PCE core deflator (Jul): Annual rate still at 1.4%
Written on August 28, 2010 by Wiley Hayden
Personal income was flat in June but could have risen by 0.3% mom in July: nonfarm payrolls declined again due to the loss of temporary Census jobs, but aggregate working hours increased by 0.4% mom and average hourly earnings went up by 0.2% mom. Personal spending which had merely remained stable in June, is likely to have risen by about 0.3% mom in July too. Retail sales went up by 0.4% mom, although this was only due to higher adjusted gasoline prices and car purchases. However, real consumer spending will have been more or less flat, indicating a further deceleration of consumption’s contri- bution to GDP growth in Q3.
Just like core CPI, the personal consumption core deflator might have increased by 0.1% mom in July, leaving the yearly rate unchanged at 1.4%. At present, the PCE core deflator’s yearly rate is much higher than core CPI yoy, which remained at a mere 0.9% in July. In the past, it has generally been the other way round, because the PCE core deflator is often dampened by substitution effects in the basket of goods. But housing has a much higher weighting in the calculation of the consumer price index, and therefore the unfavourable development of the real estate markets is having a greater dampening impact on consumer price levels. However, the 3-month annualised change in the PCE core deflator fell to 0.9% in June, indicating that the Fed’s favourite inflation measure is also showing that inflation risks are muted.
The Conference Board’s consumer confidence had fallen 12.3 points from its May peak in June and July. As it is more sensitive to labour market conditions, it turned out worse than the University of Michigan’s consumer sentiment. The news from the labour market remained unfavourable, as especially jobless claims continued their upward trend. We thus expect August consumer confidence to have remained unchanged at its depressed level. The discussion about the US economy possibly falling back into recession could have prevented confidence from recovering.
After the last FOMC meeting the committee had decided to reinvest principal payments from agency debt and mortgage-backed securities, buying long-term Treasuries in order to keep the volume of the Fed’s balance sheet over $2000bn. The FOMC minutes of the August meeting could show that the decision was hotly discussed because of the possibility of its being misinterpreted by the markets as a sign that the Fed’s economic outlook had deteriorated. However, all members, except Mr Hoenig, finally consented to the plan as it was preferable to balance-sheet contraction, which would probably have accelerated due to very low long-term interest rates.
So far the results of the regional manufacturing surveys have been unfavourable in August: although its headline figure improved modestly, the New York Empire manufacturing index’ weighted components painted a bleak picture. The Philadelphia Fed index actually entered negative territory for the first time since July 2009, and its subcomponents confirmed the change into the contraction zone. Thus the national ISM index could even have dropped below the expansion threshold in August. But as the ISM manufacturing index was still showing a comfortable expansion level in July, we consider a significant fall by about 4 points to 51.5 more likely in August.
The ISM non-manufacturing index had improved in July, narrowing the gap to the manufacturing index to a mere 1.2 points. The slowdown in growth momentum seems to have been primarily in the manufacturing sector, due to a halt in inventory stocking, which could have been only temporary. Thus the ISM non-manufacturing index could surpass the level of its manufacturing counterpart in August for the first time since June 2009. Nevertheless, it could have declined from 54.3 to about 53.0 in August.
Construction spending, which had risen by a mere 0.1% mom in June, could have fallen by about 0.5% mom in July. Both private and commercial construction spending are likely to have gone down, as indicated by the ongoing deterioration in the NAHB index and decelerating corporate investment demand.
Nonfarm productivity growth in Q2 is likely to be revised down, from –0.9% in the first estimate to – 1.9% qoq annualised, given the downward revision of nonfarm business gross value added from 2.6% to 1.6% qoq annualised. Unit labour costs were initially reported to have gone up by a mere 0.2% qoq, but this could have been revised to 1.2%.
After three increases in a row, initial jobless claims went down by 31k in the week ending 21 August. But the 4-week moving average rose further to 486.8k, the highest level since the end of November 2009 when private payrolls were still being cut. We expect jobless claims to have remained elevated amid a decline to 470k in the week ending 28 August.
Factory orders could have gone up by 0.7% mom in July, and there could be an upward revision of about 0.5 percentage points for June. We already know that July durable goods orders increased modestly by 0.3% mom due to robust growth in the transportation sector, which compensated for a plunge in nondefense capital goods orders ex aircraft. Nondurable goods orders, which had declined by 4.5% in the last two months, could have recovered somewhat, partly due to higher energy prices.
Pending home sales had plummeted by 32% in May and June due to the expiry of the tax credit for firsttime home buyers. Meanwhile the rules have been extended until the end of September, and therefore pending home sales might have already recovered modestly in July, by about 1% mom.
Nonfarm payrolls declined by 131k in July due to the loss of 202k government jobs: 143k Census workers had completed their jobs and there were temporary dismissals of teachers during the summer break. Private payrolls rose by 71k, but the noticeable increase in jobs in the automobile sector was partly due to the seasonal adjustment, with fewer plant shutdowns than usual. According to weekly figures, 115k Census jobs will have finished in August. The increase in private payrolls will be dampened because of less hirings at automobile firms in seasonally adjusted terms. Given the high level of jobless claims and the string of disappointing economic indicators, we predict that private payrolls will have increased by about 40k, less than the latest 3-month average of 50k. Thus nonfarm payrolls could have dropped by about 75k in August. The unemployment rate, which had only fallen because of discouraged workers leaving the labour force, could have edged up to 9.6%. As the graph illustrates, the unemployment rate is very high at present relative to job openings, which have rebounded since the recession supposedly ended in summer 2009. In the past, both have been closely correlated: higher job openings have been accompanied by a decline in the unemployment rate. The current development indicates that structural unemployment has risen dramatically in the US since the recession.
Similar Posts:
- ISM non-manufacturing index (Jun): Set to remain stable
- ISM indices (Dec): Robust expansion levels
- Housing starts (Jul): Slight rise, but still at depressed level
- ISM manufacturing index (May): Downward correction
- Housing starts (Sep): Downward correction
