August 2011 DuPont Economists Report

A lack of confidence in government, fed by a widening European debt crisis and the performance of the U.S. President and Congress during the debate over extending the debt ceiling, has triggered a global decline in stock prices and raised concerns about a new recession. A better-than-expected U.S. employment report for July halted the decline, at least temporarily, but couldn't reverse it. US payroll employment (based on a survey of employers) rose by 117,000 in July and gains in the two prior months were revised up by a total of 56,000. The better-thanexpected jobs gain came despite a loss of 37,000 government jobs, more than half of which were due to a temporary shutdown in Minnesota that has since ended; private payrolls were up 154,000. The civilian unemployment rate, based on a survey of households, fell from 9.2% in June to 9.1% in July. The Institute for Supply Management's Manufacturing Index (the PMI) fell from 55.3 in June to 50.9 in July, barely above the 50-level that separates growth from contraction. The production index slipped from 54.5 to 52.3. This reading suggests a very small increase in industrial production in US manufacturing in July, but a 0.3% increase in aggregate hours worked in manufacturing (from the payroll employment survey) suggests a somewhat better result. The ISM new orders index, which tends to lead industrial production in manufacturing, fell from 51.6 in June to 49.2 in July, the first reading below 50 since June 2009. The index suggests that growth in manufacturing could grind to a halt in coming months, but probably not until after a scheduled rebound in motor vehicle production in August. The ISM's non-manufacturing business activity index, which is more closely correlated with GDP than either the manufacturing index or the total non-manufacturing index, rose from 53.4 in June to 56.1 in July, the highest reading since March.. This is consistent with GDP growth of 2.2%. However, traders chose to focus on the total non-manufacturing index, which fell to 52.7, the lowest reading since January 2010. U.S. motor vehicle sales rose to a 12.6 million seasonally adjusted annual rate in July, up from an 11.8 million rate in June. Sales, especially sales of Hondas and Toyotas, are still being held down by vehicle shortages that resulted from parts shortages caused by the March 11 earthquake and tsunami in Japan. U.S. motor vehicle production for the second quarter was reduced significantly by the shortage of parts. Production is scheduled to rebound strongly in the third quarter and did jump in the second half of July after a disappointing start to the month. Housing starts rose in June to their second-highest seasonally adjusted annual rate in more than a year. Housing permits rose to their highest level of the year in June, and the National Association of Home Builders' Housing Market Index rose in July. There is still no evidence of a significant near-term rebound in starts, but numbers are starting to move in the right direction. New and existing home sales were both close to flat in June and have moved little in recent months. Growth in industrial production has slowed in much of Asia in recent months, following a burst of accelerating growth in late 2010 and early 2011. This probably represents the normal downshift in growth that occurs when production gets back to its long-term trend. However, a strong June in China is a positive sign.

August 2011 DuPont Economists Report Page 2 Industrial production in China was up 15.1% year-over-year in June, its best performance in over a year. Data seasonally adjusted by this office show production rose strongly in June after declining in April and rising slightly in May. Industrial production in Korean manufacturing rose in to a new record high in June but was barely above January's previous record high. Production was up just 6.2% yearover-year, the lowest year-over-year growth rate since October 2009. Seasonally adjusted data show industrial production declining in Taiwan for a fourth straight month in June and up just 3.5% year-over-year. Data seasonally adjusted by this office show industrial production in Indian manufacturing down sharply for a second straight month in May. Production was up 5.6% year-over-year, the slowest year-over-year growth rate since last August. Industrial production in Japanese manufacturing rose for a third straight month in June following the collapse by the March 11 earthquake and tsunami. Production in June was still down 5.3% from February's post-recession high and down 1.7% year-over-year, but these readings are much better than what was expected in the weeks immediately following the earthquake. Industrial production in European Union manufacturing rose to a new post-recession high in May, but remained below its pre-recession peak. The EUs production expectations survey, which tracks industrial production but is reported in a timelier manner, fell for a fifth consecutive month in July after hitting a 16-year high in February. It suggests that year-over-year growth in industrial production remains positive but is slowing significantly. Industrial production in German manufacturing, which had continued to grow strongly despite problems in much of the rest of Europe, fell sharply in June. Industrial production in Brazilian manufacturing fell sharply in June and its year-overyear growth rate was just 0.5%. Industrial production in overheated Argentina was up 5% year-over-year in May, but has not risen on a seasonally adjusted basis since the beginning of the year. Industrial production in Mexican manufacturing rebounded in May from April's sharp decline and was up 6.8% year-over-year.

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