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US economic indicators

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Consumer confidence indicators (Oct): No improvement

Mon, Oct 26 2009, 10:11 GMT
by BHF-Bank Economics Department

BHF-Bank

• Durable goods orders (Sep): rising slightly after August plunge

• GDP (Q3): marked increase after four quarters of negative growth

The Conference Board’s consumer confidence unexpectedly fell slightly by 1.4 points to 53.1. Although it is already at a relatively low level, we expect consumer confidence to have remained unchanged in October: the University of Michigan’s (UMI) preliminary consumer sentiment dropped by about 4 points to 69.4, as uncertainty about the economic outlook increased. In addition, the September labour market report showed a bigger decline in non-farm payrolls than in the previous month. Given the recent slight downward trend in the weekly ABC consumer comfort poll, we do not predict a rebound in UMI’s final October consumer sentiment either.

Since their low in January, new home sales have improved for five consecutive months, but the August rise from 426k to 429k was rather modest. We forecast that new home sales will have increased somewhat more in September, by 2.5% to 440k, because the tax credit rules for first-time home buyers, which are set to expire at the end of November, are likely to have supported demand. The oversupply of new homes has abated noticeably since the beginning of the year: while it took 12.4 months to sell the stock of homes at the current sales pace in January, months’ supply dropped to 7.3 months in August, and could have gone down slightly again in September.

After plummeting by 2.6% mom in August, durable goods orders could have risen by about 1% mom in September, despite the fact that aircraft orders fell sharply again, according to Boeing. But we assume that vehicle orders, which had only risen modestly in August, despite the Car Allowance Rebate System (CARS), will have increased noticeably in September, given the massive increase in car production by about 8% mom. The ISM new orders component retreated somewhat, but at 60.8, it was still at a level not seen since the beginning of 2006. Durable goods orders ex transportation might have risen by 0.7% mom. It will be particularly interesting to see whether capital goods orders will have gone up again in September, after having declined for two months in a row.

US GDP fell sharply from Q3/2008 to Q1/2009 and declined again, albeit only slightly by an annualised 0.7%, in the 2nd quarter. However, GDP in Q3 will have been supported heavily by CARS and other fiscal measures of the American Recovery and Reinvestment Act, and thus the Commerce Department’s first estimate of GDP in Q3 could show an annualised growth rate of 3.5%. Real personal consumption is likely to have increased by more than 3% qoq in Q3, and the depletion of inventories will have been less pronounced, therefore contributing positively to GDP growth. However, net exports, which were the biggest positive contributor in Q2, will have had a negative impact, and the weakness in commercial real estate investment could be responsible for a slight drop in overall investment, despite the fact that residential construction will have risen for the first time since Q4/2005. The PCE core deflator, which had increased by an annualised 2% qoq in Q2, is likely to have gone up by a mere 1.5% qoq in Q3.

Initial jobless claims rose by 11k to 531k in the week ending 17 October, close to the 4-week moving average. The national holiday could have caused some distortion however, and we expect the underlying downward trend in jobless claims to have continued in the week ending 24 October, with a decline to about 520k. However, this is a level which still indicates substantial payroll losses. In the past, jobless claims had to fall below 400k before new jobs were created.

Given the modest rise in average hourly earnings and the slight drop in working hours, we forecast that personal income will have increased by a mere 0.1% mom in September. As retail sales fell by 1.5% mom after CARS ended, we expect personal spending to follow suit with a decline of 0.6% mom. If the PCE core deflator rises by 0.2% mom just like core CPI, the annual rate will remain at 1.3% – close to the lower end of the Fed’s comfort zone.

The annual rate of the employment cost index (ECI) was 3.5% in Q1/2007, but it went down to 1.8% only in Q2/2009. The quarterly change was a mere 0.4% in Q2, and we expect a similarly modest rise in Q3, reducing the annual rate to 1.5% – the lowest it has ever been since the start of the ECI in 1989.

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Published on  Mon, Oct 26 2009, 10:18 GMT