NEWS / Foreign Exchange

ISM non-manufacturing index could have declined again markedly in October

• Non-farm productivity is likely to have accelerated in Q3

• Trade deficit could have widened in September

• UMI consumer sentiment might have deteriorated further in November

The ISM non-manufacturing index has remained on a higher level than its manufacturing counterpart, but also declined markedly in the 3rd quarter. We expect it to have gone down again in October, from 54.8 to about 51.5. As the graph shows, the ISM non-manufacturing activity index seems to be closely correlated to the ISM manufacturing production component, which fell to 49.6 in October.

Given that GDP growth in Q3 reached an annualised 3.9% qoq and aggregate working hours did not increase as sharply as in Q2, non-farm productivity could have accelerated from 2.6% to an annualised 3.0% qoq in Q3. Thus the annual rate could improve from a mere 0.9% to about 2%. Unit labour costs could have risen by about 1% qoq, lowering the annual rate slightly to 4.4%.

We expect wholesale inventories to have gone up by 0.3% mom in September, after an increase of only 0.1% mom in August. As the GDP report showed, inventories contributed markedly to growth in Q3, partly because of the assumed increase in wholesale inventories for September.

Initial jobless claims fell slightly by 6k to 327k in the week ending 27 October, and the 4-week moving average reached the same level after having risen for three consecutive weeks. We expect jobless claims to have gone up again to about 335k in the week ending 3 November. This would be in line with the much less positive labour market assessment in the consumer confidence survey.

The trade deficit fell noticeably from $59.2bn to $57.6bn in August, thus continuing its narrowing trend. However, it is likely to have widened in September, partly because import prices rose by 1.0% mom. Imports, which fell in August, could have gone up by about 1.5% mom; this is indicated by the sharp increase in loaded containers at the port of Los Angeles. Exports, which have been developing strongly for several months, could have corrected downwards somewhat, as aircraft deliveries were delayed and vehicle orders decreased. In the advance GDP report, the Commerce Department had also assumed that imports had risen and exports had declined. We forecast that the trade deficit will have increased to $59.2bn in September.

Import prices are likely to have risen again by a good 1% mom in October, mainly due to the increase in crude oil prices of about 6% mom. Due to a base effect, the annual rate could go up to 9.0% ??“ the highest since September 2005.

The University of Michigan??™s (UMI) final October consumer sentiment was revised down from 82.0 to 80.9, which means that late respondents were much more pessimistic. As the housing market crisis has been intensifying and the crude oil price temporarily exceeded $96/b, we forecast another decline in the UMI??™s preliminary November consumer sentiment index to about 79.0, despite the slight recovery in the ABC consumer comfort poll from ??“17 to ??“15.