US Economic Indicators Preview (Week of 30 November to 6 December 2009)

• ISM indices (Nov): mixed picture
• Labour market report (Nov): another decline in payrolls despite end of recession
• Factory orders (Oct): up again solely due to non-durable goods orders

The ISM manufacturing index jumped from 52.6 to 55.7 in October, mainly due to the employment component having crossed the expansion threshold - despite the labour market report later revealing a sharp decline in manufacturing jobs. The indicators do not bode well for November's ISM manufacturing index: the New York Empire fell by 11 points, and the Richmond Fed index declined to its lowest level since April. The Philadelphia Fed index and small business optimism improved but remained on a relatively low level. We thus expect the ISM manufacturing index to have gone down to about 52.0 in November. The Chicago PMI, to be released one day earlier, is likely to have retreated from 54.2 to 52.0 too. However, the ISM non-manufacturing index, which had gone down slightly in October, could have recovered somewhat from 50.6 to 51.5 in November.

Pending home sales rose again by more than 6% mom in September and were thus up 37% since their January low. The first-time home buyer tax credit, which expires at the end of November, seems to have played a decisive role here. However, after their marked increase, pending home sales could have corrected downwards by about 2% mom in October.

Construction spending went up by 0.8% mom in September, due to the third consecutive increase in residential construction spending. But while residential spending rose by 5.1% qoq annualised in Q3, commercial construction spending plummeted by about 40%. We expect this pattern to continue in the near future. However, in October, residential construction spending could have suffered a weather-related setback, as indicated by the plunge in housing starts. We predict that total construction spending will have fallen by 0.7% mom in October.

Domestic vehicle sales, which had plummeted by one third after the end of CARS (Car Allowance Rebate System), unexpectedly rebounded from 6.80m to 7.94m in October. However, given still rising unemployment, massive wealth losses and tight credit, consumers' demand for cars will probably have dropped, and we therefore expect domestic vehicle sales to have fallen back to about 7.70m in November.
The Fed's Beige Book, preparing for the FOMC meeting on 16 December, will probably state that economic activity is picking up. Manufacturing in particular is improving due to a slower pace in inventory runoff and better global conditions. Housing, as opposed to commercial construction, is contributing to growth, mainly because of temporary fiscal support. Consumer spending appears to be rising but is being dampened by high unemployment, wealth losses and tight credit. The Beige Book is likely to describe inflation pressure as low apart from higher oil prices, because of massive unused capacity.

We expect the final figures for productivity in Q3 to be revised downwards, because nonfarm business gross value added was only 2.9% qoq annualised as opposed to 4.0% in the initial estimate. Thus nonfarm productivity might have gone up by a still impressive 8.4% qoq, rather than the 9.5% originally estimated. Unit labour costs are likely to have dropped by about 4% qoq compared to the earlier estimate of 5.2%.
Initial jobless claims fell sharply from 501k to 466k in the week ending 21 November - the lowest level since September 2008, but still above the level historically associated with payroll increases. The 4-week moving average fell to 496.5k. This was the first time in more than a year that it was below 500k. We forecast that initial jobless claims will have risen to at least 480k in the week ending 28 November, as we assume that last week's decline was exaggerated by the seasonal adjustment process.

Despite the economy having returned to positive growth in Q3, nonfarm payrolls have continued to decline, albeit at a slower pace. The 3-month average for job losses has come down from -701k in February to -188k in October. Jobless claims have been improving, and temporary help supply payrolls have risen slightly for three consecutive months. But we nevertheless expect October's employment report on Friday to show another marked decline in nonfarm payrolls of about 150k, as consumers' labour market assessment deteriorated further and, at -46.6, was at its lowest level since May 1983. Two days earlier, ADP could reveal that private payrolls declined by about 170k in November. However, it is hard to estimate what impact the seasonal adjustment will have had on ADP and Labour Department figures: in November 2008, nonfarm payrolls, for example, went down by almost 600k, and if a similar sharp drop is factored in this year, adjusted figures for November 2009 could turn out much better.

The unemployment rate jumped from 9.8% to 10.2% in October, which was more a result of formerly discouraged workers returning to the labour market than an acceleration in job losses. However, after the sharp October increase, the unemployment rate could have corrected to 10.1% or somewhat less in November. The increase in average hourly earnings is likely to have slowed from 0.3% to 0.1% mom, which would lower the annual rate from 2.4% to 2.1%.

Factory orders could have increased slightly by 0.2% mom in October. It is already known that durable goods orders fell by 0.6% mom, but non-durable goods orders are likely to have gone up, given the relatively high ISM new orders component and the marked increase in average gasoline prices of more than 4% mom. Moreover, September factory orders are likely to be revised upwards from 0.9% mom to 1.2% mom because durable goods orders turned out to be higher than initially estimated.

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