---- by Christopher Anstey ---- WASHINGTON (AFX) - Analysts maintained their forecasts for a US economic rebound in the second half, after somewhat unexpected declines in the July Chicago purchasing managers' index and Consumer Confidence survey. However, the declines show the US economy is still in a period of pronounced weakness, economists cautioned. "We're at rock bottom. But the good news is that we are at the bottom, and do see some tail winds," said Sung Won Sohn, chief economist at Wells Fargo.
Substantial Federal Reserve monetary easing, 40 bln usd in tax rebates in coming months, and a sustained drop in oil prices all should push the economy to faster GDP growth in the second half, economists said. The Chicago PMI showed an unexpectedly deep decline to 38.0 in July from 44.4 in June.
This was counter to upticks in recent monthly National Association of Purchasing Management (NAPM) surveys, and shows the industrial sector has yet to truly bottom out, analysts concluded. "It reinforces the (picture) we have seen from industrial production declines -- the numbers still have not hit bottom," said Carl Tannenbaum, chief economist at ABN AMRO.
However, economists cautioned not to read too much into the drop, as the June reading on the index was unrealistically high. "You have to take it with a grain of salt," Sohn added, particularly as the index is not weighted to give more stress to larger manufacturers.
Ian Shepherdson, economist at High Frequency Economics, said "we remain convinced the industry sector is headed for a significant turnaround in Q3/Q4," although it may still deteriorate in the near term.
"The good news is that the inventory index hit its lowest level since Dec 1982, strongly suggesting that the inventory correction is continuing at a very rapid pace," he added, in a research note to clients.
Wall Street economists polled by AFX News expect tomorrow's July NAPM to post a slight decline to 44.5 from 44.7 in June. The unexpected drop in the Conference Board's consumer confidence index to 116.5 in July from 118.9 last month shows that consumers need to see more signs of an actual turnaround before getting more enthusiastic about a rebound, analysts concluded. The decline came after a series of increases in confidence surveys in recent weeks, and reflected last Friday's slight drop in the University of Michigan consumer sentiment survey. ABN Amro's Tannenbaum said that while the drop "was a little bit of a retreat, both businesses and consumers are (still) guardedly optimistic ... about the second half."
The confluence of tax cuts, monetary easing, and lower energy prices should still support confidence about a rebound, he said. The drop in the survey shows, however, that consumers and businesses "want something tangible" before they generate any further increases in confidence levels, Tannenbaum said. A turnaround in the job market, fuller purchasing order books, or slightly improved corporate margins, for example, could provide some tangible evidence that a rebound is truly on the way, he explained. In the meantime, "the pause should also be a signal to policymakers that the battle for a soft landing is not yet won," Tannenbaum concluded.
Analysts repeated their forecasts for the Fed to cut its key federal funds rate target by another 25 basis points on Aug 21, to 3.5 pct, on these continued signs of economic weakness.