WASHINGTON (AFX) - US economic indicators to be released in the coming week are expected to show that productivity growth was unusually solid for recessionary conditions, while consumer sentiment dropped early in the month due to the deteriorating job market, analysts said. "Productivity is seen holding up remarkably well in the face of economic recession," Bear Stearns economists said in a research note. Productivity usually declines in a recession, as output drops, then bounces back as GDP growth resumes. However, economists said the third quarter productivity report should show a gain of 1.7 pct.
Ian Morris, economist at HSBC Securities, said: "Even though the economy is cyclically damaged, productivity has still improved." This supports Federal Reserve Chairman Alan Greenspan's view that the US economy's underlying productivity growth has risen over the past half-decade, thanks to higher rates of investment. The expected increase in productivity last quarter is still above the 1.5 pct average which existed before labor productivity began to rise in the mid-1990s, noted Rick MacDonald, economist at Standard & Poors' MMS.
Greenspan said last month that productivity will likely suffer a one-time drop in order to incorporate the costs associated with increasing security, in the wake of the Sept 11 attacks. "But once the adjustment is completed, productivity growth should resume at rates in excess of those that prevailed in the quarter-century preceding 1995", Greenspan said. Bank One economists said the rise in third-quarter productivity is consistent with "the premise of improved long-term productivity trends."
Some economists cautioned that the main reason for the rise in productivity last quarter is that jobs and hours worked declined even faster than output in the third quarter. Morris said this, in turn, shows the competitiveness level of US companies, which have been "very savage and quick in responding to falling output," by cutt ing jobs and working hours. Consumer sentiment is seen declining in the University of Michigan's report for early November, due to the rout in the US labor market reported in the October employment release, which showed a 415,000 decline in non-farm payrolls. Price indexes to be released in the week will show declining import and producer prices.
Some economists have warned that the US could fall into deflationary conditions, as has occurred in Japan. Most analysts said the expected declines in the PPI and import prices are a reflection of strong counter-inflationary conditions in the economy, but not outright deflation.
Mike Carey, economist at Credit Lyonnais said it would be "very difficult" for the US to fall into outright deflation, as the service sector is highly unlikely to see declines in the price level. He added, however, that "I'm sure it's in the back of their (the Fed's) minds." Declining producer and import prices are being caused by falling demand, Mac Donald explained. The focus of next week is likely to be on the Federal Open Market Comittee meeting on Tuesday to decide any changes in interest rates. A growing number of analysts forecast a 50 basis point rate cut in the FOMC's key federal funds rate target, following a sharp drop in the National Association of Purchasing Management report for October, and the sharp rise in last month's unemployment rate, to 5.4 pct. Following are the consensus forecasts of Wall Street economists for data to be released this week.
NAPM NON-MANUFACTURING INDEX, Monday (10.00 AM): The consensus forecast of Wall Street economists is for the NAPM non-manufacturing index to fall to 45.9 in October from 50.2 in September. The index rose in September from 45.5 in August.
The NAPM manufacturing index plunged to 39.8 in October from 47.0 in September, the fifteeth month-long manufacturing recession. As was the case in the October employment report, the NAPM non-manufacturing index will illustrate that recessionary conditions have moved beyond manufacturing, and into the service sector of the economy, said Robert McGee, chief economist at Tokai Bank.
US Q3 NON-FARM LABOR PRODUCTIVITY, Wednesday (8.30 AM) Wall Street analysts expect labor producitivy to rise at a 1.7 pct annual rate. In the second quarter, productivity rose at a 2.1 pct rate.
Unit labor costs are expected to rise 2.4 pct after rising 2.7 pct in the second quarter. "Nonfarm productivity growth apparently was solid again last quarter, even as real GDP declined slightly. However, the year-to-year change in unit labor costs is estimated to have stayed firm, crimping corporate profit margins," Goldman Sachs analysts said said.
US SEPT WHOLESALE INVENTORIES, Wednesday (10.00 AM): Wholesale inventories are expected to fall 0.3 pct in September after falling 0.1 pct in the previous month. This would be the fourth consecutive monthly decline.
US SEPT CONSUMER CREDIT, Wednesday (3.00 PM): Analysts expect consumer credit to fall 0.7 bln usd in September, after rising 2.3 bln in August, which was the first rise since May.
"Consumers probably resumed paying down installment debt during September, as the bulk of tax rebate checks were saved and personal spending plunged after the Sept 11 terror attacks," Goldman Sachs economists said.
US WEEKLY JOBLESS CLAIMS, Thursday (8.30 AM): The consensus forecast of Wall Street economists is for jobless claims to rise 4,000 to 503,000 in the week ended Nov 3 after falling 10,000 to 499,000 in the previous week.
US OCT IMPORT PRICES, Thursday (8.30 AM): Import prices are expected to drop 0.8 pct in October after rising 0.3 pct in September, which was the first increase in four months.
US OCT PPI, Friday (8.30 AM): Wall Street analysts expect the Oct PPI to drop 0.4 pct and the core rate to fall 0.1 pct. In September, the PPI rose 0.4 pct and the core rate rose 0.3 pct.
Sharply lower energy prices likely will lead the PPI down, Bear Stearns economists said.
US NOV U. OF MICH CONSUMER SENTIMENT, Friday (9.45 AM): The University of Michigan's consumer sentiment index is expected to weaken to 78.3 in November, after it dropped to 82.7 in the final October reading, from the 83.4 initial reading for the month.
A sharper than expected decline "could provide a boost to the Treasury market, as it would raise the specter of considerable erosion in consumer spending in the fourth quarter," Bank One economists said in a research note.