 GMT
• Durable goods orders: soft in June, transportation orders slowed
  Published On Mon, Jul 21 2008, 10:36 GMT

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