Economic Outlook: US Companies Quick off the Mark

This week's highlights

US companies have reacted fast to the economic slowdown. They have managed to keep down stocks, the order books are very fat, and employee efficiency is improving. That is of importance for adjusting to the economic slowdown, for corporate earnings and for the inflationary pressure.
Companies traditionally run into various problems when sales slacken. Companies realise too late that the fall in sales is lasting, and since they do not adjust production/purchases in time, their stocks of unsold goods grow. The combination of a surfeit of unsold goods and flagging sales means that companies have to slash production/purchases to reduce stocks.
However, in the present slowdown, companies have foreseen the decline in sales and they are faster off the mark than usual. They reduced production as sales fell and thus avoided stockpiling. In fact, they have managed to reduce stocks in relation to sales, as evident from the chart.
There is another point on which we have seen a change in behaviour: the manufacturing companies have managed to build up large order books as mentioned earlier
Normally, employees turn less efficient at times of economic slowdown/ recession. That is because companies reduce production rather than the workforce. Also in that respect have companies deviated from normal practice. Production growth which is a measure of employee efficiency has risen sensibly over the past five quarters
What is the effect of this change in behaviour? First of all, it means better management of production and stocks when companies do not have to fire workers as they had to during earlier recessions. On the other hand, it may mean that employment does not rise fast when sales pick up again. The effect will therefore be that the economic swing will probably be smaller this time. The solid growth in productivity shows that companies are increasing employee efficiency, and that bodes well for corporate earnings in future. Finally, it also means that companies' costs per unit produced fall, and that may dampen inflation.

This week's other highlights

• The US: pending home sales, producer prices and retail sales
• China: consumer prices
• Norway: consumer prices
• Sweden: consumer prices

Monday

The UK: RICS - August

The survey from the Royal Institute of Chartered Surveyors has long indicated a softening housing market, and we expect this trend to have continued in August.
According to the RICS survey , the ratio between home sales and the stock of unsold homes fell further in July - particularly because of falling home sales and is now at the lowest level since 1995. This indicates further price falls to come.
The RICS house price index - which shows how many of the real estate agents who responded asses that housing prices to rise compared with those who expect them to fall - has risen marginally these past three months. That indicates some stabilisation, but the level is still very low and indicates that the fall in house prices has some way to go.
The low number of transactions indicates that the tighter borrowing conditions and expectations of further falls in house prices keep many potential buyers out of the housing market. The number of new mortgage loans is also very low.

Tuesday

The US: pending home sales - July

Pending home sales are a fairly good leading indicator of housing activity for the next two months although they cover only about 20% of total pending home sales. This is due to the fact that pending home sales are based on contracts signed before the transactions are closed.
Home sales have fallen by 33% since the autumn of 2005, but as appears from the chart below, home sales have been stable around 5m units (converted to sales in one year) over the past nine months. It is of course interesting whether home sales will remain stable.

The stabilisation is probably due to a combination of lower mortgage yields and falling house prices around the turn of the year, and this has been sufficient to neutralise the effect of the tighter credit standards in the mortgage market.
Mortgage yields have, however, risen since the spring. 30-year mortgage yields have risen from 5.5% in January to around 6.5%, and together with the tighter credit standards this may dampen home sales in the coming months. This is supported by a sharp fall in mortgage applications since the start of the year. But please note that part of the sale is due to compulsory sale of homes.

Sweden: consumer prices - August

The Swedish consumer prices are high and also significantly higher than what is to the liking of the Riksbank. The Riksbank is concerned whether the high rate of inflation - although it has risen due to temporary factors such as food and energy - will lead to second-round effects in the form of higher inflation expectations and acceleration of wage growth. But some indicators of inflation expectations have fallen a little just as wage growth has fallen slightly over the past months. Lower wage growth is, however, offset by a negative trend in productivity which means that labour costs will be higher.

In July, consumer prices rose by 4.4% y/y. We assess that August inflation will remain around this level since rising electricity prices offset some of the effect from the considerably lower oil and food prices. Moreover, the considerable weakening of SEK against USD means that the fall in oil prices in terms of SEK is less visible. However, for the slightly longer term we expect that the inflationary pressure will abate as the bleak growth picture materialises and the pressure on the resources of the economy is reduced, just as the basis effect from commodity prices will disappear.

Wednesday

Japan: machine orders - July

The development in machine orders has been better than expected over the past months. This indicates that private investment is more robust than earlier expected, and the level is still much higher than during earlier recessions.
However, we expect a much slower development in July since the growth picture is becoming increasingly gloomy just as the corporate profit margin is squeezed by high commodity prices. In June, it was notably foreign machine orders which had an adverse effect (fell by 12.1% m/m) while domestic orders - notably from manufacturing companies and the public sector - offset some of the fall.

China: consumer prices - August

Inflation has fallen some over the past months due to lower food prices, and we expect the falling trend to continue for the rest of the year. Consumer prices rose by 6.3% y/y in July against 8.7% in February (the sharpest rate of increase since 1996). Over the same period, inflation in food prices has fallen to 14.4% from 23.3%. It is notably prices on meat and vegetables which have driven down inflation over the past couple of months. These product groups have been affected by swine disease and the snow storm earlier in the year and are now normalising.

Inflation exclusive of food prices has, on the other hand, increased lately due to the government's increases of energy and fuel prices. In July, inflation exclusive of food prices was 2.1% y/y against 1.5% in January. Energy prices do not have a large share in the consumer price index - less than 5% - while food prices account for 1/3. The development in inflation will therefore still dominate headline inflation.

Norway: consumer prices - August

Since the turn of the year, inflation has been markedly above Norges Bank's inflation target, mainly driven by rises in food and energy prices but also the inflationary pressure from core inflation has increased. Domestically created inflation has increased, among other things due to a tight labour market and high wage increases, whereas imported inflation has long been negative. But imported inflation has turned and is now around zero.

In July, consumer prices rose by 4.3% y/y, and we expect inflation to remain around this level in August. Just as in July, there are prospects that electricity prices will drive up inflation whereas the falling oil prices pull in the other direction. For the slightly longer term, we expect that the inflationary pressure will abate as growth slows down and the pressure on the resources of the economy is reduced, just as the basis effect from commodity prices will disappear.

Thursday

The US: trade balance - July

The trade balance is interesting for a number of reasons. First and foremost because net exports have contributed significantly to GDP growth in recent quarters. In Q2 total growth was largely driven by net exports, and it is of course interesting to see whether this growth contribution continues. The trade balance may reveal how much the rest of the world will be affected by slower US growth. Finally there are indications of a falling deficit due to the fall in oil prices.
Since the end of 2006, the deficit has fluctuated around USD 60bn, and in June it declined to USD 56.8bn. The improvement of the deficit in June can be attributed to a very strong increase in exports driven by increasing deliveries to the manufacturing industry, capital goods and food. We doubt that export growth can be maintained at the very high level (13% y/y) in the light of the international slowdown in growth. Imports adjusted for price increases declined by 3% y/y and things are beginning to look like the development during the last recession.

However, if the effect of oil imports is removed, the deficit is only approx. USD 32bn and has fallen significantly since early 2007. Since oil prices have fallen considerably, a sharp fall in the deficit could be expected. But one should be aware that the oil price peaks in mid-July and the effect of it will therefore only be reflected in coming months. Furthermore, there is a tendency that the oil price is only reflected two months after. Our model for oil imports indicates an increase of approx. 2bn in the oil import.
Focus will also be on the import of capital goods, since this is an indicator of corporate investment. Traditionally corporate investment falls sharply during recessions, but this has not been the case so far. The import of capital goods adjusted for inflation shows a rise of 6%, which is rather solid.

Friday

The US: producer prices - August

The attention paid to producer prices has presumably fallen somewhat in line with the significant fall in oil prices. However, the financial markets will be interested in seeing whether companies raise prices of other goods. There has been a tendency that companies raise prices of semi-finished goods and commodities in particular – even exclusive of food and energy.
One should be particularly aware that producer prices are normally collected in the week containing the 13th day in the month. In fact, oil prices peaked around that time in July and fell by 20% until 13 August. Furthermore, food prices have fallen over the past two months. This will presumably pull down total producer prices.

On the other hand, there is a certain risk that companies have raised the prices of other goods (i.e. exclusive of food and energy). Thus, prices of semi-finished goods increased by 10.2% y/y and commodities by 37%. There is a certain risk that it will begin to be reflected in the prices of finished goods.
Thus there are prospects of a fall in total producer prices in August, while core producer prices may rise quite significantly.

The US: retail sales - August

Retail sales are one of the most important economic indicators this week. Retail sales account for approx. 40% of consumer spending and it is generally expected that consumer spending will pull the economy into recession.

Retail sales will be pulled down by petrol stations sales. Petrol prices declined by approx. 10% from July to August, and since retail sales are measured in terms of sales it will pull retail sales down. In the long term, the fall in oil prices may stimulate consumer spending and thus retail sales.
Overall, we expect a fall in retail sales.
Jyske Markets - FX Research http://www.jyskebank.dk/finansnyt
The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor for transactions made on the basis of the information or the estimates of the analysis. The estimates and recommendation of the analysis may be changed without notice.