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UMI consumer sentiment could remain at a long−term low in July

Tue, Jul 8 2008, 06:16 GMT
by BHF-Bank Economics Department

BHF-Bank

• The trade deficit is likely to have risen noticeably again due to the surge in import prices
  

Wholesale inventories went up by 1.3% mom in April, partly because of an increase in automobile inventories. Due to the rise in energy prices, we forecast that wholesale inventories will have gone up strongly again, by 0.8% mom in May.

Initial jobless claims jumped to 404k in the week ending 28 June, and the 4-week moving average rose to 390.5k, the highest level since the beginning of October 2005. We expect jobless claims to have at least remained on that elevated level in the week ending 5 July because of the summer shutdown in automotive plants. As a 13-week extension of benefits was signed into law, continuing claims will probably rise sharply in the weeks ahead. Because they could to some extent be mistakenly classed as initial claims, they might push initial jobless claims up too.

The trade deficit increased by more than $4bn to $60.9bn in April, although exports rose sharply by 3.3% mom. But due to the surge in import prices, nominal imports went up even more sharply, by 4.5% mom. As import prices increased by a further 2.3% mom, we forecast that the trade deficit will have risen again in May to about $63bn. As the graph shows, the divergence between the total trade deficit and the trade deficit ex petroleum has widened; the latter has fallen significantly since 2007, as exports have benefited from the depreciation of the dollar, and import growth has slowed as a result of weaker domestic demand.

Import prices went up significantly by almost 8% in the previous three months, raising the annual rate to a record 17.8% in May. This was mainly due to petroleum prices, but on account of the dollar depreciation, import prices ex petroleum also rose noticeably by 6.6% yoy. Petroleum prices continued to increase in June, but much less sharply than in May. We forecast that import prices will have risen by 1.8% mom in June, raising the annual rate to 18.4%.

The University of Michigan’s (UMI) consumer sentiment fell by 3.4 points to 56.4 in June – a 28-year low. The marginal downward revision of the final June index indicates that consumer sentiment could decline further in July, particularly since gasoline prices have risen to about $4.1 per gallon. However, the weekly ABC consumer comfort index seems to have stabilized, albeit on a low level, and thus we forecast that UMI’s consumer sentiment will only have fallen slightly to 56.0 in July. Unfavourable labour market conditions, sinking house prices and the higher cost of living are continuing to weigh on consumers, and the stock market has begun to deteriorate too.

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Published on  Tue, Jul 8 2008, 11:39 GMT