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Industrial production (July): slower than June

Mon, Aug 11 2008, 11:28 GMT
by BHF-Bank Economics Department

BHF-Bank

• Trade deficit (June): noticeably wider due to surge in petroleum prices

• Retail sales (July): slight decrease despite tax rebates boost

• Consumer prices (July) : less pressure from energy prices

• New York Empire (August): indicating ongoing weakness in manufacturing

• UMI consumer sentiment (August): higher, but still close to long-time low

The trade deficit fell in May, especially in real terms. As the graph shows, real net exports contributed 2.4 points to GDP growth in the 2nd quarter, and about 83 per cent of GDP growth over the last 4 quarters can be attributed to the shrinking real trade deficit, due to robust global and weak domestic demand. Because of the surge in petroleum prices and the total rise in import prices by 2.6% mom, we expect the nominal trade deficit to have widened to $62.5bn in June.
However, as the port of Los Angeles reported a sharp decline in loaded containers, imports excluding oil could have developed weakly, indicating that the real trade deficit will not have widened considerably.

The Congressional Budget Office (CBO) estimates that the July budget deficit will have risen to $102bn, $65bn higher than in July 2007. There are several reasons for the deterioration: the tax rebates and calendar effects (1 July fell on a weekend) each account for one third, and the rest is due to an increase in general outlays. CBO estimates that the government recorded a deficit of about $371bn in the first ten months of fiscal year 2008, more than double last year’s shortfall of $157bn for the same period.

In the first six months of 2008, import prices went up by 13.5%, driven mainly by the surge in oil prices. Import prices ex petroleum also rose markedly by 5.5% mom. In the course of July, crude oil prices fell significantly, but in the first third of the month, which is the statistically relevant period for the import prices release, oil prices were still close to their earlier record levels. Thus we expect import prices to have increased by at least 1.0% mom (20.3% yoy) in July.

In view of the enormous amount of tax checks that were sent out by the government, retail sales developed quite weakly in June, rising by a mere 0.1% mom. However, much of the weakness was a result of declining demand for cars, as retail sales ex autos went up by 0.8% mom, but this was still a decline in real terms. We forecast that lower car sales will have dampened retail sales again in July, as domestic vehicle sales plummeted by 8% mom to a mere 9.1m in annualized terms. The deterioration in the labour market, tighter credit conditions and elevated energy prices also explain why consumers are reluctant to buy durable goods. We expect retail sales to have fallen by 0.2% mom in July (less autos: 0.4% mom).

We forecast that business inventories will have increased by 0.7% mom in June, as it is already known that factory inventories went up by 1.0% mom and wholesale inventories by 1.1% mom, mainly due to the surge in oil prices. Less oil, the rate of inventories has been slowing, but their negative contribution to Q2 GDP could have been somewhat smaller than the 1.9 percentage points in the advance estimate.

June consumer prices’ (CPI) annual rate reached 5% for the first time in seventeen years, as higher energy prices were mainly responsible for an increase in CPI of 1.1% mom. Energy might not have played such a major role in July, as gasoline prices, for example, remained stable on average, and began to decline in the second half of the month. We thus expect the rise in CPI to have slowed to 0.3% mom, but the annual rate will nevertheless go up to 5.1% – probably the peak for this year and next. As the graph shows, the spread between CPI and core CPI has been widening for some years, indicating that second round effects from a wage-price spiral have become less pronounced.

Initial jobless claims rose further by 7kto 455k in the week ending 2 August, reflecting labour market weakness and miscountings connected to the extension of unemployment benefits. We forecast that jobless claims will have corrected downwards somewhat, remaining at an elevated level of 435k, above the latest 4-week moving average of 420k.

The New York Empire manufacturing index has been close to or below zero since February. In July it rose slightly to –4.9. The Beige Book stated that manufacturing conditions in the New York area had remained weak, but as the new orders component entered positive territory in July, we are not expecting the New York Empire to have deteriorated further. It is more likely to have remained stable at about –5.0 in August.

Industrial production rose by 0.5% mom in June, due to a rebound in car production in the aftermath of the strikes and warmer temperatures boosting utility output. The indications for July production are mixed: the ISM manufacturing production component increased to 52.9 and the projected assembly rate at car factories has risen, as more strikers have returned to work. However, manufacturing working hours continued to decrease slightly, and utility output will probably have dropped due to less demand for air-conditioning.
All in all, we forecast that industrial production will have gone up slightly by 0.1% mom, remaining well below the peak in January 2008. The annual rate would turn slightly negative for the first time in five years. The capacity utilization rate is expected to have remained at 79.8%, slightly below the long-term average of a good 80%.

The University of Michigan’s (UMI) final July consumer sentiment was revised up markedly from 56.6 to 61.2, indicating that late respondents were much less pessimistic. This could have been due to the significant decline in energy prices. We thus forecast that UMI’s preliminary August sentiment will go up to about 63.5, albeit still remaining at a low level last seen in the early 1980’s. It is not likely to have improved more significantly, as the weekly ABC consumer comfort poll deteriorated further, and rising unemployment, sinking house prices and tighter credit conditions are continuing to weigh on consumers.

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Published on  Mon, Aug 11 2008, 11:43 GMT