US Economic Indicators Preview

(Week of 24 to 30 November 2008)

• Existing and new home sales (October): stabilizing on low levels
• GDP (Q3 preliminary): downward revision due to consumption and net exports
• Consumer confidence indicators (November): still near record lows
• Durable goods orders (October): sharp decline
• PCE core deflator (October): approaching the Fed's comfort zone

Existing home sales went up by a more than expected 5.5% mom to 5.18m in September, thus surpassing the previous year's level. Given that pending home sales (which lead existing home sales by 1 to 2 months) fell back in September, we expect existing home sales to have declined somewhat in October too, but at 5.05m they would still be at their highest level since November 2007. Thus existing home sales appear to have bottomed out, particularly due to the massive increase in foreclosures. As the graph shows, the supply of unsold homes is still elevated, and the NAHB homebuilders' index has reached a new record low. Therefore the current stabilization in existing home sales does not indicate a turnaround in residential construction in the near future.

New home sales rose slightly by 2.7 % mom in September, but that was after a decline of more than 12% in August. They were therefore still 33% lower than in the same month of the previous year. We forecast that new home sales will have stabilized around their current low level in October.

In the advance report for Q3, GDP declined slightly by an annualised 0.3% qoq. The downward revision of retail sales and the higher than initially estimated real trade deficit in August and September indicate that the first estimate was too high. We expect the preliminary GDP report to show an annualised growth rate of -0.7% qoq in Q3. According to the San Francisco Fed's estimate, the decline could accelerate to -3.5% qoq in Q4.

Consumer confidence plummeted from 61.4 to a new record low of 38.0 in October due to the sharp deterioration in the labour market, wealth losses as a result of declining house and stock prices, the credit crunch and the intensification of the financial markets crisis. Like consumer sentiment, consumer confidence could be boosted temporarily by Barack Obama's election victory. But consumer confidence might only rise to 39 in November, as the ABC consumer comfort index deteriorated further and jobless claims rose above 500k. At 57.9, the University of Michigan's final November consumer sentiment could thus at best remain stable, as the preliminary report had shown a further deterioration in expectations.

Personal income might have stagnated in October, since the decline in aggregate working hours could have evened out the slight rise in average hourly earnings. Given that retail sales fell sharply by 2.8% mom, we also expect the downward trend in nominal personal spending to have accelerated. Personal spending will probably have declined by about 1.5% mom. This would translate into another real decrease in spending, although the deflator could have dropped as much as CPI, which declined by 1.0% mom.

Core CPI fell by 0.1% mom in October. But as medical care costs have gone up, the PCE core deflator is not likely to have declined. However, given the economic weakness and diminished pressure from commodity prices, we expect it to have remained unchanged in October, lowering the annual rate to 2.2%. The PCE core deflator is likely to enter the Fed's comfort zone of 1 to 2 % by the end of the 1st quarter of 2009 at the latest.

Initial jobless claims surged by 27k to 542k; it is 26 years since they have been at such a high level for any length of time. We only expect jobless claims to have gone down slightly to 535k in the week ending 22 November. This would correspond with monthly losses in non-farm payrolls exceeding 350k.

Durable goods orders are likely to have fallen sharply by 3.0% in October, dragged down by transportation in particular, as car production declined by 3.5% mom and Boeing orders were down two-thirds from September. The plunge in the ISM manufacturing new orders component to only 32.2 signals that overall orders activities ex transportation developed very weakly too.

The Chicago PMI, which unlike other purchasing manager indices had shown surprising strength in August and September, finally plummeted by almost 19 points to 37.8 in October. Thus it was even lower than the national ISM, which fell to 38.9 last month. Although a slight rebound cannot be ruled out with this volatile indicator, we expect the Chicago PMI to have fallen further to 37.0 in November, mainly due to the orders component, which was only 32.5 in the September report.

BHF-BANK
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