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Weekly Observatory
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August 11th, 2008
Mon, Aug 11 2008, 13:06 GMT
by Marcial Nava, Alejandro Neut
Retail & Food Services Sales (July, Wednesday 8:30 ET)
F: 0.0, 0.4% C: 0.1, 0.5% P: 0.1, 0.8%
We expect July’s retail sales to remain unchanged from the previous period. Consumers continue diverting spending into nondurable goods away from big ticket items. In fact, in July auto sales tumbled to 12.6 million, their lowest level in 12 years and 2007. While the tax rebates probably helped to ease some pressures, the magnitude of this additional income was significantly lower than in June. The biggest risk to the economy is a sharp correction in consumer spending. Households face lower real income gains –as a result of high inflation and declining payroll- and tighter credit conditions.
Industrial Production & Capacity Utilization (July, Friday 9:15 ET)
F: -0.1, 79.7% C: 0.0, 79.8% P: 0.5, 79.9%
We expect July’s industrial production to decline 0.1% after solid gains in June. Industrial activity continues benefiting from strong sales abroad and still solid demand for some business products and equipment. However, the ongoing drag from the housing sector and a slowdown in consumer spending should restrain growth in key sectors such as the auto industry. Capacity utilization will edge slightly lower with strong levels in the energy sector.
Headline CPI & Core (July, Thursday 8:30 ET)
F: 0.5, 0.2% C: 0.4, 0.2% P: 1.1, 0.3%
Both energy and food prices continued rising in July, although at a more moderate pace than in the previous month. Thus, we expect headline inflation to halve to 0.5% after gaining 1.1% in June. The major impact will come from natural gas and electricity which declined around 12% during July. While gasoline prices have come down in the last few weeks, July’s average is only slightly lower than the previous month, thus the impact will be mostly felt in August. Core inflation remains relatively stable with low to moderate pass-through signals. We continue to expect these pressures to ease off as the economic downturn intensifies. July’s expected 0.2% would be welcomed, by most FOMC members. The most critical issues continue to be wage gains –which have remained well contained- and inflation expectations -which have already shown strains at the short-term end.
Consumer Sentiment (August, Prel., Friday 10:00 ET)
F: 63.0 C: 62.0 P: 61.2
We don’t expect a significant change in consumer sentiment for August although some improvement is likely. On the one hand, consumers got some relief during the final weeks of July, as gasoline prices trended downward after reaching record high levels in mid-July. On the other hand, conditions in the labor market weakened further, withholding some of the positive effects stemming from lower energy prices.
Published on Mon, Aug 11 2008, 13:06 GMT
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August 4th, 2008
Tue, Aug 5 2008, 09:33 GMT
by Marcial Nava, Alejandro Neut
FOMC Monetary Policy Announcement (Tuesday 14:15 ET)
Fed Funds Forecast: 2.0% C: 2.0% P: 2.0%
We expect the FOMC to maintain its current policy stance by keeping rates at 2% while committing to fight long term inflationary risks. We therefore expect the Board to announce no bias, with increasing inflationary and growth risks balancing each other. Some members have recently expressed their willingness to initiate a rate hike, even if only to signal their commitment to fight inflation. But the majority of the Board, including Bernanke, feels it is too soon to tighten. Most governors still see important cyclical recessionary risks for the second half of 2008. And given the current frailty of the financial system, they worry about the prospects of a deeperthan- average recession. With rising risks in both side of the Fed equation, we expect FOMC members to keep their current stance while on the alert to any of multiple threats.
Non-manufacturing ISM (July, Friday 8:30 ET)
F: 48.0 C: 48.7% P: 48.2%
The latest BLS employment report showed a significant reduction in private services’ jobs -around 129,000 from January to July- most of them from temporary and help services. These suggest that services may no longer be able to absorb the ongoing losses in manufacturing and construction. Second-quarter GDP also revealed some moderation in services’ demand. Private spending on services increased 1.1% in 2Q08, the lowest rate since 1Q91. Therefore, we expect the non-manufacturing ISM index to remain below its 50 points threshold, pointing to a contraction in the services sector.
Initial Unemployment Insurance Claims (August 2nd, Thursday 8:30 ET)
F: 400K C: 420K P: 448K
Unemployment insurance claims have increased dramatically over the past three weeks, implying acceleration in the pace of job destruction. This was also evident from the fact that the unemployment rate reached 5.7% in July, the highest since March 2004. We expect initial claims to remain elevated at 400K in the week ending August 2nd, consistent with weaker labor market conditions.
Non-farm Business Productivity & ULC (2Q08, Friday 8:30 ET)
F: 1.2, 1.6% C: 2.5, 1.4 % P: 2.6, 2.2%
Higher-than-expected GDP figures and relatively mild job losses suggested that non-farm business productivity continued to expand in the second quarter. We look for a 1.2% increase from 2.5% in 1Q08. This is equivalent to a 2.9% change on a year-over-year basis, still above productivity’s longterm trend, estimated at 2-2.5%. We also expect unit labor costs to increase 1.6% in 2Q08 (from 2.2% in 4Q07), favored by relatively solid productivity gains and some moderation in the pace of compensations. Labor compensations have softened as implied by the Employment Cost Index, which grew 0.7% q-o-q in 2Q08, its lowest quarterly increase since September 2005. A slower pace of unit labor costs should help to contain inflationary pressures.
Published on Tue, Aug 5 2008, 09:33 GMT
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July 28th, 2008− August 1th, 2008
Mon, Jul 28 2008, 08:03 GMT
by Marcial Nava, Alejandro Neut
Consumer Confidence Index (July, Tuesday 10:00 ET)
F: 49.0 C: 50.0 P: 50.4
Increasing concerns about the economy have been stirred by rising foreclosures, increasing job losses, and high commodity prices. As a result, the Conference Board Index of Consumer Confidence probably declined further in July. We expect it to come at 49.0, the lowest reading since February 1992. Late in July, oil prices decreased notably; if this becomes a trend, the Consumer Confidence Index could bottom in the next months.
Employment Cost Index (2Q08, Thursday 8:30 ET)
F: 0.7% C: 0.7% P: 0.7%
Despite rising inflationary pressures, there is no evidence of a wage spiral. On the contrary, some measures of labor compensations have moderated in recent months. This is the case of average hourly earnings, whose y-o-y growth has decelerated steadily since December 2006. In addition, sustained profits in the non-financial business sector and an intense competition have offset some of the pressures from higher commodity costs. In line with these developments, we look for a 0.7% quarterly increase in the Employment Cost Index in 2Q08 from 0.7% in the previous quarter.
Nonfarm Payroll & U Rate (July, Friday 8:30 ET)
F: -75K, 5.6% C: -68K, 5.6% P: -62K, 5.5%
High frequency indicators suggested that job losses continued in July. For instance, initial unemployment insurance claims have been above trend, with the 4-week-moving average at 382K in the week ending July 18. Claims have accelerated since March, reflecting weaker conditions in the labor market. July’s nonfarm payroll will primarily reflect losses in manufacturing and construction. Professional and business, and financial services are likely to shed additional jobs. On the positive side, the government is likely to add as well as private health and education services. Finally, we expect the unemployment rate to increase to 5.6% from 5.5% in June. Continuing unemployment insurance claims have moved up in recent months, suggesting that applicants spend more time (on average) without a job. In our main scenario, the labor market will deteriorated further and the unemployment rate will reach 5.7% before year-end.
Gross Domestic Product (2Q08, Thursday 8:30 ET)
F: 0.9% C: 1.8% P: 1.0%
According to our estimates, the U.S. economy proved resilient in the second quarter, supported by tax rebates, lower interest rates and a solid expansion of both non-residential investment and exports. We expect a 0.93% real GDP growth in 2Q08 from 0.96% in 1Q08. This is equivalent to a 1.8% year-over-year rate from 2.5% in 1Q08. For further details please see our GDP Observatory 2Q08 (July 24, 2008).
Manufacturing ISM Index (July, Thursday 8:30 ET)
F: 51.5 C: 49.1 P: 50.2
Durable goods orders rebounded in June, probably favored by a weak exchange rate and solid economic growth abroad. This anticipates better manufacturing numbers in July than in previous months. Thus, we expect the manufacturing ISM index to post a small gain of 51.5 from 50.2 in June. However, we do not expect this improvement to anticipate a rebound in the ISM index since the economy will slow down further in the next quarters.
Published on Mon, Jul 28 2008, 08:03 GMT
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July 7th − 11th, 2008
Mon, Jul 7 2008, 08:13 GMT
by Marcial Nava, Alejandro Neut
Import Price Index (June, Friday 8:30)
F: 1.6% C: 1.8% P: 2.3%
Rising energy prices and dollar weakness continue to boost import prices. On a year-over-year basis, import prices have risen at double digits rates, reaching 17.8% in May, the highest since April 1989. Higher import prices inflation posse an important risks to core CPI outlook. However, this risk may be counterbalanced by the current economic downturn.
Pending Home Sales (May, Tuesday 10:00)
F: -2.2% C: -2.5% P: 6.3%
In line with the ongoing adjustment in the housing sector, we expect a 2.2% decline in May’s pending home sales, anticipating a disappointing report of existing home sales in June. Housing demand keeps falling despite lower mortgage rates; and given the substantial levels of inventories, it will decline further through the rest of the year.
Consumer Sentiment (Jul, Prel., Friday 8:30)
F: 51.0 C: 56.0 P: 56.4
Things are getting worse for consumers. The average gasoline price continues to the upside and has already exceeded $4.00 per gallon. Higher energy prices are forcing consumers to change spending patterns, something that has started to be reflected by demand of durable goods, particularly autos. In addition, labor markets have experienced significant losses particularly in construction, manufacturing and financial sectors. Thus, we expect the U of Michigan Consumer Sentiment Index to decline further in July.
Trade Balance (May, Thursday 8:30)
F: -62.0B C: -62.1B P: -60.9B
The trade deficit probably increased in May as higher energy prices boosted the value of imports. When adjusted for prices changes, imports of goods have declined by an average yoy rate of 0.8% from January to April. On the other hand, real exports of goods have increased by a solid 10% in the same period. The net effect of international trade’s dynamics has been a positive contribution to GDP growth, which is likely to continue in the next quarters boosted by dollar weakness and economic growth overseas.
Initial Unemployment Insurance Claims (July 5th, Thursday 8:30)
F: 385K C: 385K P: 404K
Initial claims rose substantially over the past five weeks, suggesting that labor market conditions worsened. In fact, the nonfarm payroll lost 62,000 jobs in June. Meanwhile, continuous claims continued on its upward trend, implying that unemployed persons are spending more time without a job. In June, the unemployment rate remained steady at 5.5%, the highest since April 2004. Job losses are likely to continue in the next months, affecting the pace of personal income and consumer spending. We expect initial jobless claims to remain relatively high at 385K for the week ending July 5th, consistent with a negative payroll reading during the month.
Published on Mon, Jul 7 2008, 08:13 GMT
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June 30th, 2008
Mon, Jun 30 2008, 08:20 GMT
by Marcial Nava, Alejandro Neut
Non Farm Payroll and Unemployment rate (June, Thursday 8:30)
F: -85K 5.3% C: -50K 5.4% P: -49K 5.5%
Last month’s payroll data and unemployment rate were seemingly contradictory. While no one was surprised by the non-farm payroll data released (which showed that May’s total non farm payrolls had decreased by 40,000), May’s unemployment rate came out unexpectedly high. The reason to this apparent contradiction was a higher that expected increase in labor participation. The Fed hence dismissed this higher unemployment rate, under the impression that the rise in labor participation was transitory and would not constitute the beginning of a trend. Next week we will see data that will confirm or deny the Fed’s assumption. We expect that it will be ratified, and that the rise in labor participation will not magnify the already low non farm payroll data.
We do expect that non farm payrolls data has further decreased in June, with even larger losses than observed the previous month (-85 thousand for June compared to -49 thousand in May). But at the same time we expect the unemployment rate will not go along. On the contrary, we expect June unemployment rate to step back to 5.3% (from May’s 5.5%). This scenario assumes that in June labor participation has corrected all the abnormal increase observed the previous month.
Manufacturing ISM (June, Tuesday 8:30)
F: 49 C: 49.6 P: 49.6
Last month ISM data was better than expected, thus constituting one of the several elements used by the Fed when arguing that the economic downturn was not spiraling out of control. Both new orders and production showed signs of strength - largely due to robust global growth. Clearly, the weaker dollar has helped lift exports, although this week’s FOMC shows that policymakers are increasingly worried about the possible inflationary impact. Prices in the ISM show the reason behind the Fed’s current unrest: while non-manufacturing data seems stalled, prices are under mounting pressures.
Nonmanufacturing ISM (June, Thursday 8:30)
F: 51 C: 52: P: 51.7
This is another report which suggests that the economic downturn is not intensifying. Despite a huge reduction in January, this variable has kept above the 50 point benchmark. But there have been initial signs that services are starting to feel the effects of the downturn at a more structural level. We do expect non-manufacturing ISM to suffer as a result, but we do not expect it to cross the 50 point barrier. Services still constitute a pillar for the US economy, closely watched by the Fed, and one of the few resilient sectors during the current downturn.
Construction Spending (May, Tuesday 8:30)
F:-0.6% C: -0.6 P: -0.4
The housing sector continues under considerable stress. Nothing has changed since our prevision that the housing market would touch bottom only at the end of this year. Prices continue to drop and credit restrictions are tightening. Construction Spending will therefore not recover any time soon.
Published on Mon, Jun 30 2008, 08:20 GMT
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FOMC Policy Announcement (June 25th)
Mon, Jun 23 2008, 13:20 GMT
by Marcial Nava, Alejandro Neut
Fed Funds Forecast: 2.0% C: 2.0% P: 2.0%
In its next meeting the FOMC will probably maintain rates at 2%. Uncertainty has intensified on both sides of the Fed’s equation. On the one hand, the economy still faces downside risks due to the fact that financial markets remain under considerable stress. On the other hand, inflationary pressures – coming mainly from large increases in oil and food prices- have intensified and headline inflation has accelerated both for PPI and CPI. Although core inflation has remained immune to these pressures, expectations have been showing an incipient reaction –and with isolated surveys showing a very significant rise, like the 5.5% inflation reached by Michigan 1-year Inflation Expectations. As a result, recent speeches by Board members have been hawkish in tone. But other than reemphasizing their commitment to combat inflation, we do not see them as signaling any change in policy in the near future.
Consumer Confidence Index (June, Tuesday 8.30 ET)
F: 56.0 C: 57.0 P: 57.2
We expect the Conference Board’s Index of Consumer Confidence to deteriorate in June, reflecting more pessimistic assessments on labor markets, increasing gasoline prices, and weaker financial markets. In May, private nonfarm payroll declined only by 49,000, but the unemployment rate reached a high 5.5%. Tax rebates may have helped the hardship faced by a large percentage of families but probably, they did little in terms of expectations. The Confidence Index stands at 57.2 points, the lowest reading since October 1992.
Existing & New Home Sales (May, Tuesday and Wednesday 10:00 ET)
F: 4.80, 550K C: 4.96M, 510K P: 4.89M, 526K
Housing demand has not bottomed yet and homebuyers have adopted a waitand- see attitude toward home prices. Thus, we expect housing demand to weaken further as prices keep falling. In our view, the housing market will deteriorate –each time at a slower pace– throughout the rest of the year and will not start to recover until the beginning of 2009. We will hardly see an improvement in existing home sales, given a wave of foreclosures that make the housing inventory even higher. We expect new home sales to continue on a downward trend. Prices are likely to continue falling, particularly in markets with weaker economic fundamentals.
Durable Goods Orders (May, Wednesday 8:30ET)
F: 0.0% C: 0.0% P: -0.5%
May durable goods orders likely remained at April’s low levels, anticipating disappointing readings of industrial output in the coming months. Durable good orders have accumulated a 4.3% reduction so far this year. Nondefense capital goods orders excluding aircraft –a leading indicator of nonresidential investment– declined 1.6% y-o-y on average during 2007. This trend continues and is likely to be exacerbated by tighter credit standards and declining corporate profits. As a result, we expect non-residential investment to soften in 2008; although, it will remain growing above PCE. Sectors more closely linked to exports are likely to benefit the most.
Published on Mon, Jun 23 2008, 13:20 GMT
Archive
- August 11th, 2008
Published On Mon, Aug 11 2008, 13:06 GMT - August 4th, 2008
Published On Tue, Aug 5 2008, 09:33 GMT - July 28th, 2008- August 1th, 2008
Published On Mon, Jul 28 2008, 08:03 GMT - July 7th - 11th, 2008
Published On Mon, Jul 7 2008, 08:13 GMT - June 30th, 2008
Published On Mon, Jun 30 2008, 08:20 GMT
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