Manufacturing Sector on the Brink of Contraction

The Purchasing Managers??™ Index fell to 50.9 in October from 52.0 in the prior month. Readings below 50 denote a contracting factory sector. The October drop is the fourth consecutive monthly decline. The message from the October survey is that the factory sector is losing momentum quickly. Indexes tracking new orders (52.5 vs. 53.4 in Sep), production (49.6 vs. 54.6 in Sep), supplier deliveries (50.6 vs. 51.9 in Sep), and imports (47.5 vs. 53.0) declined in October. The production index is the lowest since April 2003, excluding similar readings in November 2006 and January 2007. The increase in the export index is holding up the composite index. The import index fell to 47.5, the lowest since July 2001 when the economy was in a recession.

Jobless Claims ??“ Weak Demand for Labor

Initial jobless claims fell 6,000 to 327,000 during the week ended October 27. The four week moving average at 327,000 is the highest since late-April.

Continuing claims, which lag initial claims by one week, rose 65,000 to 2.588 million and the insured unemployment rate moved up to 2.0% from 1.9% in the prior week. The upward trend of continuing claims points to a reluctance in expanding payrolls.

Tepid Consumer Spending in September

Inflation adjusted consumer spending rose only 0.1% in September, following gains of 0.3% and 0.6% in July and August, respectively. Purchases of durables (+0.4%) and non-durables (+0.3%) advanced while that of services fell 0.1%. The outlook for the fourth quarter is not promising. Conservative assumptions about consumer outlays in each of the three months of the fourth quarter yield a very tepid increase in consumer spending in the fourth quarter.

The FOMC indicated that inflation risks remain a concern in the policy statement of October 31. The overall personal consumption expenditure price index moved up 0.2% in September putting the year-to-year gain at 2.4%. The much followed personal consumption expenditure price index excluding food and energy rose 0.2% in September, which translates to 1.83% year-to-year increase, virtually the same as the 1.84% increase in August. There are no signs of an accelerating core price index.

Personal income rose 0.4% in September, matching the increase seen in the prior month. Personal saving as a percentage of disposable income is climbing up gradually, with the September reading at 0.9% vs. 0.8% in the prior month. In the first nine months of the year, this rate has averaged 0.8%, representing an improvement from the 0.4% average in 2006.