Economy / US

1 March 2012

ISM Manufacturing; Income and Consumption; Construction

ISM -- February decline and flat trend suggest modest to moderate activity Consumers splurged on durable goods, but spent cautiously on services A drop in business-related activity pulled construction lower
recent range and its level was not extreme by historical standards.

Data Review

Michael Moran

Daiwa Capital Markets America 212-612-6392 mike.moran@us.daiwacm.com

Income and Consumption

Consumer outlays for durable goods jumped 0.9 percent in January, partly reflecting a pickup in sales of new cars and trucks, but consumers were cautious in other areas, as outlays for nondurable goods grew moderately (up 0.4 percent) and spending on services was unchanged. In total, consumer spending rose 0.2 percent, which translated to no change after adjusting for inflation and suggests a slow quarter for consumer spending. Disappointing results on income might explain the slow pace of total consumer spending. Wage income grew moderately (0.4 percent), but government transfer payments to individuals fell because of expiring provisions under the Obama stimulus package, which limited the increase in

ISM Manufacturing Index The ISM index fell 1.7 percentage points in February, moving to the
lower portion of its recent range (chart). Although the measure remained range-bound, the results were disappointing in that they fell well shy of expectations and argued against the view that the manufacturing sector is gathering momentum. The level of the index suggested modest to moderate growth. The new orders component, valuable because of its leading indicator properties, dropped 2.7 percentage points to 54.9 percent. The drop in orders had only a small influence on production, as this component fell fractionally and remained in the mid-50 percent area (off 0.4 percentage point to 55.3 percent). Slower orders left manufacturers a bit more reluctant to hire, as the employment measure fell 1.1 percentage points to 53.2 percent. The supplier deliveries index registered the largest change, falling 4.6 percentage points to 49.0 percent. The inventory measure was unchanged at 49.5 percent. Although activity eased in February, the price index jumped 6.0 percentage points to 61.5 percent, most likely reflecting the influence of higher energy prices. The change in the price index represented the fourth consecutive increase, but the measure remained comfortably within its

total personal income to 0.3 percent. An increase in tax payments and an adjustment for inflation generated a decline of 0.1 percent in real disposable income.

Construction
Despite favorable weather, total construction activity dipped 0.1 percent in January. The private residential component performed well, increasing 1.8 percent, but businessrelated activity fell 1.5 percent, and government sponsored construction dipped 0.2 percent. The disappointment with the January results was tempered by upward revisions to the results for November and December, which were equivalent to 1.4 percentage points of growth. Most of the revision was the result of a shift in the volatile homeimprovements category, but business and government construction also were adjusted upward.

ISM Manufacturing Index

60 Per cent 50 + = g r o wt h

55

50

45

40

35

30 0 6 - Jan

0 8 - Jan

10 - Jan

12 - Jan

Source: Institute for Supply Management

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