Sunday, November 4, 2007

Services Probably Expanded at Slower Pace: U.S. Economy Preview

By Bob Willis


Nov. 4 (Bloomberg) -- Service industries in the U.S. grew at a slower pace in October, restrained by record oil prices and a slump in housing that shows little sign of filtering to other parts of the economy, economists said before reports this week.

The Institute for Supply Management's index of non- manufacturing businesses fell to 54 from 54.8 the previous month, according to the median estimate of economists surveyed by Bloomberg News. Anything greater than 50 indicates growth.

Gains in consumer spending, business investment and exports have sustained the six-year economic expansion even as the real- estate recession intensified. A report from the Commerce Department later in the week is forecast to show the trade deficit widened as a jump in oil imports offset record foreign demand for American goods.

``The ongoing correction in the housing market remains in full swing,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. Still, ``the problems in residential construction pose less of a risk to the overall economy.''

ISM will issue the service-industries report tomorrow. The group's factory index, released on Nov. 1, fell to 50.9 in October, the lowest in seven months, from 52 the prior month, as manufacturers received fewer orders and production contracted.

Growth forecasts have been scaled back since a jump in subprime mortgage defaults caused credit markets to seize up in mid August. Economists surveyed by Bloomberg in early October forecast the economy will grow at an annual rate of 1.8 percent in the fourth quarter after expanding at a 3.9 percent pace in the previous three months.

Payrolls Jump

Stronger-than-forecast reports last week suggested consumers, who account for more than two-thirds of the economy, may have more staying power. Payrolls grew by 166,000 in October, double economists' median forecast.

The Federal Reserve on Oct. 31 cut its benchmark rate a quarter point to 4.5 percent, the second reduction in as many months, and signaled it may hold off on further rate cuts pending evidence the economic slowdown was deepening.

``Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance,'' the Fed said in its statement. ``However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.''

Homebuilders and financial-service firms are among companies hurting the most. Pulte Homes Inc., the third-largest U.S. homebuilder, said Oct. 25 that price reductions last quarter failed to spark sales.

No Stabilization

``Time has proven that no one can be sure when this particular downturn will end or begin to show signs of stabilization,'' Chief Executive Officer Richard Dugas said on a conference call.

GMAC Financial Services will cut 25 percent of its staff, or 3,000 people, at its Minneapolis-based Residential Capital LLC unit, known as ResCap, adding to a record number of mortgage industry firings as demand for home loans declines, GMAC said in a statement Oct. 17.

The credit squeeze, falling home prices and rising gasoline costs are likely to soften demand at retailers.

Four out of 10 shoppers say they'll spend less this holiday season because of higher food and fuel costs and falling home values, according to an annual survey by Deloitte & Touche LLP published Nov. 1.

Less Optimism

``There is certainly a lower degree of optimism across the board,'' Stacy Janiak, vice chairman for retail at New York- based Deloitte, said in an interview last week. ``We also see concern around the stock-market volatility and housing values'' among more affluent consumers, Janiak said.

The National Retail Federation, a Washington trade group, forecast a combined 4 percent sales gain for November and December, the smallest in five years.

The Department of Commerce will release the trade report Nov. 9. The gap widened to $58.5 billion in September from a seven-month low of $57.6 billion the prior month, according to the survey median.

The report ``would still leave foreign trade as a huge contributor to third-quarter growth, thanks to surging exports,'' said Nigel Gault, chief U.S. economist at Global Insight Inc., a Lexington, Massachusetts, forecasting firm.

Also on tap this week, worker productivity rose at an annual rate of 3 percent in the third quarter, from a 2.6 percent gain in the prior three months, a report from the Labor Department Nov. 7 may show.

The improvement in efficiency led to a moderation in labor expenses, which account for about two-thirds of the cost of producing a good or service. Costs climbed at a 1.2 percent pace, down from 1.4 percent in the second quarter, according to a Bloomberg survey. The report may give the Fed margin to lower interest rates again should growth falter.

Bloomberg Survey

Date Time Period Indicator BN Survey Prior
11/05 10:00 Oct. ISM Non-Manufacturing 54.0 54.8
11/07 8:30 3Q P Productivity 3.1% 2.6%
11/07 8:30 3Q P Unit Labor Costs 1.1% 1.4%
11/07 8:30 Sept. Wholesale Inventories 0.2% 0.1%
11/07 8:30 Sept. Wholesale Sales 0.5% 0.4%
11/07 15:00 Sept. Consumer Credit $9B $12.2B
11/08 8:30 10/13 Continuing Claims 2550K 2588K
11/08 8:30 10/20 Initial Jobless Claims 325K 327K
11/09 8:30 Oct. Import Prices 1.1% 1.0%
11/09 8:30 Sept. Trade Balance $-58.5B $57.6B
11/09 10:00 Nov. P Confidence- U. of MI 80.0 80.9

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