ISM indices (Feb): At very high expansion levels
Written on July 23, 2011 by Wiley Hayden
Personal income, which rose by 0.4% mom in December, could have gone up by 0.3% mom in January. Average hourly earnings increased by 0.35% mom, but this could have been partly cancelled out by the decline in aggregate working hours. Retail sales increased by a mere 0.3% mom, but personal spending might have risen somewhat more by 0.4% mom in January, not least due to the ongoing rise in gasoline and food prices. Core CPI went up by 0.2% mom, but we are expecting the PCE core deflator to have risen by 0.3% mom, as medical care costs, which have a relatively high weighting in the calculation of the deflator, appear to have increased markedly at the beginning of the year. The annual rate could thus have gone up to 1.0%, which would still be at the low end of the Fed’s comfort zone. The PCE core deflator’s annual rate is set to rise in the coming months. However, the latest FOMC projections revealed that the Fed expects the PCE core deflator to be within a range of 1.0% to 1.3% at the end of the year.
Pending home sales increased by 2.0% mom in December, but after five gains in six months, we expect a slight setback in January, particularly due to unfavourable weather conditions. We forecast that pending home sales will have gone down by about 2.0% mom in January.
Construction spending plummeted by 2.5% in December. But given the sharp rise in housing starts, which was due to starts of volatile multiple units, we expect construction spending to have gone up by about 0.5% mom in January, despite severe winter weather.
The Chicago PMI continued to surprise on the upside in January by rising to 68.8 – the highest level since July 1988. The Chicago PMI will probably have remained at a very high level in February, but it could have nevertheless corrected downward moderately by about two points in February.
The first regional manufacturing PMIs improved in February, especially the Philadelphia Fed index which jumped by 16.6 points to the highest level since January 2004. However, as the national ISM manufacturing index is already at an elevated level, we are not expecting it to have risen further in February, but rather to have remained stable at 60.8.
The ISM non-manufacturing index, which had been lagging behind its manufacturing counterpart since July 2009, has reached a similarly high expansion level in the last two months. This indicates that the US upswing is now more balanced and sustainable. We expect the ISM non-manufacturing index to have risen, albeit slightly, to about 60.0 in February. This would be the highest level since August 2005.
Domestic vehicle sales improved by 3.5% in the two previous months, and the January level of 9.59m was far above the average in 2010 of 8.84m. After two consecutive improvements, we expect domestic vehicle sales to have remained more or less unchanged at 9.60m.
The Beige Book could again paint a relatively positive picture of the US economy. The ISM indices and leading indicators point to a robust recovery in the manufacturing and service sectors. But the Beige Book could also mention the negative impact of the snow storms on retail sales and construction. There will be no hints of wage pressure, but the sharp upward trend in commodity prices has continued. Mr Bernanke will deliver his semiannual monetary policy report to the Senate and the House on 1 and 2 March. Given that the labour market situation is still weak, he is unlikely to indicate that the Fed is intending to change its extraordinarily expansive monetary policy stance in the near future. But he could be more cautious about the need for (additional) quantitative easing, as the risk of a double dip or deflation has receded significantly. Several Fed representatives have indicated that the current $600bn purchase programme due to run until the end of June might not be fully used up.
According to the revised GDP figures, nonfarm business gross value added increased by 4% qoq annualised in Q4 rather than 4.5% as initially announced. We thus expect nonfarm productivity to have gone up by 2.1% qoq annualised rather than 2.6%, and unit labour costs to have fallen by 0.1% rather than –0.6% qoq.
In the week ending 19 February, initial jobless claims had fallen below 400k for the second time only since summer 2008. We expect jobless claims to have remained more or less around the 390k level in the week ending 26 February. This would be lower than the last 4-week moving average of just over 400k.
Nonfarm payrolls went up by a mere 36k in January, much less than the average monthly rise of 137k in Q4, as severe weather conditions hampered activities. The forecasts for February are difficult: after the disappointing figures in January, there could be a rebound, especially as consumers’ assessment of the labour market has improved. However, snow storms in most federal states could have had a negative impact again. We forecast that nonfarm payrolls will have increased by about 125k in February. The ADP figures, which are less sensitive to weather conditions, could again show higher job growth of about 175k, which would be close to the latest 3-month average. It should be noted that ADP will release annual revisions to the employment report, which could alter the historical data.
The unemployment rate fell at an unusually rapid pace of 0.8 percentage points in the two previous months. The decline was not only due to the upswing gaining traction, but also to discouraged workers leaving the labour force. However, the graph shows that more and more consumers are finding it easier to get a new job, which corresponds to the improvement. We thus forecast that the unemployment rate will have remained stable at 9.0% in February, although a slight upward correction cannot be ruled out after its sharp decline in December and January. Average hourly earnings went up sharply by 0.4% mom in January. We predict a more moderate increase of 0.2% mom in February, which would leave the annual rate at 1.9%.
Factory orders are likely to have risen by 2.2% mom in January, and the December increase could be revised up from 0.2% to 1.0% mom. Durable goods orders went up by 2.7% mom at the beginning of 2011, mainly due to a sharp rebound in aircraft orders amid a plunge in nondefense capital goods orders ex aircraft. Nondurable goods orders, which had risen sharply in the last months, could have gone up significantly again, as the ISM new orders component and energy prices were elevated.
Similar Posts:
- Home sales (Jan): Weather-related decline
- ISM indices (Dec): Robust expansion levels
- Housing starts (Jan): Weather-related decline
- ISM non-manufacturing index (Jun): Set to remain stable
- ISM indices (Apr): At robust expansion levels
