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US economic indicators

June consumer confidence indices are likely to decline further from long−time lows

Mon, Jun 23 2008, 09:30 GMT
by BHF-Bank Economics Department

BHF-Bank

• Durable goods orders could have risen slightly in May due to transportation

• FOMC is likely to leave the fed funds rate unchanged, placing more emphasis on inflation risks

The Conference Board’s consumer confidence fell from 62.8 to 57.2 in May, only about half the level of the last cyclical high in July 2007. Given the sharp rise in the unemployment rate from 5.0 to 5.5% in May, we expect consumer confidence to fall to about 55.0 in June. We already know that the University of Michigan’s (UMI) preliminary June consumer sentiment index declined further from 59.8 to 56.7, and as the graph shows, the Conference Board indicator tends to deteriorate even more sharply in times of economic weakness. As the latest weekly ABC consumer comfort poll increased slightly to –44, we forecast that UMI’s final June consumer sentiment will remain stable at its 28-year low of 56.7, despite a further increase in gasoline prices to more than $4 per gallon.

After five consecutive declines totalling 30%, new home sales rose by 3.3% mom in April. Lower home prices will ultimately lead to rising demand due to improved affordability, but the decline in prices is far from over, and potential buyers are thus still reluctant to buy a new home. We therefore expect new home sales to have fallen back to 510k in May, almost the same level as in March.

Existing home sales, which had declined from 4.94 to 4.89m in April, are likely to have recovered slightly to about 5.0m in May: pending home sales, which are regarded as an indicator for future home sales, had rebounded unexpectedly by 6.3% in April. However, the supply overhang is still huge, as months’ supply jumped to 11.2 months that month. Thus the downward trend in house prices could actually steepen in the near future.

Durable goods fell by 0.5% mom in April, but partly due to the strength in non-defense capital goods orders ex aircraft, durable goods orders ex transportation rose by 2.5% mom, after a 1.7% increase mom in March. We expect total durable goods orders to have risen by about 0.5% mom in May. The rise in car production indicates that vehicle orders recovered too, and according to Boeing figures, aircraft orders rose by 15% mom. But durable goods orders ex transportation might have suffered a setback. We forecast that they will have decreased by about 1.5% mom, as capital goods orders and consumer goods orders are likely to have corrected downwards.

The FOMC is likely to leave the fed funds rate unchanged at 2.0% after its two-day meeting, during which the semi-annual monetary policy report will be prepared. In the last statement, the committee refrained from giving a specific risk assessment. This time it could state that growth and inflation risks are more or less balanced: economic downside risks still persist because of weak housing and credit conditions as well as soft labour markets, but due to the substantial easing of monetary policy, the measures to foster market liquidity and the fiscal stimulus, the risks of a severe downturn seem to have diminished. At the same time the inflation outlook has deteriorated mainly due to the ongoing rise in food and energy prices in particular. Thus, financial markets believe there is about a 40% chance that the FOMC will raise the fed funds rate as early as August, after having lowered it aggressively by 325 points since September 2007. However, core inflation has developed quite moderately, and as long as inflation expectations, which have risen slightly, do not erode, we think it unlikely that the FOMC will begin to withdraw the monetary stimulus while unemployment is still rising noticeably.

In its preliminary estimate, the Commerce Department revised the annualised the Q1 GDP growth rate from 0.6% to 0.9%. Due to net exports having developed better than estimated and the upward revision in March retail sales, the final release could show that GDP actually rose by 1.1% qoq in Q1.

We expect personal income to have increased by 0.4% in May, which would be twice as much as in April, as the rise in average hourly earnings accelerated as well, to 0.3% mom. Given the surprising strength in retail sales, which increased by 1.0% mom and less cars by 1.2% mom, we forecast that nominal personal spending (PCE) will have gone up by at least 0.8% mom. The increase could not be attributed solely to price increases, although the sharp rise in gasoline prices might have led to an increase in the PCE deflator of at least 0.5% mom. The PCE core deflator is likely to have risen by just under 0.2% mom, in line with core CPI, as medical care costs only went up moderately. The PCE core deflator’s annual rate will probably remain at 2.1%, slightly above the Fed’s comfort zone.

Initial jobless claims declined slightly by 5k to 381k in the week ending 14 June, but the current level remained slightly above the 4-week moving average of 375k. We expect jobless claims to have remained at about 380k in the week ending 21 June.

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Published on  Mon, Jun 23 2008, 09:45 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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