US Economic Indicators Preview

(Week of 6 to 12 October 2008)

• FOMC minutes (16 September): more emphasis on economic risks than on inflation
• Trade balance (August): narrower deficit due to oil price correction
• Import prices (September): second sharp decline in a row

The FOMC minutes might show an intense discussion on the consequences of the financial market turmoil and the potential collapse of major financial institutions. Although the risk assessment in the last FOMC statement was balanced, more emphasis was put on the economic risks. And despite indicating that the inflation outlook is highly uncertain, the committee pointed out that inflation is expected to moderate. The financial markets have given up rate hike expectations completely and are now expecting the Fed to lower the fed funds rate again by at least 25 basis points by the end of the year.

Pending home sales fell by 3.2% mom in July, but given their volatile development in the previous months, they were more or less on the same level as at the beginning of 2008. However, they could have fallen again slightly by 1.0% mom in August. Pending home sales are indicating that the downward trend in existing home sales could soon abate, but a turnaround in the housing market is not in sight.

Initial jobless claims rose by 1k to 497k in the week ending 27 September. They have not been around this level since the recession in the 1990s and, briefly, after the terrorist attacks on 9/11. However, the hurricanes were still responsible for pushing them up by about 45k in the reporting week. The negative impact of the hurricanes could be fading, but given the economic weakness and the financial market turmoil, we nevertheless expect initial jobless claims to have remained elevated at 475k in the week ending 4 October, which would be close to the latest 4-week moving average.

Wholesale inventories increased sharply by 1.4% mom in July, particularly due to motor vehicles which were produced after the strike activities ended. However, we expect wholesale inventories to have increased by 0.4% mom only in August, as energy prices dropped significantly.

The total trade deficit rose from -$58.8bn to -$62.2bn in July, but this was an oil-related surge, because the deficit ex petroleum fell to the lowest level since the beginning of 2001. Given the drop in import prices by 3.7% mom, we forecast that the trade deficit will have fallen sharply to about -$58.5bn in August. The weakness in imports will not be due solely to the correction in energy prices, but also to weak domestic demand. Exports might also have gone up more moderately, as the global economy is experiencing a major slowdown.

As oil prices continued to fall by 11% on average, we expect import prices to have declined noticeably again by 2.5% mom in September. The annual rate, which peaked at 21.3% in June, could go down to 12.5%.

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