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Weekly Economic Commentary


Weak Global Factory Conditions Bolster Case for Central Bank Action

September 4, 2012

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The US Purchasing Managers’ Index (PMI) of the Institute of Supply Management edged down to 49.6 in August from 49.8 in July, the third consecutive monthly reading that is below 50. Readings below 50 denote a contraction in factory activity. Indexes tracking new orders (47.1 vs. 48.0 in July) and production (47.2 vs. 51.3 in July) declined in August. The new orders index stands at the lowest level since April 2009. In addition, the index measuring new export orders (47.0 vs. 46.5) continues to hover below the cutoff mark of 50 for the third straight month. The decline in new orders combined with increase in the inventories index (53.0 vs. 49.0 in July) bodes poorly as it reflects soft demand conditions. The gain in the price index (54.0 vs. 39.5 in July) points to the impact of higher energy prices. The overall tone of the US factory survey of August and below 50.0 readings of the PMI for three straight months raises expectations of additional monetary policy support at the close of the September 12-13 FOMC meeting.

Chart 1 - 09 04 2012

Overseas reports of the factory sector were disappointing for the most part (PMI’s of different countries are available here). China’s official PMI fell to 49.2 from 50.1 in July. The Markit eurozone PMI moved up slightly to 45.0 from 44.1 in July, but the level of the reading signifies a contraction in factory activity. The eurozone PMI has held below 50.0 for thirteen straight months and industrial production has declined in eight of the ten months ended June. The PMI of Brazil moved up to 49.7 from 48.3 in July, pointing to small improvement but not a turnaround to an increase in factory activity. The PMI of India was virtually unchanged in August (52.8 vs. 52.9 in July). Essentially, the three large economic blocs of the world posted a decline in factory activity in August and offer evidence to justify central bank action in the near term.

Auto Sales and Construction Outlays Move in Opposite Directions

Sales of autos rose to an annual rate of 14.52 million units in August from 14.1 million units in July, which leaves the two-month average at 14.3 million units compared with sales of 14.1 million units in the second quarter. Assuming a steady auto sales pace in September, the third quarter sales mark should exceed the second quarter performance, which should give a lift to overall consumer spending and real GDP in the third quarter.

Chart 2 - 09 04 2012

At the same time, construction spending for the first month of the third quarter is not so encouraging. Overall construction spending declined 0.9% in July, inclusive of a 1.2% drop in private construction spending and a 0.4% reduction in public sector construction spending. Within the private sector component, residential construction expenditures plunged 1.6% in July after a 4.6% jump in the second quarter. It is interesting to note that the weakness in July residential construction outlays was entirely in home improvements (-5.5%), while that of new housing rose 1.7%. Residential investment expenditures climbed at an annual rate of 8.9% as per the second quarter GDP report. The July residential construction numbers do not augur well in terms of a likely positive contribution to third quarter GDP.










The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.