RBC Economic Research

RBC ECONOMICS RESEARCH - DAILY ECONOMIC UPDATE – January 6, 2010

ISM Non-Manufacturing Rises in December

The ISM non-Manufacturing Index rose to 50.1 in December 2009 from 48.7 in November 2009. Expectations within financial markets were for a somewhat stronger increase to 50.5. Business activity increased to 53.7 from 49.6 in November. With respect to inflation, the prices index edged up to 58.7 in December from 57.8 recorded in the prior month.

Sentiment in the non-manufacturing sectors of the U.S. economy improved in December 2009. The ISM non-manufacturing index rose back into expansionary territory with a 50.1 reading in December following the prior month’s 48.7 (a reading above the ’50-mark’ indicates expansion). Although new orders declined to 52.1 in December from the prior month’s 55.1 reading, business activity rose to 53.7 from November’s 49.6. Employment remains weak at 44.0 in December, although this represents a nice improvement over November’s 41.6 reading and a considerable improvement over the recent low of 31.1 recorded in November 2008.

The improvement in December’s ISM’s non-manufacturing report follows on the heels of the strong ISM manufacturing report for the same month. The strength in both reports is consistent with our forecast that the U.S. GDP growth accelerated in the final quarter of 2009. We project that the economy grew at a 3.4% annualized pace in the fourth quarter after rising 2.2% in the prior quarter. In terms of the payroll report, due to be released Friday, January 8, 2010, RBC expects an above-consensus 20,000 gain in non-farm payrolls for December; however, we anticipate that the unemployment rate will remain in double digits rising to 10.1%. We project that the Fed Funds rate will remain in its current 0.00%-0.25% range until the fourth quarter of 2010 because the Fed aims to support the recovery and bring down the ranks of the unemployed.

Josh Heller, Economist, RBC Economics

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Thanks
Paul Ng