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Weekly Watch
August 2, 2010
Highlights
Economic Analysis
Graph 1
Contribution to Real GDP (percentage Graph 2
points)
Char
Real GDP (year-over-year % change)
8 6
6 GDP PCE NRI
4
4
2 2
0 0
-2
-2
-4
-4
-6
-8 -6
00
01
02
03
04
05
06
07
08
09
10
D07
D08
D09
M07
J07
M08
J08
M09
J09
M10
J10
S07
S08
S09
Week Ahead
ISM Manufacturing Index (July, Monday 10:00 ET)
Forecast: 55.0 Consensus: 54.0 Previous: 56.2
The regional manufacturing indices have indicated that the pace of expansion in the
manufacturing industry slowed in July. Accordingly, the ISM Manufacturing Index is
expected to slide down to 55. Nevertheless, the index will remain at a level consistent with
economic growth for the fourteenth consecutive month. Manufacturing comprises
approximately 70% of industrial production. As a result, the pace of expansion of industrial
production may slow in July as well. This outcome would be consistent with our
expectation that the rate of economic expansion will slow in 3Q10.
Personal income is expected to rise for the eleventh consecutive month, but at a slower
pace given the decline in June’s non-farm payrolls. As income firms, so will personal
spending However, June’s decline in retail sales and sluggish consumer confidence point
to slow growth in this arena. The key driver of consumer spending will be employment.
While consumers now feel more secure in the jobs than during the recession, those that
are unemployed are still struggling to find work. Given our expectation that the labor
market will continue to improve at a slow pace, consumer spending will follow suit.
After May’s nosedive to the lowest level in the history of the index, pending home sales
are forecasted to inch up 4.1%. One effect of the tax credit is that people who may have
been planning to buy a home during the summer months accelerated their purchases in
order to receive the tax benefit. As a result, post-tax credit demand is low. Nevertheless,
the environment remains favorable to buyers — the employment situation is improving,
home prices are low and mortgage rates are favorable. Given this setting, we expect
housing demand to gradually improve throughout the year.
Total non-farm payrolls will drop for the second consecutive month in July due to the
termination of temporary Census jobs. Private payrolls, on the other hand, are expected to
rise, but at a slow pace. In sum, the private sector has added 593K jobs in 2010, but the
pace has not been strong enough to significantly move the unemployment rate. The
market will look for surprises in the private payrolls figure. A negative surprise would feed
market fears about weak economic growth in 2H10.
Market Impact
This week’s economic data will give some of the first insight into third quarter economic
performance. The non-farm payrolls report will be the most watched as strong private
sector job growth will be the catalyst for consumer spending. However, this week’s data is
expected to show that the economy is continuing to grow, but at a slow pace.
Financial Markets
Graph 3 Graph 4
Stocks (Index, KBW) Commodities (Dpb & DpMMBtu)
11,500 60 90 8
WTI
11,000 Banks 55 80 7
10,500 50 6
70
10,000 5
45
9,500 60
Dow Jones 40 4
9,000 50
35 3
8,500 Natural gas
40 2
8,000 30
7,500 25 30 1
Jun09
Oct09
Dec09
Feb10
Jun10
Aug09
Apr10
Jun09
Oct09
Dec09
Feb10
Jun10
Aug09
Apr10
Source: Bloomberg & BBVA Research Source: Bloomberg & BBVA Research
Graph 5 Graph 6
Currencies (Dpe & Ypd) Volatility (Vix, Index)
50
1.55 99
Euro
1.50 97 40
1.45 95
30
1.40 93
1.35 91 20
1.30 89
Yen
1.25 87 10 Jun09
Oct09
Dec09
Feb10
Jun10
Aug09
Apr10
1.20 85
Jun09
Oct09
Dec09
Feb10
Jun10
Aug09
Apr10
Source: Bloomberg & BBVA Research Source: Bloomberg & BBVA Research
Graph 7 Graph 8
Commercial Paper Issuance (US$Bn) TED & BAA Spreads (%)
1,400 0.6 4.0
1,350 0.5 BAA
1,300 3.5
1,250 0.4
1,200 0.3 3.0
1,150
0.2
1,100 2.5
1,050 0.1 Ted
1,000 - 2.0
Jul09
Nov09
Jan10
Mar10
May10
Jul10
Sep09
Jun09
Oct09
Dec09
Feb10
Jun10
Aug09
Apr10
Source: Bloomberg & BBVA Research Source: Bloomberg & BBVA Research
Economic Trends
Graph 10
Graph 9 BBVA US Monthly Activity Index & Real
BBVA US Weekly Activity Index Gross Domestic Product
(3 month % change) (4Q % change)
15 6 1.0
10 GDP 0.5
4
5 0.0
0 2
-0.5
-5 0
-1.0
-10
-2
-15 MAI -1.5
-20 -4 -2.0
-25 -6 -2.5
06 07 08 09 10 95 97 99 01 03 05 07 09
Graph 11 Graph 12
BBVA US Surprise Inflation Index BBVA US Surprise Activity Index & 10-yr
(Index 2004-09=100) Treasury (Index 2004-09=100 & %)
140 150 6.0
SAI
130
130 5.0
120
110 110 4.0
100 90 3.0
90 10yrTN
70 2.0
80
70 50 1.0
D03
J04
D04
J05
D05
J06
D06
J07
D07
J08
D08
J09
D09
J10
Graph 14
BBVA US Recession Probability Model
Graph 13
(Recession episodes in shaded areas,
BBVA US Leading Inflation Index & Core
%)
Inflation (Qoq % change)
10 1 100%
LII
5 0.8
80%
0
0.6
-5 60%
0.4
-10
0.2 40%
-15 Core
-20 0 20%
-25 -0.2 0%
O05
O06
O07
O08
O09
A05
A06
A07
A08
A09
A10
687174778083868992959801040710
“The U.S. is closer to a Japanese-style outcome today than at any time in recent history,”
Bullard said, warning in a research paper released yesterday about the possibility of
deflation. “A better policy response to a negative shock is to expand the quantitative easing
program through the purchase of Treasury securities.”
Economic Calendar
Date Event Period Forecast Survey Previous
2-Aug ISM Manufacturing JUL 55 54 56.2
2-Aug ISM Prices Paid JUL 55.5 54.5 57
2-Aug Construction Spending MoM JUN -0.80% -0.50% -0.20%
3-Aug Personal Income JUN 0.10% 0.20% 0.40%
3-Aug Personal Spending JUN 0.20% 0.10% 0.20%
3-Aug PCE Deflator (YoY) JUN 0.10% 1.30% 1.90%
3-Aug Factory Orders JUN -0.20% -0.30% -1.40%
3-Aug Pending Home Sales MoM JUN 4.10% 3.70% -30.00%
3-Aug Total Vehicle Sales JUL 11.9M 11.60M 11.08M
4-Aug ADP Employment Change JUL 28K 35K 13K
4-Aug ISM Non-Manf. Composite JUL 54 53 53.8
5-Aug Initial Jobless Claims 31-Jul 453K 455K 457K
5-Aug Continuing Claims 24-Jul 4551K 4512K 4565K
6-Aug Change in Nonfarm Payrolls JUL -112K -60K -125K
6-Aug Unemployment Rate JUL 9.60% 9.60% 9.50%
6-Aug Avg Hourly Earning MOM All Emp JUL 0.00% 0.10% -0.10%
6-Aug Avg Weekly Hours All Employees JUL 34.1 34.1 34.1
6-Aug Consumer Credit JUN -$7.5B -$5.7B -$9.1B
Contact details
BBVA Research
5 Riverway Drive
Houston, Texas 77056
ResearchUSA@bbvacompass.com
BBVA Research reports are available in English and Spanish
PAGE 6
U.S. Economic Watch
July 19, 2010
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