Recent evidence would seem to indicate that a slowdown in the current expansion is in the works. Last week’s indicators showed a dip in consumer confidence, an unexpected spike in initial jobless claims, and a slightly lower reading on the Institute for Supply Management’s purchasing-managers’ index (PMI) for manufacturing. These pallid numbers, coming on the heels of an upward revision of the second-quarter real gross domestic product (GDP) to 3.3 percent, from 2.8 percent, suggest that the pace of growth seen through June may be unsustainable.
Friday’s PMI of 58.5 percent for September marked the 16th consecutive month of growth for the manufacturing sector — anything above 50 percent is considered “expansionary” — despite a cooldown from August’s mark of 59 percent. The institute noted, however, that based on “the past relationship between the PMI and the overall economy,” the average index of 61.5 percent for the first nine months of 2004 “corresponds to a 6.8 percent increase” in real GDP. Using the same formula, the GDP increase for September alone would work out to a still-heated 5.7 percent.
In an interview with CFO.com, John Lonski of Moody’s Investors Service predicted that the economy will still be showing signs of significant growth on October 29 — “days before the presidential election” — upon the release of initial numbers for third-quarter GDP.
According to Lonski, preliminary evidence shows that the quarter-to-quarter annualized growth rate for consumer spending, the largest GDP component, will pick up the pace from the second quarter’s 1.6 percent. Another reason to expect growth, he added, is the relative ease with which most companies should be able to access the capital markets, at least from the debt side. The past three months marked the second straight quarter in which Moody’s issued more credit-rating upgrades than downgrades, a feat unequalled since the second quarter of 1998. Noted Lonski, “The risk premium for corporate issuers is at its best level since late 1997 for higher-rated issues, and early 1998, before the onset of the Russian financial crisis, for high-yield bonds.”
He also sees some indications that the economy will receive a shot in the arm from pent-up demand following the end of the hurricane season, which has negatively impacted some retail numbers, construction spending, and employment. According to Lonski, “A report issued recently by Wal-Mart said that while there might be some temporary loss of sales due to the hurricanes, over the long run they expect to come out ahead.”
Looking ahead this week:
• Tuesday morning’s ISM release will highlight the September performance by the service economy. According to Briefing.com, the consensus estimate calls for an increase to 59 percent, from August’s 58.2 percent, partially making up for the slight slide in Friday’s manufacturing report.
• August’s consumer-credit figures, to be announced Thursday afternoon, are expected to show an increase of $7 billion compared with July’s $10.9 billion hike, according to the Briefing.com consensus.
• Friday will see a further update of the employment situation with the release of reports on September’s nonfarm payrolls, unemployment rate, and hourly earnings. Analysts will peer through their magnifying glasses “with a view toward the possible loss of jobs,” said Lonski, who noted that these possible losses are likely to be felt most heavily in the construction sector, due to the hurricanes. The Briefing.com consensus calls for the growth in nonfarm payrolls to dip slightly, to 140,000 from $144,000, and for the unemployment rate to hold steady at 5.4 percent.