Thursday, Sept. 6th

There were several economic releases this morning, offering a few more glimpses into the state of the economy in August. A few of the highlights:

• The non-manufacturing ISM index was unchanged in August, again suggesting no dramatic economic impact yet from turmoil in the credit markets. There was a sharp drop in the employment index, however, to 47.9, which is the lowest since late 2001, suggesting a downside risk in tomorrow’s employment report. (See attached chart.)
• Unemployment claims fell to 318k from 337k last week, suggesting that earlier increases in August could have been related to the Midwest floods. Continuing claims rose again, but they are lagged a week.
• Productivity growth was revised up from 1.8% to 2.6% in the final second quarter report. Unit labor costs were revised as well, from 2.1% to 1.4%.

Looking back at previous periods of market turmoil, we found that it takes a month or two for the economy to reflect a los of credit. Still, the Fed’s rate decision in September depends on the August data. For that reason, we are sticking with our prediction that he FOMC will opt to cut 25bp, not 50bp, on the 18^th.