US Economic Indicators Preview

(Week of 12 to 18 May 2008)

• Sharp rise in import and consumer prices will have been mainly due to energy in April
• High gasoline prices will contribute to decline in consumer sentiment, but support retail sales
• The first two May manufacturing surveys are likely to show ongoing contraction
• Industrial production could have declined in April, given the drop in working hours
• Housing starts and building permits are expected to have fallen further in April

The Congressional Budget Office (CBO) estimates that the usual April budget surplus will have reached $160bn this year, a good $17bn less than last year. Although receipts are expected to have exceeded last year's level, outlays could have risen twice as much, partly due to calendar effects. The total deficit after the first seven months of the current fiscal year would amount to -$151bn, compared to -$81bn in the same period of the previous fiscal year. In May and June, the tax rebates, as enacted in the Economic Stimulus Act, will further raise the deficit significantly.

Import prices rose by 2.8% mom in March, driven mainly by higher petroleum prices. However, import prices ex petroleum also went up markedly by 1.1% mom, due to a surge in food and natural gas prices. Crude oil prices increased further, albeit less sharply, in the first third of April, which is the statistically relevant period. But import prices could still have risen by 1.0% mom and 14.3% yoy in April. Consumer prices (CPI) increased by a mere 0.3% mom in March, but we forecast that they will have gone up by 0.5% mom (4.1% yoy) in April, as average gasoline prices jumped by almost 7% mom. This alone could account for 0.3 percentage points of the increase. Core CPI could have risen by 0.2% mom again, leaving the annual rate at 2.4%.

Although the sharp rise in gasoline prices will have had a positive impact on nominal retail sales, we nevertheless expect them to have fallen by 0.2% mom in April. The unexpected increase in March retail sales was partly due to auto sales, despite the fact that industry figures had indicated a decline. However, in April domestic vehicle sales fell further from 11.1m to 10.6m, and thus car sales are likely to have corrected downwards. Less autos retail sales could have gone up by 0.1% mom, but real sales will probably have fallen, as consumer confidence indicators plummeted.

According to the Commerce Department's preliminary estimate, business inventories contributed 0.8 percentage points to GDP growth in the 1st quarter, more than compensating for the decline in domestic demand. We already know that factory inventories went up by 0.9% mom, but wholesale inventories fell by 0.1% mom. Total business inventories might thus have risen by 0.4% mom only in March, leaving some scope for a slight downward revision of inventories in the preliminary Q1 GDP estimate.

Initial jobless claims, which have been very volatile for some weeks, fell by 18k to 365k in the week ending 3 May. However, the 4-week moving average went up slightly to 367k. We expect jobless claims to have increased again to about 380k in the week ending 10 May.

Whereas the Philadelphia Fed index deteriorated further in April, the New York Empire manufacturing index bounced back from -22.2 to +0.63. However, the national ISM manufacturing index remained below the expansion threshold, and we expect the New York Empire index to have fallen back to about -5.0 in May. The Philadelphia Fed index could have recovered somewhat, given that its expectations index went up for two months in a row and returned into positive territory in April. But at -18.0 the Philly Fed index would indicate that manufacturing activities are still receding significantly in May.

Industrial production increased unexpectedly in March, due to utilities and the output of computers and business equipment. The latter might not have risen in April, given the weakness in commercial investment, which is partly due to the tightening of credit standards. As vehicle sales declined again in April, car production is unlikely to have rebounded. We expect industrial production to have fallen by at least 0.3% mom in April, because the ISM manufacturing index is indicating contraction, and aggregate working hours in the goods producing sector went down sharply by 1.1% mom. The capacity utilization rate might have fallen to 80.1%, slightly below the long-term average.

The NAHB index of national homebuilding activity has been stable at 20 for three months in a row, but as we do not think that the housing market has bottomed out yet, we forecast that the NAHB index will decline slightly to 19 in May.

Housing starts plummeted by 11.9% in March, and we expect another, albeit modest, decline from 0.947m to 0.94m in April, given the rising number of homes for sale due to foreclosures. The much stricter lending standards even for prime residential mortgages also indicate that the housing market will remain weak in the months ahead. Building permits, which are already on a lower level, could have fallen to 0.92m.

The University of Michigan's final April consumer sentiment was revised downwards from 63.2 to 62.6, and we expect a further decline to about 61.0 in the preliminary May consumer sentiment index, particularly due to the further rise in gasoline prices at the beginning of the month. The fact that the latest weekly ABC consumer comfort poll deteriorated sharply by 5 points is another indication of a further decline in the consumer sentiment index.

BHF-BANK
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