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PCE core deflator (August): moderate increase only

Mon, Sep 29 2008, 12:29 GMT
by BHF-Bank Economics Department

BHF-Bank

• Consumer confidence (September): decline due to rise in unemployment and financial market turmoil

• ISM indices (September): below the expansion threshold

• Labour market (September): unemployment rate remains elevated

Personal income is expected to have increased moderately by 0.2 % mom in August. Nominal personal spending might only have remained unchanged, as retail sales fell by 0.3% mom and gasoline prices went down markedly. As the personal consumption deflator will have been slightly negative, real spending could have risen modestly, but consumption will nevertheless have made a negative contribution to growth in the 3rd quarter.

The rise in the PCE core deflator could have slowed from 0.3% to a good 0.1% mom in September. The annual rate would thus remain at 2.4%. The Fed expects core inflation to gradually decline in the near future, so that the PCE core deflator could settle at just above the comfort zone of 1-2% at the end of 2009.

Consumer confidence recovered somewhat in the previous two months, probably mainly due to the sharp drop in oil and gasoline prices. However, there are several reasons why this is not already a turnaround: first of all, the unemployment rate jumped to over 6% in August. Secondly, stress in financial markets has increased significantly and is continuing to jeopardize job security. The ongoing housing market correction and stricter credit rules continue to be a burden for consumers. We thus expect consumer confidence to have fallen back from 56.9 to about 54.0 in September, despite the sharp improvement in the University of Michigan’s consumer sentiment.

Contrary to other purchasing manager indices, the Chicago PMI rebounded unexpectedly to 56.9 in August, but could have fallen back significantly to 52.0 in September, due to domestic weakness and global economic cooling.

Domestic vehicle sales rebounded by 14% mom in August, but we expect them to have corrected downwards from 10.4m to just under 10m in September, due to the depressed buying climate.

The ISM manufacturing index has been hovering around the expansion threshold of 50 for a year. We expect it to have fallen from 49.9 to about 49.0 in September. The results of the regional purchasing manager surveys have been mixed so far: the Philadelphia Fed index surprisingly went into positive territory but the New York Empire and the Richmond Fed index deteriorated. In addition, the steep downward trend in small business optimism indicates some downward potential for the ISM manufacturing index. The tightening of credit conditions and the escalation of the financial market crisis are likely to have made a negative impact too. That also applies to the ISM nonmanufacturing index, which could have declined from 50.6 to 49.5 in September.

Construction spending could have decreased again by 0.6% mom in August, due to the ongoing housing market correction and less support from public and commercial construction, given weak domestic demand and tight credit conditions.

Initial jobless claims jumped from 461k to 493k in the week ending 20 September. The deterioration was mainly connected with the hurricanes Gustav and Ike, which alone raised the level by about 50k. But even without this temporary effect, the level is elevated, and at 462.5k, the 4-week moving average has reached the highest level since the last recession in 2001. Given the potential job losses in the financial sector, we forecast that initial jobless claims will have only fallen back to 470k in the week ending 27 September.

Factory orders are likely to have dropped markedly by about 3% mom in August. We already know that durable goods orders went down by 4.5% mom due to weakness in transportation and capital goods orders in particular. Given the noticeable decline in energy prices, we expect non-durable goods orders, which had gone up sharply in the previous months, to have corrected downwards sharply.

The negative trend in the labour market has intensified. ADP private employment fell by 33k in August and could have declined by at least 60k in September. The decline in private payrolls has been much more pronounced in the official Labour Department figures for several months, and overall non-farm payrolls declined by 84k in August. Given the ongoing housing market correction, weak consumer demand, and the fact that the financial market turmoil has reached a new dimension, we forecast that non-farm payrolls will have fallen by 105k in September. The unemployment rate unexpectedly jumped from 5.7% to 6.1% in August. This could have been partly connected with the extension of unemployment benefit payments. But the upward trend in jobless claims and the negative assessment of employment opportunities in the consumer confidence survey indicate that the unemployment rate will not have corrected downwards, but could have remained at its 5-year high of 6.1% in September. Average hourly earnings went up again relatively sharply by 0.4% mom in August; however, this is not an inflationary signal, but rather reflects that lower paid, less qualified employees are the first to lose their jobs in a downswing. If average hourly earnings rose by 0.3% mom in September, the annual rate would remain unchanged at 3.6%.

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Published on  Mon, Sep 29 2008, 12:44 GMT