September 2009 - Fed and Economy Watch

Business conditions in the Midwest deteriorated in September, resuming a ten-month contractionary trend that had been broken in August. The Chicago Business Barometer fell 3.9 points to 46.1, hurting forecasts for the nationwide survey of manufacturing conditions coming out this Friday. The unexpected slide caused markets to leap down more than 1% in the minutes following the release.

Private jobs shrunk at their slowest monthly pace since July of 2008 in September, according to the ADP employment survey, which tracks payrolls from private industry. ADP said 254,000 jobs were lost in September, including 103,000 in the services sector and 151,000 in the manufacturing sector. Wall Street was disappointed with the results though, as forecasters were looking for a total decline of 195k jobs. Economists said the report would have little impact as the ADP survey has been off in recent months, and traders are more concerned with the official statistics coming out Friday.

New orders for durable goods sent stocks into retreat on Friday as the report tumbled well beyond expectations in August. But analyst reactions to the report were mixed as the headline was mostly a reflection of the overweighted transportation sector, which plummeted in August do to the volatile aircraft component. New orders fell 2.4% in August, reversing course from the 4.8% gain in July and failing to match forecasts for a 1.0% gain. The transportation sector was the key factor as it fell 9.3% compared to July, mostly owing to the 29.9% plunge in aircraft orders. When transportation is excluded, orders were still in decline, but only slightly.

Manufacturing conditions in the Philadelphia area beat forecasts in September, as a survey of executives reported the highest levels of current activity since June 2007. The Philadelphia Fed’s Business Outlook survey advanced 10 points to +14.1, marking the second straight month of growth in the region covering eastern Pennsylvania, southern New Jersey, and Delaware. Forecasts were for +8.0 A third of the firms surveyed reported more activity in September, compared to 19% that said conditions deteriorated since August. This is broadly in line with the Tuesday’s Empire State survey from the New York Fed, which bounced up 7 points to 18.9. In both surveys, any reading above zero suggests growth.

The Treasury’s latest measure of international capital flows failed to match the optimism in economists’ forecasting charts. Foreign demand for long-term Treasuries was just $15.3 billion in July, a quarter of what analysts were expecting. Total figures including short-term securities showed an outflow of $97.5 in the month versus -$56.8 billion in June.

Consumer prices were rising modestly in August. Higher energy prices pushed the all-items index up 0.4%, as expected, but a decrease in new car prices helped mitigate the monthly advance. The core rate, which excludes volatile energy and food components, also matched forecasts as it inched up 0.1%. Annually, the all-items index is down 1.5%, while core prices are up 1.4%, six basis points below the Federal Reserve’s preferred rate.

Manufacturing conditions in New York once again beat expectations and showed new orders were on the rebound. The Empire State survey jumped 7 points in September to hit +18.9, the highest level since November 2007. Forecasters, surprised by last month’s ascension, were only looking for a moderate 2-point increase this month. “This is a strong print and we expect a slow upward trajectory in this indicator going forward, though likely not to the same leaps and bounds we have seen over the past two months,” commented Ian Pollick from TD Securities. New orders advanced to +19.8 in the month,...

Retail sales performed much better than forecasts in August, boosted by gains in the auto sector but helped by broad advances too. The report suggests the economy, almost two thirds of which is based on consumption, could see third-quarter GDP grow between 3.0% and 5.0%. The headline index climbed 2.7% in August, easily beating predictions for a 2.0% figure. “The upward momentum in retail sales in August was not merely a ‘cash-for-clunkers’ or higher gas price phenomenon,” said analysts at RDQ.