A Road Map to Stabilization in the US Economy (Ed McKelvey)
· Our US economic outlook calls for stabilization in real GDP by about mid-year. Today's comment provides a "road map" for key indicators to help gauge whether this stabilization is in fact occurring.
· In the area of consumer spending, we look for (1) an end to the drop in vehicle sales, with the sales rate hopefully, but not necessarily, slightly above February's 9.1-million unit annual rate six months from now; (2) gains averaging 0.1%-0.2% per month in retail sales excluding vehicles, building materials, and gasoline, and (3) modest improvements in consumer confidence, especially in the Conference Board index.
· For home building, we expect little if any increase in starts and sales from the extremely low levels to which they have recently fallen, but we do look for a significant moderation in the rate at which residential construction outlays are falling, from more than 2% per month on average over the past six months to a range of 1Ž2%-1% (reflecting ongoing price weakness) six months from now.
· Industrial indicators should improve over the next six months, but they are unlikely to stabilize completely given our anticipation of ongoing weakness in capital spending and further near-term declines in exports. Thus, the sharp downtrend in durable goods orders is apt to persist, but the ISM indexes should move up-into the low to mid 40s for the manufacturing index, with the annual rate of decline in industrial production returning to single digits-and towards 50 for the index of nonmanufacturing activity.
· Labor market reports should show meaningful improvement in the rate of job loss and smaller but still notable month-to-month increases in the unemployment rate. Specifically, we would look for: (1) initial claims to drop below 500,000 per week over the next six months, (2) payroll declines to lessen to about 200,000 per month, and (3) increases in the unemployment rate to average between 0.1 and 0.2 percentage points per month, as compared to more than 0.3 points per month since mid-2008.
· One obvious risk to this outlook is that financial conditions remain tight. In this regard, the GSFCISM has essentially returned to the tightest readings of last autumn, due mainly to the selloff in equities. Without a significant reversal of this, we would distrust signs of stabilization even if we saw most of the mileposts on the economic road map.