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ISM indices (Jan): higher again

Fri, Feb 5 2010, 07:21 GMT
by BHF-Bank Economics Department

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• Personal spending (Dec): up despite drop in retail sales

• ISM indices (Jan): higher again

• Labour market report (Jan): modest increase in nonfarm payrolls

Personal income increased by 0.4% mom in November, but was still 0.3% points lower than the previous year. However, due to various fiscal measures, disposable income was 3% higher than in November 2008. According to the GDP data for Q4, personal income could have gone up again by 0.4% mom in December. The data suggest that personal spending, which was up 0.5% mom in November, will also have increased by 0.4% mom, even though retail sales declined by 0.3% mom. As consumer spending is restrained due to deleveraging, the savings rate is approaching 5%.

Just like core CPI, the PCE core deflator could have risen by 0.1% mom in December, raising the yearly rate to 1.5%. In the course of 2010, the PCE core deflator’s yearly rate is likely to decelerate somewhat because of considerable resource slack in the economy.

It was initially reported that the ISM manufacturing index had risen from 53.6 to 55.9 in December, but this was later revised down to 54.9. We predict that the ISM index will have risen again in January. The January results for the regional indices have been mixed so far: the New York Empire manufacturing index rebounded from 4.5 to 15.9 and was thus slightly higher than the Philadelphia Fed index which dropped from 22.5 to 15.2. The Richmond Fed index went up by two points, but remained slightly negative. However, the Chicago PMI jumped from 58.7 to 61.5, with new orders, production and employment rising particularly sharply. We thus forecast that the ISM manufacturing index will have increased to 56.0 in January.

The current restocking of inventories is having a greater positive impact on manufacturing. Thus the ISM non-manufacturing index is lagging behind and, despite an increase in December, was still below the expansion threshold after revision. But after the marked improvement in the business activity component at year-end, we expect the ISM non-manufacturing index to show expansion again in January, at a level of 51.5. The gap between the two indices would thus have narrowed somewhat.

Construction spending fell by 0.6% mom in October, with outlays for residential construction declining much more than for non-residential construction. Given the massive weather-related drop in December housing starts, private residential construction spending could have fallen again, and commercial construction appears to be continuing its downward trend, partly due to tight credit conditions. We predict that total construction spending will have decreased by about 0.5% mom in December.

Pending home sales plummeted by 16% mom in November, due to the original deadline of first-time home buyer credit. However, this has now been expanded and extended until April 2010. Thus pending home sales could have recovered somewhat. But it is likely to take some time until they reach their last peak again. We expect pending home sales to have gone up by about 2% mom in December.

Domestic vehicle sales have improved in the previous three months, mitigating the downward correction which took place after the Car Allowance Rebate System ended in August. However, the December increase appears to have resulted from large rebates, because the retail sales report showed a decline in nominal car sales in the same month. Given that the buying climate is dampened by high unemployment, massive wealth losses and tight credit, we forecast that domestic vehicle sales will have declined to about 8.4m in January.

Factory orders increased by 1.1% mom in November, primarily due to higher non-durable goods orders, which rose by 1.8% mom, driven mainly by petroleum products. We already know that durable goods orders, dampened by ongoing weakness in nondefense aircraft orders, went up by a mere 0.3% mom. Nondurable goods orders are likely to have increased at a much slower pace than the previous month, especially as energy prices fell noticeably. We forecast that total factory orders will have gone up by 0.3% mom in December, and the November figures are likely to be revised downwards to just under 1 %.

As nonfarm business gross value added was 7.2% annualised in Q4 and aggregate working hours only declined slightly, we predict that nonfarm productivity will have risen by 6.8% annualised in Q4. The yearly rate would have accelerated to about 5.5% at the end of the year. In the whole of 2009, nonfarm productivity is likely to have gone up by 3.1%, after 1.8% in 2008. Unit labour costs could have declined by 3.0% qoq in Q4. They would thus have decreased by 1.0% in 2009, after having risen by 1.0% in 2008.

Initial jobless claims fell by a mere 8k to 470k in the week ending 23 January, contrary to expectations for a larger decline after the Labour Department had announced that the previous week’s rise had been due to a holiday-related backlog. We expect jobless claims to have declined to 455k in the week ending 30 January, close to the latest 4-week moving average.

The December labour market report was disappointing, because, instead of remaining stable, nonfarm payrolls dropped by 85k. Construction jobs in particular took a heavy hit, possibly due to the unfavourable weather conditions. But according to the graph, the upturn in temporary jobs could foreshadow a rise in nonfarm payrolls in January. Given that jobless claims are still relatively high and would actually point to ongoing job cuts, we expect only a moderate increase of 10k. The ADP report, two days prior to the official labour market data, could still show a decline in private jobs of about 40k, as ADP uses jobless claims for the finetuning of its estimate. The unemployment rate could nevertheless have remained at 10.0%, as job creation must surpass the increase in the labour force to lower the rate. Furthermore, the return of formerly discouraged workers to the labour market could actually push the unemployment rate up. Average hourly earnings are predicted to have increased by 0.2% mom again.
It should be noted that the January labour market report will introduce some statistical changes and incorporate the annual benchmark revisions. It is already known that 824k more jobs than initially estimated were cut from April 2008 to March 2009. These will be divided among the months. There are also likely to be further downward revisions for the subsequent months up until December 2009.

Consumer credit had fallen by almost $100bn since February 2009, and the monthly decline accelerated to $17.5bn in November. Due to tight credit conditions and consumers deleveraging, we expect consumer credit to have continued falling in December, albeit less markedly, by $10bn.

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Published on  Fri, Feb 5 2010, 07:40 GMT

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