ISM indices (Oct): Still showing relatively robust expansion levels
Written on November 1, 2010 by Wiley Hayden
Aggregate working hours only rose slightly in September, and employment fell. We therefore predict that personal income will have fallen by 0.2% mom in September – in line with the Q3 GDP figures. In August, personal income had risen by 0.5% mom, as it had been temporarily boosted by special unemployment insurance benefits. The GDP figures indicate that personal spending will have gone up by about 0.5% mom in September. This means that real consumption also increased noticeably in the final month of Q3.
Just like core CPI, the PCE core deflator could have re- mained unchanged in September. According to the Q3 GDP figures, that showed an annualised quarterly rise of 0.8% only, the core deflator’s annual rate might have decreased to 1.2%, approaching the lower end of the Fed’s comfort zone.
The ISM manufacturing index declined by 1.9 points to 54.4 in September – still a robust expansion level. In October, the first indications from the regional manufacturing surveys were favourable: the New York PMI jumped by about 11 points, while the Philly Fed index and the Richmond Fed index returned into positive territory. However, the levels of these regional indices are still comparatively low. But the Chicago PMI actually rose slightly in October, and the components weighted according to the ISM method improved noticeably. The ISM manufacturing index could have therefore remained stable at 54.4 in October.
Contrary to the ISM manufacturing index, the ISM nonmanufacturing index increased by 1.7 points to 53.2 in September, thus narrowing the gap to its manufacturing counterpart. The new orders component of the ISM non-manufacturing index rose particularly sharply, by 2.5 points to 54.9. This indicates that the overall index will have at least remained stable in October. It would nevertheless be lower than in spring, when it stood at 55.4 from March to May.
Construction spending went up by 0.4% mom in August, which was solely due to public construction, because residential and non-residential private construction in particular went down. As housing starts were revised upwards for August, we predict that the August increase in construction spending could have been somewhat higher than initially estimated. But in September, the marginal rise in housing starts will have been probably more than cancelled out by a downward correction in public construction spending, and we thus expect total construction spending to have fallen by 0.5% mom in September.
Factory orders could have gone up by about 2.0% mom in September. We already know that durable goods orders increased by 3.3% mom because of a surge in aircraft orders. In addition, non-durable goods orders could have risen more steeply than in August, partly due to higher gasoline prices.
The FOMC is expected to take a decision on additional quantitative easing measures (QE2)at this week’s meeting, due to the unacceptably high unemployment rate and the ongoing downward trend in measures of underlying inflation. According to Fed president Ben Bernanke, the risk of deflation is currently higher than desirable, thus real interest rates could become too high, given the modest economic recovery. However, not all FOMC members are convinced that QE2 is a good idea: Thomas Hoenig, for example, who voted against the last six FOMC decisions, said that buying more US Treasuries would be “a dangerous gamble” that might accelerate inflation and create asset price bubbles in the longer term. Furthermore it would not spur economic or employment growth. The controversy is unlikely to prevent a majority vote for additional easing measures, but it could limit the volume of the purchases. FOMC voting member James Bullard made a concrete suggestion recently: the central bank could buy $100bn worth of Treasuries prior to the FOMC meeting in December. Furthermore, the FOMC could give guidance on whether a further $100bn of assets was likely to be purchased in the period following the next meeting. According to newspaper reports, the expected purchases could have a total volume of about $500bn within six months and would be focused on US Treasuries with maturities between 2 and 10 years, but purchases of 30-year Treasuries are also possible. Contrary to the first round of quantitative easing, the Fed will probably not set a fixed time limit for the purchases after this week’s meeting. The FOMC could announce that future purchases will depend on the development of inflation (too low) and unemployment (too high). As the graph shows, since summer, securities held outright in the Fed’s balance sheet have been kept stable at a little more than $2,000 bn. The first asset purchasing program (QE1), which commenced at the end of 2008 and was concluded in the first quarter of 2010, had a total volume of $1,750bn.
Given that nonfarm business gross value added increased by 3.0% qoq annualised and private working hours by about 1.5 %, we predict that nonfarm productivity will have gone up by 1.5% qoq annualised in Q3. Thus unit labour costs might only have increased slightly by 0.2% mom.
Initial jobless claims went down by 21k to 434k in the week ending 23 October. This was close to the lowest level this year, which was 427k in the 2nd week of July. The lower level of claims could be taken as a positive signal for the economic recovery. However, it is also possible that temporary jobs related to the Congressional Elections on 2 November had a positive impact, which would soon peter out. We predict that, after last week’s sharp drop, initial jobless claims will have risen slightly to 440k in the week ending 30 October, but this would be far below the last 4-week moving average of 453.3k
Nonfarm payrolls declined by 95k in September – more sharply than in August (–57k), even though less temporary Census jobs were discontinued. But local governments cut 76k jobs, and the growth in private employment slowed from 93k to 64k. As the labour market assessment in the consumer confidence report deteriorated again in October, we expect private employment to have at best increased at about the same rate as in September (the ADP report is likely to show a lower, albeit positive, increase in private payrolls in October). The loss of Census jobs will have had a negligible impact, but local governments may have cut jobs again, as they have done in 9 of the last ten months. However, there is also a possibility that temporary government jobs related to the Congressional elections will have been created. All in all, we expect nonfarm payrolls to have gone up by about 40k in October. The unemployment rate will probably have remained unchanged at 9.6% at best for the third consecutive month. Average hourly earnings, which were stable in September, could have increased by a good 0.1% mom, matching the average increase in the first nine months which totalled a mere 0.14% mom. The annual rate could fall to 1.6%, and would thus have been below 2% for nine consecutive months.
Pending home sales, which had dropped by a whopping 32% in May and June, could have increased for the third month running in September, by about 3.5% mom. However, compared to the previous year, they would have deteriorated again slightly from –20.1% to –21%.
After peaking in December 2008, consumer credit fell steadily by a total of $126.1bn up until August. Another decline of about $3bn is expected in September due to credit conditions still being relatively tight and weak demand resulting from consumers’ high debt burden.
Congressional Elections will be held on Tuesday. In these midterm elections, all seats in the House of Representatives are up for election, and according to surveys, the Democrats are set to lose their majority in the House. They might also lose seats in the Senate, but it seems unlikely that the Republicans will gain a majority there too. In any case, the political situation will become more unpleasant for President Obama after the elections, and he will find it difficult to enforce structural reforms in his second term.
Similar Posts:
- ISM indices (Dec): Robust expansion levels
- Housing starts (Sep): Downward correction
- PCE core deflator (Jul): Annual rate still at 1.4%
- GDP (Q3, 2nd estimate): Slight upward revision
- ISM indices (Apr): At robust expansion levels
