US Economic Indicators Preview

(Week of 30 June to 6 July 2008)

• June ISM indices are likely to have deteriorated
• Non-farm payrolls could have declined sharply by 80k in June

The ISM manufacturing index had improved somewhat in May, albeit remaining below the expansion threshold. But the regional manufacturing indices published so far in June have all been weaker, indicating that the ISM manufacturing index will have declined markedly to 47.8. The Chicago PMI, which had also improved in May, could have fallen as well, to about 48.5.

In contrast to its manufacturing counterpart, the ISM non-manufacturing index returned to expansionary territory in April and May. However, the gap between the two indices tends to narrow over time, and we thus expect the ISM non-manufacturing index to have decreased too in June, from 51.7 to about 50.5, due to the constant deterioration in consumer confidence and the ongoing correction in the housing market.

Annualised domestic vehicle sales fell to 10.5m only in May, and were thus 16% lower than at the end of 2007. Given low consumer confidence levels and the decline in willingness to buy durable consumer goods, we expect domestic vehicles sales to have remained unchanged at best in June.

Construction spending fell by 0.4% mom in April, as a sharp decline of 2.1% in residential construction was accompanied by an increase in non-residential construction. However, commercial construction spending might have fallen back, and the weakness in residential construction will have continued due to the supply overhang. We forecast that overall construction spending will have declined by about 0.7% mom in May.

Factory orders could have decreased slightly by 0.1% mom in May, and the April increase could be revised downwards from 1.1% to 0.8% mom. We already know that durable goods orders remained unchanged in May; despite the continued rise in energy prices, non-durable goods orders could have suffered a slight setback, after having increased significantly in March and April.

In May, ADP figures showed an unexpected increase of 40k in private payrolls, but we expect them to have corrected noticeably. Our forecast for a 60k decline in ADP employment in June would be more in line with the official figures of the Department of Labor.

Initial jobless claims reached 384k in the two previous weeks, slightly above the 4-week moving average of 378.3k. We expect the deterioration in labour market conditions to have continued, and thus initial jobless claims could at least have remained at the present level of 384k in the week ending 28 June.

Non-farm payrolls have declined by a total of 324k since January. This is comparatively mild compared to the first five months of the recession in 2001, when payrolls fell by more than 600k. However, the deterioration in consumers' labour market assessment indicates that the decline in payrolls could get steeper, and we forecast that non-farm payrolls will have fallen by 80k in June, after -49k in May. The unemployment rate had jumped from 5% to 5.5% in May, particularly due to school leavers entering the labour market. As the situation does not appear to have improved since then, the unemployment rate might have remained at its elevated level in June, although there could have been a slight improvement after the exceptional increase in May. Average hourly earnings are expected to have gone up by 0.3% mom again, leaving the annual rate stable at 3.5%. Wage dynamics have actually been slowing since autumn 2007, despite the sharp rise in inflation rates, making it easier for the Fed to leave the fed funds rate unchanged.

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