U.S. August Light Vehicle Sales Recovered Modestly

The Composite Index for the nonmanufacturing sector, from the Institute for Supply Management, again ticked up. For August it rose to 50.6 from an unrevised 49.5 during July. The latest was the highest level since May. Consensus expectations had been for a slightly lower August reading of 49.5.

Beginning with the January 2008 Nnonmanufacturing Report On Business®, a composite index is now calculated as an indicator of the overall economic condition for the nonmanufacturing sector. It is a composite index based on the diffusion indexes for four of the indicators (business activity, new orders, employment and supplier deliveries) with equal weights. The latest report from the ISM can be found here.

The nonmanufacturing business activity sub-index rose to 51.6 from 49.6 in July and the latest level equaled the 2Q average. Since the series' inception in 1997 there has been a 48% correlation between the level of the business activity index for the nonmanufacturing sector and the Q/Q change in real GDP for the services and the construction sectors.

The new orders sub-index also made up the prior month's decline and rose to 49.7, the highest level since May.

The employment index, conversely, fell m/m to 45.4 and reversed half of its July improvement. Since the series' inception in 1997 there has been a 56% correlation between the level of the ISM nonmanufacturing employment index and the m/m change in payroll employment in the service-producing plus the construction industries.

Pricing power fell sharply to 72.9 which was its lowest level since May. Since inception ten years ago, there has been a 60% correlation between the price index and the q/q change in the GDP services chain price index.

ISM surveys more than 370 purchasing managers in more than 62 industries including construction, law firms, hospitals, government and retailers. The nonmanufacturing survey dates back to July 1997.

Initial claims for unemployment insurance rose unexpectedly last week to 444,000 from 429,000 during the prior week. The latest level was the highest in four weeks.

The four-week moving average dipped again w/w to 438,000 (34.7% y/y), still the highest level since near the end of the 2001 recession 2001. During July claims averaged 393,000.

A program to locate people eligible for jobless benefits may have continued to play a role in last week's elevated level of claims. Congress approved the extra benefits in June.

A claims level below 400,000 typically has been associated with growth in nonfarm payrolls. During the last ten years there has been a (negative) 76% correlation between the level of initial claims and the m/m change in nonfarm payroll employment. Over the longer period of time, the level of claims for jobless insurance has not trended higher with the size of the labor force due to a higher proportion of self-employed workers who are not eligible for benefits.

Continuing claims for unemployment insurance during the latest week ticked up another 6,000 after an upwardly revised 70,000 jump during the prior week. The four-week moving average of continuing claims rose to 3,400,250, the highest level since late-2003.

Continuing claims provide some indication of workers' ability to find employment and they lag the initial claims figures by one week.

The insured rate of unemployment was stable at 2.6%, the highest level since late-2003.

Labor productivity in the nonfarm business sector rose a revised 4.3% last quarter. The increase was larger than expected growth of 3.4% and it was double the preliminary estimate of a 2.2% increase.

The upward revision was due to a near-doubling of output growth to 3.4% and a slightly larger 0.8% decline in hours worked.

Growth in compensation per hour was little-changed at 3.7% and that about equaled the 1Q increase.

Unit labor cost growth was revised to show a slight 0.5% decline rather than the 1.3% increase estimated earlier. Year-to-year that left costs up just 0.6% from one year earlier.

In the factory sector productivity growth was revised down and it showed a 2.2% decline (+2.4% y/y). Productivity rose 3.4% last year. Unit labor cost growth surged a little-revised 6.2% (1.4% y/y) as compensation rose 3.9% (3.8% y/y).

In the nonfinancial corporate sector, productivity surged 5.6% and the y/y gain rose to 2.3% after a 1.9% increase last year.Compensation in the corporate sector rose 3.7% (3.8% y/y), a gain which left unit labor costs to decline 1.8% (+1.5% y/y).

German orders are clearly falling. Orders are dropping from domestic sources as well as from foreign sources. The degree of decline is accelerating both domestically and from overseas; the degree of the drop is substantial.

The new quarter is quite new, but one month into it, the degree of decline is severe for orders and sales.

Orders are weak enough and have been weak enough for long enough that real sales are starting to show adverse trends. Over three months all major sales categories are showing significant volume declines.

In comment today Nout Wellink of the Dutch central bank warned that the credit crisis would linger for several years. European Economic and Monetary Affairs Commissioner Joaquin Almunia said that, "We're experiencing a serious economic downturn…’ he attributes the slip to several causes but adds that fears of recession are exaggerated. Still, the notion of recession is haunting Europe as it has haunted the US. Former BOE governor Eddie George said, "My impression is that most forecasters now expect little growth if any at all across the industrial world as a whole over the next year or so ahead, and certainly technical recession cannot be ruled out."

In Germany there seem to be a difference of opinion on the subject. Up until now most pronouncements have been upbeat hold-the-line sort of things. But yesterday, Deputy Economy Minister Walther Otremba said in an interview that, "Economic indicators and surveys are clearly pointing down and we must expect a slump." He added, "The crisis won't be over quickly; whether or not things will pick up next year is doubtful." Still, yesterday German Finance Minister Peer Steinbrueck also said, "It is completely irresponsible for some pessimists to proclaim, on the basis of just one single quarter of slightly negative growth, that the specter of recession is looming,"

Europe’s data are weak enough to talk of slumps and recessions; the talk is not all on the back of one quarter of declining GDP. Europe’s policymakers (at least the ones in office) do not want to entertain that notion, however. That reluctance suggests either that they are unrealistic or plan to do nothing to avert the growing weakness.