ISM indices (Apr): At robust expansion levels
Written on July 10, 2011 by Wiley Hayden
New home sales plummeted by 17% mom to a new low of 250k in February while median home prices declined by 8.9% yoy. The weakness in new home sales is related to the excess supply of existing homes, mainly resulting from massive foreclosure activities. However, given the drop in prices and the improvement in the employment outlook, new home sales could have risen to 285k in March.
The Conference Board’s consumer confidence dived from 72.0 to 63.4 in March as inflation expectations surged. The catastrophe in Japan and the turmoil in Libya also took their toll. We already know that the University of Michigan’s (UMI) preliminary April consumer sentiment recovered slightly from 67.5 to 69.6 on improved expectations, given stable stock prices and relatively favourable labour market news. However, gasoline prices have continued to rise sharply, and we thus expect consumer confidence to have remained merely stable in April. UMI’s final consumer sentiment is likely to have fallen slightly again to 69.0.
Durable goods orders will probably have rebounded in March. Firstly, Boeing reported a rise in aircraft orders from 21 to 98. Secondly, due to the still elevated level of the ISM manufacturing’s new orders component, we expect orders ex transportation to have gone up after two consecutive declines. Nondefense capital goods orders ex aircraft in particular might have increased after having dropped by more than 7% in the last two months. We predict that durable goods orders will have risen by about 2.2% mom in March. Non-durable goods orders might have increased markedly too, supported by higher gasoline prices. Thus total factory orders could have gone up by 1.5% mom in March, after having fallen by 0.1% mom in February.
The last FOMC statement emphasised that the central bank would pay close attention to inflation and inflation expectations because of the upward pressure caused by energy and other commodity prices. Although this was expected to be transitory, several FOMC members are now concerned that monetary policy is too expansionary. They see an increased risk of inflation accelerating because of the improved economic outlook. The FOMC is set to leave the fed funds rate in a range of 0–0.25%, and the $600bn Treasury purchase programme, which is due to expire at the end of June, will probably be confirmed. But disagreement over the appropriate policy course may prompt changes to the commitment of “keeping the fed funds rate at exceptionally low levels for an extended period”. A modification of this phrase, which has been included in the statement since March 2009, would trigger strong financial market reactions. For the first time ever, the FOMC will hold a press conference after the meeting, at which it will present adjusted projections for growth, unemployment and inflation (the table above shows the January projections). Given that economic growth was weaker than expected in the first quarter, there could be a slight downward adjustment to this year’s range for the projected growth rate (Q4/Q4). However, the FOMC is likely to be confident that growth will pick up, even though uncertainties have arisen after the disaster in Japan. Unemployment rates could be lowered again somewhat, given that the rate had already fallen to 8.8% in March. The PCE inflation rates for 2011 could be raised markedly due to the ongoing surge in energy prices, but the core PCE deflator might have remained in a range of 1.0 to 1.3%.
We expect GDP growth in Q1 to have slowed from 3.1% qoq to about 2.0% qoq annualised, not least due to unfavourable weather effects at the beginning of the year. Personal consumption, which had gone up by 4% in Q4, might have grown by less than half that rate, partly due to the dampening impact of high energy prices. Moreover, investment demand could have been disappointing, as shipments of capital goods only increased modestly, and residential investment will have even gone down. Inventories, which shaved off 3.4 percentage points from the growth rate in Q4, will have made a big positive contribution in Q1, as indicated by the acceleration in industrial production. But this will have been largely cancelled out by the deterioration in real net exports, which had contributed 3.2 points in Q4. The PCE core deflator could have increased by 1.4% qoq annualised – the highest increase since Q4/2009.
Personal income could have risen by about 0.5% mom in March amid unchanged average hourly earnings and an 0.6% mom increase in aggregate hours worked. Personal spending might have gone up by 0.6% mom, but a large part of this increase will be attributable to higher gasoline prices. Just like core CPI, the PCE core deflator could have risen by 0.1% mom, leaving the annual rate below 1% for the sixth consecutive month.
The Chicago PMI remained above 70 in March, and its new orders and production components were even higher. However, the Chicago PMI is running far ahead of other purchasing manager indices, and as it also covers the global activities of US companies, it could have corrected downwards to 68.5 in April due to disruptions in the wake of the Japanese catastrophe.
March’s first regional purchasing manager surveys were mixed: the New York Empire improved by about four points to 21.7, but the Philadelphia Fed index corrected downward sharply from 43.4 to 18.5. According to the Beige Book, manufacturing is still leading the economic upswing, which is also illustrated by the ISM indices. But we expect the gap between the two indices to have narrowed somewhat in April: the ISM manufacturing index could have decreased to about 60.0, while the nonmanufacturing index might have gone up to about 58.0.
After having fallen by more than 6% in the last three months to the lowest level since November 1999, construction spending could have risen slightly by 0.5% mom in March, partly supported by better weather conditions. We already know that housing starts also recovered somewhat in March.
Nonfarm productivity is likely to have increased by a mere 0.5% qoq annualised in Q1, much less than in the previous quarter because of slower GDP growth and a significant rise in aggregate working hours. Thus unit labour costs will have risen by about 1% qoq.
Nonfarm payrolls rose by 216k mom in March, and we expect a similar increase in April. The unemployment rate, which had fallen by one percentage point in the last 4 months, could have remained unchanged at 8.8%. We predict that average hourly earnings will have risen by about 0.2% mom, after having remained unchanged in the two previous months. As the unemployment rate is still elevated, there is no wage pressure, since the annual rate will have remained below 2% for the 17th consecutive month.
ADP private payrolls increased by 200k per month in the last three months on average. We predict that they will have gone up by about 200k mom again in April; once more somewhat less than private payrolls: jobless claims, which are factored in, rose to over 400k in the week ending 8 April.
Consumer credit has been rising since October 2010, and the increase accelerated from $4.4bn to $7.6bn in February. We expect consumer credit to have gone up by $5.5bn in March, which would equate to the 3-month moving average.
Similar Posts:
- ISM indices (Dec): Robust expansion levels
- GDP (Q3, 2nd estimate): Slight upward revision
- Existing home sales down – new home sales slightly up
- Existing home sales down – new home sales slightly up
- ISM non-manufacturing index (Jun): Set to remain stable
