US Economic Indicators Preview

(Week of 13 to 19 October 2008)

• Producer and consumer prices (Sep): decreasing again
• Retail sales (Sep): soften due to declines in auto sales and gasoline prices
• Industrial production (Sep): ISM, aggregate weekly hours and hurricanes indicate fall in output

The Congressional Budget Office (CBO) estimates that September's budget surplus was about $45bn, $68bn less than the surplus recorded in the same month last year, when corporates' quarterly tax payments were much higher. Outlays are also likely to have risen markedly, even if adjusted to calendar effects. September marks the end of fiscal year 2008, and the total deficit could have increased to $438bn, up from $162bn in 2007. This would be the highest annual deficit ever, topping the 2004 record level of -$412.7bn. Given the rescue package ($700bn) for the financial sector and the fact that the US economy has entered a recession, the deficit will rise markedly in 2009.

We expect producer prices to have gone down by 0.7% mom in September. We already know that import prices declined by 3.0% due to the fall in petroleum prices, and the ISM price component corrected downwards noticeably from 77.0 to 53.5. The rise in core PPI could have slowed to 0.1% mom.

Retail sales are likely to have declined for the third consecutive month in September, by about 0.6% mom. First of all, domestic vehicle sales plunged by almost 8% mom, and secondly gasoline station sales are likely to have declined due to the fall in gasoline prices.

After having reached a low in June, the University of Michigan's (UMI) consumer sentiment recovered somewhat in the summer months. The improvement appears to have been mainly due to the drop in gasoline prices, to which the UMI indicator usually reacts quite sensitively. Gasoline prices continued to fall, but given the intensification of the financial market turmoil and the plunge in equity indices, we forecast that UMI's preliminary October consumer sentiment will have declined at least to 65.0.

In September, the New York Empire manufacturing index went into negative territory again after having briefly turned positive in August. Due to weak demand and the global financial market crisis we expect the New York Empire manufacturing index to decline significantly to -12 in October. Likewise the Philadelphia Fed index, which surprisingly was above zero in September for the first time since November 2007, could decrease to -12 too.

We already know that factory inventories went up by 0.6% mom and wholesale inventories by 0.8% mom in September. But retail inventories could have actually fallen slightly, due to a decrease in the stock of autos. Thus, total business inventories might have risen by a mere 0.5% mom in September.

The Beige Book will describe economic activities to have slowed markedly in the reporting period: the housing market correction has not bottomed out yet, and private consumption is suffering from rising unemployment and restricted credit availability, which together with the financial market turmoil and the global growth slowdown is also having a negative impact on investment. Weak growth and lower oil prices also have a dampening effect on prices and wages. The Beige Book is due for release on 15 October and will serve as a preparation for the FOMC meeting on 28/29 October. It should be noted that there was an unscheduled interest rate cut by 50 basis points to 1.5% on 8 October. The cut was coordinated with other major central banks, as the “recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability”.

Initial jobless claims fell by 20k to 478k in the week ending 4 October due to the diminished negative impact of the hurricanes. Therefore, jobless claims could have declined slightly again to about 475k in the week ending 11 October. They have not been around this elevated level since the recession in the 90s and, briefly, after the 2001 terrorist attacks on 9/11. Job losses in the financial sector are likely to be particularly responsible for the current surge in claims.

Consumer prices declined slightly by 0.1% mom in August, and they might have fallen again in September, as food prices moderated and energy prices continued to decline. However, the seasonal adjustment will factor in most of the decrease in gasoline prices. We thus forecast that consumer prices will have remained unchanged in September. The annual rate could fall just under 5% for the first time since May. Core CPI could have risen modestly by 0.1% mom, leaving the annual rate stable at 2.4%.

We expect industrial production to have fallen significantly by 1.2% mom in September: the ISM manufacturing index plummeted by 6.4 points to 43.5, aggregate weekly hours in manufacturing declined by 1% mom, and the figures should also reflect the negative impact of the hurricanes and strikes by Boeing. The capacity utilization rate could thus decline by 1 point to 77.7% - the lowest since June 2004.

The NAHB index of homebuilding activities improved by 2 points to 18 in September, but it is expected to decline again to 17 in October, as the turning point for the housing market is not yet reached.

Housing starts and building permits fell much more markedly than expected in August, by 6.2% mom and 8.5% respectively. The downward trend does not seem to have come to an end, but we forecast only slight further decreases in September: housing starts could have gone down from 895k to 890k, and building permits from 857k to 850k.

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