Indicators next week on the whole should be positive, with hefty productivity advances for the third quarter and gains in ISM leading indicators for October offset to some extent by further declines in October payrolls. We expect the FOMC to vote to retain its aggressive stance on monetary policy.
Volatility is clearly on the increase, as markets attempt to digest what appear to be contradictory signals on the economy. Hefty productivity gains in the third quarter, which will be reported on Thursday, propelled nonfinancial sector earnings higher. But companies appear to hoarding cash balances and restraining head counts due to uncertainty about the strength of the recovery and the path for key federal policies that might affect payroll costs.
As a result, labor markets overall still reflect recessionary conditions, and further downward pressure on employment and compensation is likely. This will be reflected at the end of the upcoming week in another relatively modest decline in payroll employment during October and a further uptick in the unemployment rate. It is no surprise that consumer confidence is backpedaling, and the outlook for consumer spending is poor.
While single family housing construction is seeing an upswing, multi-family homebuilding and commercial construction are skating furiously downwards—on net, we expect a decline in October construction spending. But ISM leading indicators are expected to claw a little higher in the month, and motor vehicle sales should get a pop from ramped-up incentives.
Despite grumpy consumers, auto producers and retailers will not give up, and that will translate into further discounts and incentives to keep factories burdened and inventories from moving up. Therefore, inflation is caged well below the Fed's target—with a huge output gap and the continued fragility of the financial system, we expect the FOMC to vote retain its aggressive stance on monetary policy on November 4.
KEY U.S. DATA RELEASES THIS WEEK
Monday, November 2 – Construction Spending (Sep.)
Construction Put in Place
Construction Excl. Residential Improvements
What to Look For
Implications
Single-family housing will post another strong increase, but this will be offset by declines in multi-family and nonresidential construction. The outlook for the single-family home market is looking up, but that for multi-family housing and nonresidential construction is grim.
Monday, November 2 – ISM Manufacturing Index (Oct.)
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IHS Global Insight: 53.0
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Consensus: 53.0
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Last Actual: 52.6 (Sep.)
What to Look For
Implications
The last month was mixed, with the Empire and Chicago surveys scoring gains, but the Richmond and Philadelphia readings losing ground. The early recovery is not going to be very strong in many manufacturing segments, with the auto sector carrying much of the load in the third quarter, but no clear route to build on those gains in the fourth quarter. However, the tech sector is picking up some momentum and solid export demand, especially in emerging markets, is also providing some tailwinds.
Tuesday, November 3 – Motor Vehicle Sales (Oct.)
What to Look For
Implications
Still woozy from September's cash-for-clunkers sales hangover, manufacturers moved to ease the pain in October, rolling out incentive programs that should help push sales to a seasonally adjusted annual rate of 10.1-million units. Recovering inventory levels should also support aggressive marketing programs and sales volume through the rest of fourth-quarter 2009.
Wednesday, November 4 – ISM Non-Manufacturing Index (Oct.)
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IHS Global Insight: 52.0
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Consensus: 51.6
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Last Actual: 50.9 (Sep.)
What to Look For
Implications
Freight activity picked up in recent weeks after a summer lull, but indicators of activity across regions are mixed and contradictory. Financial markets continue to be positive, although there is less upward momentum than we saw in September and loan loss pressures on banks remain high. Employment markets are showing only marginal improvements.
Wednesday, November 4 – FOMC Rate Decision
What to Look For
Implications
The FOMC is expected to vote on November 4 to keep rates unchanged, and retain existing targets and timetables for quantitative easing measures. Core inflation is still running below the Fed's target, and the output gap remains huge. In addition, the stability of the banking system remains fragile, as loan loss reserves continue to rise, and regional banks are having difficulty absorbing mounting losses from commercial real estate—the contagion risk remains high. All these elements argue for no change to the current accommodative stance on policy.
Thursday, November 5 – Productivity (Preliminary, Q3)
Nonfarm Business Productivity
Unit Labor Costs
What to Look For
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Nonfarm productivity increased by an awesome 6.6% in the second quarter. We believe that it performed even better in the third quarter, increasing 7.0%, on a 4.0% increase in output and a 2.8% drop in hours.
Implications
These strong productivity gains will translate into a 4.5% drop in unit labor costs. The good news is that the productivity gains in the past two quarters are providing a solid boost to corporate earnings. Cash on corporate balance sheets is high, so a modest improvement in business confidence could translate into a burst of spending on investment, and ultimately some hiring, as we move into the middle of 2010.
Friday, November 6 – Employment Report (Oct.)
Nonfarm Payrolls
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IHS Global Insight: -190,000
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Consensus: -175,000
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Last Actual: -263,000 (Sep.)
Unemployment Rate
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IHS Global Insight: 9.9%
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Consensus: 9.9%
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Last Actual: 9.8% (Sep.)
Average Hourly Earnings
What to Look For
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Payroll employment is expected to decline 190,000 in October, less than the 263,000 decline in September.
Implications
This would be the least severe decline so far this year, but is still another large drop. Initial unemployment insurance claims are falling, but the improvement is painfully slow. We expect the unemployment rate to edge up another tick, from 9.8% to 9.9%.
