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Key U.S. Data Releases and Events24 Oct 08Next week promises to be another major watershed in the evolution of the financial crisis, which appears now to have morphed to a generalized global deflation. While the policy action will focus on managing the current crisis, with a view to turning the economy around in 2009, the economic indicators next week pertaining to the economy in the third quarter are not expected to be pretty. Next week promises to be another major watershed in the evolution of the financial crisis, which appears now to have morphed to a generalized global deflation, pulling down even the price of gold. On the policy front, the Treasury is poised to announce an additional 20 banks that will receive capital infusions from the Treasury, the FOMC will issue an October 29 press release on the interest rate decision, and the Joint Economic Committee of Congress will hold hearings on a possible third economic stimulus package. We expect that the FOMC will lower the target fed funds rate by an additional 50 basis points to 1.00%, as the policy battle now will be geared to combat the worsening recession, the lock-up in the financial markets, and generalized deflation of asset and commodity prices. While the policy action will focus on managing the current crisis, with a view to turning the economy around in 2009, the economic indicators next week pertaining to the economy in the third quarter are not expected to be pretty. While September home sales should see a technical bounce, durable goods orders are expected to decline and third-quarter real GDP will see a slight contraction, as weak consumption spending in September will round off a very soft quarter for spending overall, while October consumer sentiment will take a large negative hit. KEY U.S. DATA RELEASES THIS WEEK Monday, October 27 – New Home Sales (Sep.) Global Insight: 0.478 Mil. What to Look For
Implications New home sales dropped 11.5% in August, dragged down by a 37% drop in the West. Sampling errors probably accounted for part of this drop. For September, we project a small rebound in sales to 478,000, with the West accounting for the rebound. Even though we expect a bounce back in September, home sales are fighting fierce headwinds from sharp declines in household net worth, shrinking employment levels, and periodic upward pressure on mortgage rates. Offsetting this, home valuations are much more reasonable. A sustained decline in mortgage rates has not yet materialized, but we should see mortgage rates back below 6% shortly. Wednesday, October 29 – Durable Goods Orders (Sep.) Global Insight: -1.0% What to Look For
Implications We expect durable goods orders to fall 1.0% in September. Even though most durable goods orders will be weak, a bounce in aircraft ordering and comparative stability in motor vehicle orders should prevent a more severe decline in total orders in September. Boeing garnered 41 orders in September, up from 38 in August, and should provide a $2.0–2.5 billion cushion to total durables orders. Shipments will fare worse than orders, as an expected strike-related decline in Boeing deliveries will combust negatively with weak orders from last month. Orders are seeing downward pressure not only from the weak economy, but also from further tightening in credit conditions. Business credit recently has been contracting, with sharp declines in commercial paper outstanding, and that will act to restrain orders considerably. Wednesday, October 29 – FOMC Rate Decision Global Insight: 1.00% What to Look For
Implications The economy now faces the triple threat of recession, deflation, and stalled (or contracting) credit growth as banks conserve scarce capital. The Federal Reserve is pulling out all the stops to unlock the credit markets, leveraging its balance sheet by as much as $2 trillion in the fourth quarter of 2008. This is an all-out battle, and the Fed is not expected to "stand down." We expect the FOMC will move to lower interest rates by 50 basis points on October 29, thereby dropping the federal funds rate to 1.00%. Thursday, October 30 – Real Gross Domestic Product, Advance (Q3) Global Insight: -0.2% What to Look For
Implications The economy weakened dramatically from the start to the end of the quarter, but the full extent of the downturn will not show up in these figures, which compare average third-quarter activity with average second-quarter activity. The weakest area will be consumer spending, which probably fell around 3.5%, the worst quarter for the consumer since the second quarter of 1980. With consumer spending falling so far, how can GDP growth still be so close to zero? The answer is threefold: (1) surging exports and declining imports will once again give a huge stimulus from foreign trade (of around 2 percentage points of GDP), (2) inventory reductions will be less deep, and (3) defense spending should show another strong increase. The fourth quarter will show the recession much more clearly, with real GDP likely to decline by around 3% as export growth slows and firms cut production to pare back inventories, at the same time that final sales keep falling. There is an unusual degree of uncertainty surrounding the third-quarter outcome since much will depend on assumptions about inventories for September, on which we have no data, but which should have fallen sharply as the hurricanes cut oil and gas production. Friday, October 31 – Personal Income, Consumption and Prices (Sep.) Personal Consumption, Nominal Personal Consumption, Real Core PCE Price Index Personal Income What to Look For
Implications We expect personal income to rise only 0.2% in September, held back by a decline in private wage and salary income. The two hurricanes that hit the United States in September will raise transfer receipts (insurance payments) but lower rental income and proprietors' income. The overall effect of these accounting adjustments should be negligible. Although spending on consumer services may eke out a small gain, that will not prevent nominal consumer spending from dropping 0.3% in September, since core retail sales dropped 0.6%, and auto sales fell to their lowest level since 1992. Adjusted for inflation, spending is expected to fall 0.4%, the fourth monthly decline in a row. Tightening credit conditions, falling home and stock prices, and uncertainty about jobs and incomes are causing households to postpone or forego major purchases. We estimate that real consumer spending declined at roughly a 3.5% annual rate in the third quarter, the steepest decline in almost 30 years. Further declines are expected in the fourth quarter. We project that the core PCE inflation rate came in at 0.2% month-on-month and 2.4% year-on-year in September, down from August's 2.6% reading. Inflation is yesterday's problem. Core inflation will drop more gradually than headline inflation, but in 2009 it should be in the 1.0–1.5% range. Friday, October 31 – Michigan Consumer Sentiment Index, final(Oct.) Global Insight: 55.0 Consensus: 57.5 Last Actual: 57.5 (preliminary, Oct.) What to Look For
Implications The Reuters/University of Michigan consumer sentiment index will average 55.0 this month, down from 57.5 in early October and 70.3 in September. With job losses accelerating, net household worth declining sharply, and credit conditions tightening, the decline in real consumer spending that began in June is likely to extend into early 2009. by Brian Bethune and Nigel Gault
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