• Home ::
• Fundamental ::
• Economic Calendar ::
• US economic indicators

• Send
• Print
• Add To
• Rss

US economic indicators

17831ec1-19f7-4c0d-85ef-4b38e3380911

0

0

PCE core deflator (July): well above the Fed's comfort zone

Mon, Aug 25 2008, 08:54 GMT
by BHF-Bank Economics Department

BHF-Bank

• Consumer confidence indicators (August): slightly higher because of decline in gasoline prices

• GDP (Q2 preliminary): upward revision mainly due to bigger contribution from net exports

We expect existing home sales to have risen by almost 3% mom to 5.0m in July, which would be the highest level since February. The rebound in pending home sales by 7.2% since March indicates some improvement, because pending home sales tend to lead existing home sales by 1 to 2 months. New home sales might have fallen, albeit only slightly, to 0.525m in July. If existing and new home sales have stabilized, this would not necessarily indicate a turnaround in the housing market: as the graph shows, the supply overhang and falling prices are delaying a recovery in residential construction.

Consumer surveys since 2002

The Conference Board’s consumer confidence went up from 51.0 to 51.9 in July, showing a much smaller improvement than the University of Michigan’s (UMI) indicator. We forecast that consumer confidence and the final UMI consumer sentiment indicator will rise again in August, because average gasoline prices dropped by more than 6% mom. However, as the Conference Board’s indicator is more sensitive to labour market developments, the rise in the unemployment rate to 5.7% will dampen the improvement. We thus expect consumer confidence to increase only slightly to 53.0 in August. UMI’s consumer sentiment, which in the preliminary August survey was 5.3 points higher than in June due to expectations only, could improve again, albeit slightly this time, to 62.0.

The FOMC minutes of the meeting on August 5 are likely to reveal that the committee members see economic and inflation risks as more or less balanced at present. In view of the elevated CPI rates, there might have been some discussion about the timing of eventual monetary policy tightening, as Mr. Fisher again voted in favour of an immediate rate increase in order to preserve the Fed’s credibility as a keeper of price stability. However, the FOMC statement indicated that members no longer believe that the downside risks to the economy have diminished, and thus the majority is probably expecting slower growth and the downward trend in commodity prices to be sufficient to dampen inflationary pressures. But all committee members could have agreed on the need for monetary policy to react quickly once it is clear that an economic recovery is underway.

Although the ISM manufacturing’s new orders component fell to a seven-year-low in July, we forecast that durable goods orders will have gone up slightly by 0.2% mom in July. The transportation sector should have had a positive impact: Boeing announced that its aircraft orders rose from 62 to 70, and the increase in automobile production, which was connected with the end of strikes, indicates that vehicle orders will have risen too. Non-defense capital goods orders ex aircraft had increased noticeably in June, but might have suffered a setback in July due to weaker domestic demand. Thus durable goods orders ex transportation, which had gone up by 2% mom in June, could have declined by about 1.0% mom in July.

Growth contributions of GDP components in %

In the advance report, GDP growth was estimated at an annualised 1.9% qoq. Net exports made the biggest contribution to GDP – 2.4 percentage points. As it later transpired that June’s real trade deficit was much smaller than initially estimated, net exports could even have contributed 3 percentage points. Business inventories were also better than estimated, and thus inventories’ negative contribution is likely to have been somewhat smaller.
We expect the GDP growth rate to be revised upwards markedly to 2.8% qoq. However, GDP growth is likely to fall back sharply in the 3rd quarter.

More or less as expected, initial jobless claims fell by 13k to 432k in the week ending 16 August 2008. Compared to the same week in 2007, this is an increase by 106k or 32.5%. At 430k, we expect initial jobless claims to have remained almost unchanged in the week ending 23 August.

We expect personal income to have remained unchanged at best in July: the favourable impact of tax checks has faded, and wages might only have gone up very modestly, as the decline in aggregate weekly hours will probably have cancelled out the rise in hourly earnings. Personal spending could have gone up by 0.4% mom, but given that the PCE deflator could be as high as 0.7%, this would translate into another decline in real spending.

Just like core CPI, we expect the PCE core deflator to have gone up by 0.3% mom again in July: medical care costs have quite an impact and the prices of prescription drugs rose noticeably. The annual rate is likely to have risen to 2.4% – well above the Fed’s comfort zone of 1-2%. We envisage the annual rate declining at the end of the year, but it is not likely to fall below 2.2%. Due to the economic weakness, however, the PCE core deflator’s annual rate could enter the comfort zone again next year.

• Download Full US Economic Indicators

Published on  Mon, Aug 25 2008, 09:17 GMT