NEWS / Foreign Exchange

March consumer confidence is expected to have declined markedly

There are several important indicators on this week??™s economic agenda: March consumer confidence is expected to have declined markedly due to weaker growth, turmoil in the financial markets and higher gasoline prices. Durable goods orders may show a partial rebound in February due to the transportation sector and capital goods. The PCE core deflator is likely to have remained at 2.3% yoy.

January new home sales plunged by 16.6% to only 937k. Similar to housing starts, they could have rebounded to about 1000k in February, but this would still be 3.6% below last year??™s level. Even if the median price has risen slightly again, the annual rate would decline to about ??“4%, much lower than January??™s ??“2.1%. Financial markets will also be interested to see whether the supply overhang has grown further, after months supply ??“ the ratio of houses for sale to houses sold ??“ rose from 5.7 to 6.8 at the beginning of the year.

After having risen from 110.2 to 112.5 in February, we expect the Conference Board??™s consumer confidence to decline markedly from 112.5 to 107.0 in March, despite the slight decrease in the unemployment rate to 4.5% in February. The turmoil in the stock markets and the difficulties in the subprime mortgage markets are likely to have had a negative impact, and we already know that the University of Michigan??™s (UMI) consumer sentiment fell from 91.3 to 88.8. In addition, the most recent ABC consumer comfort poll showed an extraordinary fall from +2 to ??“5. UMI??™s final March consumer sentiment may have declined further to 88.0 at best, given the ongoing rise in gasoline prices.

Durable goods orders plummeted by 8.7% mom in January, mainly due to transportation and capital goods orders. We expect a partial rebound of at least 3.5% mom in February (ex transportation: 1.7% ). First of all, transportation orders are likely to have risen: Boeing announced a rise in its order level from 13 to 57, and the industrial production report revealed a recovery in car production. In addition, given the negative development of non-defense capital goods orders ex aircraft in the last months as shown in the graph, they could have recovered somewhat too.

Initial jobless claims fell slightly again to 316k in the week ending 17 March. We expect them to have risen to 325k in the week ending 24 March, close to their latest 4-week moving average.

GDP growth in Q4 was revised downwards significantly from an annualised 3.5% to a mere 2.2% in the preliminary estimate, mainly due to a much smaller rise in inventories. We expect the final GDP figure for Q4 to be marginally higher at 2.3% qoq, because construction spending for December was revised upwards.

Personal income increased by 1.0% in January. This was much stronger than expected and mainly due to special factors such as bonus payments and gains on stock options. Personal spending (PCE) also performed better than estimated and rose by 0.5% mom. Personal income and spending are expected to have increased only moderately by 0.3% mom in February. Given that the PCE deflator will have risen by at least 0.3% mom, real spending would have not increased. However, mainly due to the statistical overhang from Q4, the real rise in Q1 could nevertheless reach an annualised 3.0%, after 4.2% in Q4. We forecast the PCE core deflator to have gone up by 0.2% mom, which would leave the annual rate stable at 2.3%.

Whereas the ISM manufacturing index returned into expansionary territory in February, the Chicago PMI fell further to 47.9. The first two regional manufacturing surveys for March were also on the weak side: The New York Empire manufacturing index plummeted to 1.9, and the Philadelphia Fed index was barely positive at 2.0. We are thus not expecting the Chicago PMI to rebound significantly. At 49.5, it could remain below the expansion threshold for the third consecutive month in March.

Construction spending fell by 0.8% in January, due to a large decline in residential construction and only flat non-residential construction spending. Although housing starts recovered, we expect construction spending to have declined again by about 0.5% mom in February, partly due to cold weather.