US Economic Indicators Preview

(Week of 4 to 10 January 2010)

• ISM indices (Dec): showing little growth
• Labour market report (Dec): deterioration abating

The ISM manufacturing index declined from 55.7 to 53.6 in November, and we expect it to have fallen further to about 53.0 in December. The first regional manufacturing indices for December showed mixed results: the Chicago PMI jumped to 60.0 and the Philadelphia Fed index rose again, albeit remaining on a relatively low level. However, the New York Empire plummeted from 23.5 to a mere 2.6, and the Richmond Fed index even went into negative territory again. Small business optimism also fell back.

Contrary to its manufacturing counterpart, the ISM nonmanufacturing index fell below the expansion threshold again in November, after having indicated slight growth for two months in a row. We predict that the ISM non-manufacturing index will have recovered somewhat in December, but at 50.0, after 48.7, it would still be noticeably lower than the ISM manufacturing index, which is boosted by the inventory cycle.

Construction spending remained unchanged in October, but the initially announced increase of 0.8% for September was revised down to -1.6% mom. Residential construction spending rebounded in October, but the weakness in commercial construction continued. Further significant revisions for the previous months cannot be ruled out, and we forecast a further decline in non-residential spending; thus total construction spending could have dropped by 0.5% mom in November.

Factory orders could have gone up by 0.6% mom in November. We already know that durable goods orders merely increased by 0.2% mom due to weakness in transportation. However, the ISM new orders component remained elevated and the increase in gasoline prices could have lifted nominal non-durable goods orders.

Pending home sales rose another 3.7% mom in October, supported by the initial November 30 deadline for the first-time home buyer tax credit. The deadline has now been extended to the end of April, but we nevertheless predict that, after having risen by 42% from their January low, pending home sales will have fallen temporarily by 4.0% mom in November.

Even though the Car Allowance Rebate System had ended, domestic vehicle sales increased in October and November, but at 8.4m in annualised terms, they were still far below their August peak of 10.2m. We expect domestic vehicle sales to have corrected downwards to about 8.2m in December.

Initial jobless claims fell to 432k in the week ending 26 December, the lowest level since the end of July 2008. Jobless claims are now approaching the 400k threshold, which in the past has been taken to indicate that employment is at least stable. However, the data could have been distorted because of Christmas, and thus we predict that jobless claims will have gone up to about 440k in the week ending 2 January.

Non-farm payrolls declined by a mere 11k in November - the best result since December 2007. The deterioration in the labour market is abating, but given the negative assessment of labour market conditions in the latest consumer confidence survey, non-farm payrolls could nevertheless have fallen again by about 10k in December. The total loss in non-farm payrolls in 2009 would then be about 4.08m, after -3.08m in 2008. Over the last two years, the labour market has posted its worst performance ever. The unemployment rate could have remained at 10.0%, about double the level associated with full employment. If average hourly earnings rose by 0.2% mom, the annual rate would decline further to 2.1%, which would be the lowest since August 2004.

The ADP report, which is due to be released two days earlier, could show a decline in private payrolls of about 60k in December. This would be similar to the pattern in previous months when the ADP figures were more negative than the official statistics from the Labour Department.

Wholesale inventories went up by 0.3% mom in October, after declining for 13 consecutive months. We forecast that wholesale inventories will have remained unchanged in November. It now looks as though GDP growth could have exceeded 4% annualised in Q4, with inventories having contributed more than two percentage points.

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