US Economic Indicators Preview

(Week of 16 to 22 August 2010)

• First manufacturing indices (Aug): no significant recovery
• Housing starts (Jul): slight rise, but still at depressed level
• Industrial production (Jul): rebound led by manufacturing and utilities

In July, the New York Empire manufacturing index plummeted from 19.6 to 5.1 - the lowest level so far this year. After this sharp decrease, it could have risen somewhat in August, but there is unlikely to have been a significant improvement for the following reasons: the inventory adjustment cycle appears to be in its final stages, thus giving manufacturing less support. The new orders component deteriorated in July, and unfilled orders actually showed a marked contraction. Weaker exports also indicate that the recovery in the manufacturing sector is decelerating. We thus expect the New York Empire manufacturing index to have gone up to about 6.0 only in August. The Philadelphia Fed index, which also declined to 5.1 in July, will possibly have edged up to about 6.0 too.

The NAHB housing market index fell further from 16 to 14 in July, the lowest assessment given by home builders since April 2009. Because of the recent expiration of tax incentives, building activities will probably have remained subdued in August, although the index could have risen slightly to 15 again. However, this would still be far below the threshold of 50, above which more builders view sales conditions as good than poor.

Housing starts have retreated sharply in the last two months, by a total of almost 20%, and the deterioration in the NAHB index signals that housing starts will remain at a low level in the near future. But building permits increased slightly in June, indicating a modest improvement in housing starts in July, from 549k to a still depressed level of about 570k. Building permits, which rose by 1.6% mom in June, could have remained stable at 583k in July, compared to the low of 522k in March 2009 and the peak of 2263 in May 2005.

Producer prices fell by 0.5% mom in July due to lower food and energy prices. Core PPI therefore went up, albeit only slightly by 0.1% mom. Just like import prices, PPI could have increased moderately by 0.2% mom in July. Due to resource slack, the rise in core PPI is expected to have been a mere 0.1% mom.

Industrial production only went up by 0.1% mom in June, due to a decline in manufacturing. In July, the level of the ISM production component decreased, but remained elevated at 57, indicating a rebound in manufacturing. In addition, according to the labour market report, aggregate weekly manufacturing hours went up by 0.5% mom. Industry figures suggest that utility output will have contributed as much as 0.2 percentage points. We predict that industrial production will have risen by about 0.5% mom in July. The capacity utilisation rate could have gone up to 74.6%, which would still be far below the long-term average of a good 80%.

Leading indicators fell by 0.2% mom in June, mainly due to a decline in the average workweek and faster supplier deliveries. In July, leading indicators might have risen by 0.3% mom, as six of the ten subcomponents could have had a positive impact. As usual in this recovery, the yield curve will have made the biggest contribution (0.3 percentage points). Since April 2009, almost half of the improvement in leading indicators has been attributable to the steep yield curve resulting from the Fed's zero-interest rate policy. Noticeably negative contributions are likely to have come from lower consumer expectations and a fall in real M2 in July. The development of leading indicators supports the assumption that economic growth is decelerating: the annual rate and the annualised 6-month rate will both have declined for the fourth consecutive month in July. At 4.7%, leading indicators' 6-month annualised rate would be at its lowest level since June 2009.

Initial jobless claims rose further by 2k to 484k in the week ending 7 August. Seasonal adjustment problems due to there being fewer reopenings in the automobile industry may have played a role again. Thus jobless claims could decline in the coming weeks, but they will still remain too high to suggest a convincing labour market recovery. We expect initial jobless claims to have fallen to about 470k in the week ending 14 August, a little above this year's average level so far.