NEWS / Foreign Exchange

August's increase in personal income was smaller than expected

United States

1/11 Personal Income & Outlays (Sep)

At 0.3%, August??™s increase in personal income was smaller than expected. However, personal expenditure exceeded market expectations, rising 0.6% in both nominal and real terms. As a result, the three-month on three-month annualised rate of change rebounded from 1.4% in June and 1.5% in July to 2.6%. It will almost certainly be higher still in September ??“ a flat month will see the annualised increase in Q3 rising to 3.0% - giving credence to our view that consumer spending will be stronger in Q3 than in Q2. Elsewhere in the report there was further good news on the inflation front, with the overall personal consumption expenditure (PCE) deflator declining 0.1% and the core index rising a smaller than expected 0.1%. This enabled the core annual rate to ease a further notch to 1.8. And with the three-month on three-month annualised rate coming in at 1.5%, there is every prospect of further declines over the coming few months. The consensus predicts that both personal income and expenditure will rise by 0.4% in September.

1/11 ISM Survey of Manufacturing Business (Oct)

One again, the September ISM Survey of Manufacturing was weaker than financial markets had been expecting, with the main activity index (PMI) declining from 52.9 in August to 52.0. However, this is still consistent with an expanding manufacturing sector, albeit at its slowest pace since the first quarter. The ISM also again emphasised that the September reading was compatible with growth in the overall economy of 3.1-3.4%, which is around trend. However, whilst the indicator has an excellent short-term forecasting track record up to the mid-to-late 1990s, increasingly since then its predictive capability has been deteriorating. This is hardly surprising given that the indicator is confined solely to manufacturing, which now represents less than 15% of GDP compared with more than a third in the late 1970s. Consequently, we are sticking with our view that whilst the US economy will comfortably avoid recession in the year ahead, headline growth will be significantly weaker than intimated by the ISM survey. A further slippage to 51.6% is the central market expectation for the PMI in October.

2/11 Employment Situation Report (Oct)

In September, financial markets reacted badly to the news that non-farm payrolls had fallen by 4,000 in August. If this was a reflection of the US economy before the effects of the credit crunch had started to be felt, then what was likely to be in store over the coming few months? September??™s figures should have put paid to such fears. Not only did payrolls rebound by a larger than expected 110,000 on the month, but August??™s shock fall was revised away to a rise of 89,000. And with the July figure also adjusted up, this means that at the end of August there were some 118,000 more jobs in the US economy than had initially been reported. When will financial markets learn that the first set of establishment based payroll figures should never be taken at face value? True, the normally more upbeat Household Survey measure recorded an even larger decline in August, but this has now been followed by a huge rebound of 463,000 in September. What??™s more, most of these were private sector full time employee jobs ??“ self-employment, government sector employment and the number of people working part-time for economic reasons all fell. At the same time, pay growth remains solid, with average hourly earnings u 0.4% on the month and 4.1% on the year. As a result, we calculate that total nominal income from employment is still rising by a buoyant 5.1% a year, thereby helping to underpin consumption. Financial markets are looking for a more modest 88,000 increase in non-farm payrolls in October.