Economics
ISM non-manufacturing index slips in June
Latest available: June 2008
Release date: July 3, 2008
The ISM non-manufacturing index) (NMI) unexpectedly dipped to 48.2 in June, below expectations for a 51 print and May's 51.7.
The details of the report showed that the business activity index slipped, with the index falling below 50 for the first time since January. The employment index slid to 43.8 in June from 48.7 in May, consistent with the weakening trend in services payrolls with today's labour report showing the sector added only 7,000 workers to payrolls in the month. The new orders index decreased to 48.6 from 53.6 and the new export orders index lost two points to 52.0. The prices index rose to 84.5 - a record high for the series.
While the manufacturing ISM moved above the key 50-mark in June, this service sector report was much weaker than expected and, on balance, suggests that the economy is eking out only mild growth at best. The labour components in the report were consistent with the mild deterioration shown in today's labour report that showed a 62,000 decline in non-farm payrolls and that the unemployment rate held steady at 5.5%, well above the recent low of 4.4%. The prices indices for both manufacturers and service providers remain at elevated levels. Today's payrolls and NMI reports highlight that the Fed faces pressures on both the growth (to the downside) and price (upside) fronts, which will likely see policymakers continue to highlight their worries about inflation but to judge the downside risks to growth as significant enough to justify keeping the Funds rate at 2%.
Economic growth estimate nudged up
Latest available: Furst quarter 2008
Release date: June 26, 2008
The final first-quarter GDP economic growth estimate was nudged up to an annualized 1% from the preliminary estimate of 0.9%, implying that growth started the year on a weak note resulting from ongoing declines in residential investment and tighter credit conditions that emerged last summer. However, despite these pressures, the growth rate managed to remain in the positive column.
The modest upward revision reflected stronger domestic spending that more than offset a larger drawdown in inventories. Generally, this combination is more favourable for growth going forward. The most noteworthy change in domestic spending was in business investment for equipment and software - its previously estimated 0.9% drop was revised away to show a small increase of 0.2%. Consumer spending growth remained weak in the quarter, although the rate was raised slightly to 1.1% from 1% previously.
There were also significant upward revisions to both export growth (to 5.4% from 2.8%) and imports (to -0.7% from -2.6%), although they were completely offsetting leaving the net export balance unchanged.
Growth in the first-quarter core PCE deflator, the key inflation measure in the GDP report, was revised up to 2.3% from 2.1%.
Although the economy managed to avoid a decline at the start of the year, growth was weak. Our forecast assumes that this will likely continue to be the case in the second quarter, with the economy managing to eke out another small increase with modest gains in consumer spending offsetting the ongoing restraint from a declining housing market. A continuing weak economy will keep the Fed cautious. Thus, despite growing concern expressed by the central bank about possible inflation pressures building, as evidenced by yesterday's statement following the conclusion of the FOMC meeting, we expect that Fed funds will be held unchanged at 2.00% through the end of this year.
Industrial production falls unexpectedly
Latest available: May 2008
Release date: June 17, 2008
May industrial production unexpectedly contracted 0.2% (prior read: -0.7%) compared to the consensus expectation of a 0.1% rise. Autos and auto parts bouced up 1% as we expected (prior read: 6.9%) due to the cessation of an auto parts strike. However, utility production fell 1.8%, likely due to mild weather, as did machinery production (down 1.5%).
Production continues to slip, with the month-over-month time series in a consistent downtrend since mid-2007. The trend is not currently indicative of recession, but the trajectory remains downward. The weak U.S. dollar and tax rebates are not supporting production. As global growth slows and the tax rebates get spent, the growth outlook is likely to sag. This supports RBC's base case that, when all the dust from the credit crisis and stimulus settles, the Fed will return to easing to support its full employment mandate.
ISM non-manufacturing index points to positive economic growth
Latest available: May 2008
Release date: June 4, 2008
The ISM non-manufacturing index remained essentially unchanged at 51.7 in May. The index came in at 52 in April. The report was a touch stronger than expectations calling for a dip in the index to 51. The business activity index advanced 2.7 points to 53.6. A reading above 50 indicates expanding business activity in the sector. After collapsing in January, this component has rebounded smartly and remained above 50 for four straight months.
The employment index dropped to 48.7 in May from 50.8 in April, indicating that employers trimmed payrolls in the sector and suggesting potential weakness in services employment in the upcoming payrolls report. The new orders index increased to 53.6 from 50.1. The new export orders index climbed to 54 from 48.5. The prices index increased to 77, its highest level since September 2005, reached in the aftermath of Hurricane Katrina. The prices index increased 4.9 points in May and is now a full 19.8% higher relative to its year-ago level, underscoring that inflation risks still loom in the economy.
Despite the drop in the employment component, there are some positives from a growth standpoint that can be taken from this report. For instance, both the new orders and new export orders indices increased. Also, the level of the index in May is historically consistent with positive GDP growth. The earlier-released May ISM manufacturing survey, which increased one point, is also pointing to positive growth in the economy. Combine these factors with another above 50-reading in the business activity index and a stronger-than-expected ADP payrolls report and there are growing upside risks to our current forecast calling for a 1% drop in GDP growth in the second quarter.
