US Economic Indicators Preview

(weeks of 5 to 11 January 2009)

• ISM non-manufacturing index (December): remaining deeply in contraction zone
• Factory orders (November): sharply declining again
• Labour market (December): unemployment rate could jump to 7.0%

Construction spending fell by 1.2% mom in October, as private commercial construction spending declined, thus adding to the ongoing plunge in residential spending. Given the very low levels of housing starts and the general recession, we expect construction spending to have fallen by 1.5% mom in November.

Domestic vehicle sales decreased again, albeit only slightly, to 7.6m in November. We forecast that they will have stabilized at best in December. The annual average for 2008 could thus be 9.8m, compared to 12.4m in the previous year.

Pending home sales declined by 0.7% mom in October. However, since summer they have stabilized somewhat. If they fall by about 1% mom in November, they will nevertheless be up slightly year-on-year.

The ISM non-manufacturing index plummeted by 7.1 points to a record low of 37.3 in November. The most striking feature was the drop in the employment component to 31.3, which was noticeably lower even than the corresponding component in the ISM manufacturing index. As the US economy is in recession and the ISM non-manufacturing index often follows the direction of its manufacturing counterpart, which declined to 32.4, we expect it to have fallen to 36.0 at best in December.

By October, factory orders had fallen 12.0% from their peak in July, thus reaching a level that is 5.3% lower than last October. We already know that durable goods orders only went down by 1.0% mom in November, but the ongoing downward correction in energy prices and the weakness in the ISM indices indicate another noticeable decline in non-durable goods orders. We therefore expect total factory orders to have fallen markedly again by 2.3% mom.

The last FOMC meeting lasted two days, and the Committee cut the fed funds rate from 1% to between 0 % and 0.25 %, the range in which the effective funds rate had already been for weeks. Thus there is no room left for further conventional interest rate policy steps, and the FOMC minutes from the meeting on 15/16 December will focus on other possible ways to support the functioning of the financial markets and to stimulate the economy. Apart from committing itself to leaving the fed funds rate at exceptionally low levels for some time, the FOMC will have discussed further quantitative easing measures and to which extent the Fed's balance sheet might be extended in the near future. The total supply of reserve funds has risen to about 2,300bn in December, from under 1,000bn three months ago.

Initial jobless claims fell sharply by 94k to 492k in the week ending 27 December, but the figures in the last two weeks seem to have been distorted because of the Christmas holidays. Thus the 4-week moving average of around 550k appears to be a better reference point for the situation on the labour market. We forecast that initial jobless claims will have bounced back to 555k in the week ending 3 January.

The ADP November report initially announced a decline of 250k private jobs, but this was changed to -472k jobs in the benchmark revision. The ADP figures are now more in line with the official Labour Department figures. We forecast that ADP private employment will have fallen by 480k in December.

Non-farm payrolls plummeted by 533k in November, which was the biggest monthly loss in 34 years. Given the high level of jobless claims and the deterioration in consumer's labour market assessment, we expect nonfarm payrolls to have fallen sharply again, by about 500k in December. The sum of total job losses in 2008 would thus be about 2.4m, the worst annual outcome since 1945. The unemployment rate rose from 6.5% to 6.7% in November, and is expected to have risen further to 7.0% in December. Average hourly earnings went up markedly by 0.4% mom in November, but due to the magnitude of job cuts we expect more moderate increases from now on. Average hourly earnings will have probably risen by 0.2% mom at most in December.

Wholesale inventories might decrease by 1.0% mom, particularly because of the sharp reductions in energy prices.

BHF-BANK
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