US Economic Indicators Preview

(Week of 14 to 20 December 2009)

• CPI & PPI (Nov): annual rates back in positive territory
• First regional manufacturing indices (Dec): more or less stable
• Industrial production (Nov): increase in manufacturing
• Housing starts (Nov): rebounding after massive drop
• FOMC: continuing to signal exceptionally low fed funds rates for an extended period
• Leading indicators (Nov): up markedly

Due to higher food and energy prices, producer prices increased by 0.3% mom in October, but core PPI plunged by 0.6% mom, mainly because of lower car prices. However, in the consumer prices report, car prices went up, and thus core CPI increased again by 0.2% mom. We expect energy prices to have had a major impact on November inflation data, as average gasoline prices, for example, rose by more than 4% mom. PPI could have gone up by 1.0% mom in November, and CPI by 0.4% mom, after +0.3% mom. The annual rates would turn positive again for the first time in 11 (PPI) and 8 months (CPI) respectively, as the favourable base effects from the energy side have evaporated. Core CPI will probably have increased moderately by 0.1% mom in November, but the annual rate is still likely to be approaching the 2% mark. However, due to resource slack and high unemployment, core CPI rates are expected to decelerate again next year.

The NY Empire manufacturing index slipped from 34.6 to 23.5 in November, but was still close to the levels last seen in the autumn of 2007. We expect inventory liquidation to have had a positive impact; thus the New York Empire manufacturing index could at least have stabilised at around its last level in December, especially as there has been a significant improvement in expectations for business conditions six months ahead.

Contrary to the New York Empire, the Philadelphia Fed index rose in November to its highest level since June 2007, but was still relatively low. As the outlook for business conditions continued to deteriorate for the fifth consecutive month, although remaining positive, the Philadelphia Fed index will probably not have improved further. It is more likely to have declined slightly from 16.7 to 16.0 in December, in line with the drop in small business optimism.

In October, industrial production only rose because of utilities, as manufacturing output declined due to a decrease in car production. Given that the ISM manufacturing index continued to signal expansion and that aggregate manufacturing working hours increased, we expect industrial production to have gone up by about 0.4% mom in November - despite a lack of support from utilities and possibly a further decline in car production. The capacity utilisation rate could reach 71%, which would still be a good nine points below the long-term average.

Leading indicators, which rose by 0.3% mom in October, could have jumped by 0.8% mom in November. The steep yield curve, lower jobless claims and higher manufacturing working hours will have been the main reasons for the eighth consecutive increase. Building permits and order activity could have contributed positively too, whereas supplier deliveries, consumer expectations and real M2 are expected to have made slightly negative contributions. The annual rate is likely to have improved further, from 4.2% to 5.7%. This would be the highest rate in more than four years.

After having fallen to a low of 8 in January, the NAHB housing market index had recovered to 19 by September. But in October and November, the upward trend was interrupted, as the index only reached 17. However, the NAHB index could have recovered slightly to 18 in December. This would still be a very low level, as numbers under 50 indicate that more builders view sales conditions as poor than good.

Housing starts surprisingly plummeted from 592k to 529k in October. The deterioration illustrated the ongoing weakness in the housing sector, but it could also have been partly due to bad weather conditions. Thus we predict that housing starts will have recovered to 575k in November - still about 12% less than in the previous year. Building permits, which also dropped for the third time in four months, could have risen too, from 551k to about 570k.

At this week's meeting, the FOMC will probably leave the fed funds rate close to zero. Furthermore, the statement is likely to reiterate that rates are set to remain at extraordinarily low levels for an extended period. In his latest speech, Fed president Bernanke stated that the recovery would continue next year, but that the economy was confronted with “some formidable headwinds” that would keep the pace of expansion moderate, for example tight credit and high unemployment. The fact that only 11k jobs were lost in November is unlikely to change the Fed's assessment significantly, because it takes about 140k additional jobs per month just to keep the unemployment rate stable. Bernanke was quite relaxed about inflation risks, given high rates of resource slack and stable inflation expectations. Regarding the expansion of the balance sheet, the Fed could emphasize that it is prepared to withdraw its accommodative policies. But the text will make it clear that this is not going to happen soon, but “at some point” in the future. Thus the FOMC statement is very unlikely to include any commitment on the timing of the Fed's exit strategy.

Initial jobless claims, which had fallen by a total 44k in the previous two weeks partly due to favourable weather, increased by 17k to 474k in the week ending 5 December. This was also the level of the 4-week moving average. Although this is significantly lower than the peak of 674k at the end of March, claims above 400k still indicate further job losses. We expect initial jobless claims to have remained more or less unchanged at about 470k in the week ending 12 December.

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