US Economic Indicators Preview

(Week of 15 to 22 February 2010)

• First regional manufacturing indices (Feb): more or less stable
• Housing starts (Jan): up after weather-related drop in December
• Industrial production (Jan): rebound in manufacturing
• Consumer prices (Jan): annual rate up again

In January, the New York Empire manufacturing index surged from 4.5 to 15.9. Nevertheless, it only partly rebounded from its December plunge. As we expect the inventory cycle to have continued to have a positive impact on manufacturing, the New York Empire could have stabilised around the previous month's level in February. The Philadelphia Fed index, which had risen to 22.5 in December, corrected downward to 15.2 in January. We -50 predict that it will have gone up slightly to 16 in February, which would bring it to the same level as the New York Empire index. However, there are downside risks to our forecasts, as two severe blizzards have hit the East Coast and could have a negative impact on current assessment.

The Congressional Budget Office estimates that the budget deficit was $46bn in January, $17.5bn less than a year ago. Revenues were lower than last year, but outlays decreased even more. However, if shifts in the timing of certain payments were taken into account, the deficit would be $33bn higher than in January 2009.

Builder confidence fell further to 15 in January, despite the NAHB stating that home buying conditions had rarely been as good as at present. However, the weak labour market situation is dampening confidence and slowing buyers' return to the market. The NAHB index could have remained unchanged at its low level of 15 in February. Numbers under 50 indicate that more builders view sales conditions as poor than good.

Housing starts declined from 580k to 557k in December. But the plunge could have been connected with unfavourable weather conditions, as building permits soared from 589k to 653k at the same time. We expect a different pattern in January: housing starts are likely to have rebounded from 557k to about 590k, but, given the weak performance of the NAHB index, building permits could have corrected downwards to about 600k.

Industrial production increased by 0.6% mom in December, but that was almost entirely due to higher utility output, because manufacturing output actually went down marginally. However, given the sharp rise in the ISM manufacturing's production component to a 5½-year high of 66.2, we predict that manufacturing will have staged a rebound at the beginning of 2010. In addition, utilities could have made a positive contribution again, albeit only a small one. As aggregate weekly working hours increased by 0.3% mom after having remained unchanged in December, we predict that industrial production will have gone up by 0.6% mom in January. The annual rate would thus turn positive for the first time since March 2008. As the graph shows, industrial production tends to follow the trend in leading indicators quite closely.

Leading indicators, which went up by 1.1% mom in December, are only likely to have risen by about 0.3% mom in January. The steeper yield curve, slower deliveries and a rise in manufacturing working hours will have been the main positive contributors, but the supposed decline in real M2 and the expected correction in building permits could have dampened the increase noticeably. The annual rate could rise further from 7.7% to 8.3%, approaching the annualised 6-month rate which is likely to have moderated somewhat to 9.2%.

The FOMC minutes of the meeting on 27 January will be quite interesting because one member, Thomas Hoenig, dissented. He was not voting for higher rates, but against the policy commitment as expressed in the phrase “exceptionally low levels of the federal funds rate are warranted for an extended period”. All in all, the minutes could show that disagreement about the appropriate policy course is growing.

Many members will have remained concerned about the sustainability of the upswing, given tight credit, high unemployment and the negative impact of wealth losses. This group is of the opinion that substantial resource slack is restraining cost pressures enough to keep inflation stable. But some members will not be convinced that elevated unemployment and low capacity utilisation rates are sufficient to prevent longer-term inflation expectations from rising, because monetary policy could be regarded as too accommodative, now that the economy has been growing since the second half of 2009. At any rate, there will have been some discussion about how to exit from the extraordinarily expansive monetary policy.

The minutes will include new projections for growth, unemployment and inflation. The table above shows the October forecasts, which were already more optimistic than in June. We therefore expect no major changes this time, even though the range for the growth forecast for 2010 could be raised slightly again.

Energy prices are likely to have pushed inflation higher in January. Import prices will have risen the most, as the increase for petroleum prices was particularly marked in the statistically relevant first third of the month. We thus forecast that import prices will have risen by about 1.2% mom in January, with the annual rate jumping from 8.6% to about 11.2%. Producer prices will probably have gone up by about 0.8% mom, although food prices, which had risen sharply in the previous three months, could have moderated.

Consumer prices are also likely to have increased significantly in January, by 0.4% mom and 2.9% yoy. Average gasoline prices were more than 4% higher than in December, and the PPI's upward trend in food prices could have been passed through. However, given the high degree of resource slack in the economy, we predict that core CPI will have increased by a mere 0.1% mom again.

The larger-than-expected drop in initial jobless claims in the week ending 6 February from 483k to 440k suggests that the recent administrative backlog has subsided. However, because of the two blizzards that have hit the East Coast, initial jobless claims will probably be distorted in the coming weeks. Claims may be pushed higher temporarily due to the unfavourable weather conditions, but could even have declined initially as a result of the government shutdowns. We thus forecast that initial jobless claims will have dropped to 425k in the week ending 13 February.

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