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First regional June PMIs are likely to remain in negative territory

Fri, Jun 20 2008, 06:22 GMT
by BHF-Bank Economics Department

BHF-Bank

• Producer price inflation could have accelerated in May, particularly due to energy

• Housing starts and permits will probably have corrected downwards in May

• Industrial production and leading indicators could have stagnated in May

After having rebounded in April, the New York Empire manufacturing index had fallen below the expansion threshold again in May. As the latest Beige Book stated that manufacturing activity had weakened in the New York area, we expect the New York Empire index to deteriorate slightly from –3.2 to –4.0 in June. According to the Beige Book, manufacturing activity in Philadelphia remained relatively stable, and business expectations improved noticeably twice in a row too. The Philadelphia Fed index could thus have risen from –15.6 to –9.0 in June. Although exports are supporting manufacturing in the US, manufacturing indices are likely to remain negative due to weakening domestic demand. This is also indicated by the ongoing significant job losses and the fact that small business optimism has declined to an all-time low.

Net foreign purchases of bonds and equities rebounded from $64.9bn to $80.4bn in March, but total monthly net TIC flows were a negative –$48.2bn, as banks’ net liabilities fell by about $116bn. We expect net foreign purchases of long-term securities to have reached $68bn in April, which would be close to the 3-month average.

We forecast that the Q1 current account deficit will have reached $172bn, more or less at the same level as in the fourth quarter. Although the trade deficit was marginally higher, net investment income could have shown another big surplus due to the dollar depreciation having induced US companies to repatriate profits.

Producer prices (PPI) only went up by 0.2% mom in April, as food prices were stable and energy prices actually declined, partly because of the seasonal adjustment process. However, we already know that import prices rose sharply in April and May, and the ISM price component also increased further. We forecast that PPI will have risen by 1.0% mom (6.8% yoy) in May, mainly due to energy and food prices. Core PPI, which had surprisingly gone up by 0.4% mom in April because of higher prices for furniture and cars, could have risen more moderately by 0.2% mom (3.0% yoy) in May.

The NAHB index, which had reached a low of 18 at the end of 2007, had managed to recover slightly to 20 by February. However, in May it fell again to 19, indicating that the housing market is unlikely to improve in the near future. We expect the NAHB index of homebuilding activity to remain stable at best in June.

Housing starts rebounded by 8.2% mom, but this was only a partial reversal of the March plunge, and single-family starts fell further. Given the relatively low level of building permits we expect housing starts to have fallen back to 980k in May. Building permits, which also rose in April, are unlikely to have improved further.

Industrial production fell by 0.7% mom in April, mainly due to a decline in business equipment and car production, partly related to strike activity. As the strike was still on in May, we do not expect car production to have rebounded significantly. Aggregate weekly working hours in manufacturing declined slightly, but the ISM production component improved to 51.2, indicating expansion. Industrial production is thus likely to have at least remained stable in May. The capacity utilization rate might have been unchanged at 79.7%, a 2½ year low.

We forecast that leading indicators will have remained unchanged in May. Real M2 will have made the biggest negative contribution, but the yield curve has steepened, which will have compensated for this. Most other sub-components will have been slightly negative, but the stock market has recovered noticeably. Consumer goods orders could have corrected significantly downwards, and thus leading indicators could also have declined somewhat. But as consumer goods orders were much stronger than estimated in the previous month, the April rise in leading indicators could be revised up from 0.1% mom to 0.3% mom. The annualised 6-month rate would remain negative, but at between –1 and –1.5%, would indicate slow growth rather than a severe recession.

Initial jobless claims bounced back from 357k to 384k in the week ending 7 June, raising the 4-week moving average to more than 370k again. Continuing claims have also been trending upwards and have reached 3.139m – an increase of 750k from the last cyclical low in 2006. We expect the labour market weakness to continue, and thus initial jobless claims could have remained at about 380k in the week ending 14 June.

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Published on  Fri, Jun 20 2008, 06:35 GMT