Vital Signs for the Week of Aug. 9

On tap: Federal Reserve monetary policy meeting, second-quarter productivity, July retail sales, producer price index for July, and more

There will certainly be a lot to talk about when the Federal Reserve convenes for its Aug. 10 Federal Open Market Committee (FOMC) meeting. Federal Reserve Chairman Alan Greenspan and the rest of the FOMC will have jobs, oil, inflation, and the uncertainty of terrorism to mull over.

Economists surveyed by Action Economics shows an overwhelming number believe the central bank will raise the fed funds rate to 1.5%, from 1.25%, on Aug. 10. But the outlook for a steady stream of quarter-point rate hikes for the rest of the year is now in question. That's because some of the turbulence that hit the economy in June is still buffeting it now.

The latest employment report could certainly draw a lot of discussion within the Fed. The July figures showed a tepid increase in payrolls of 32,000. That number comes from the Labor Dept.'s survey of 400,000 businesses. Yet the report wasn't clear cut. The average workweek lengthened and wage growth picked up, which are more in line with an improving labor market. What's more, the Labor Dept.'s survey of roughly 60,000 households showed a much brighter picture of a 629,000 increase in jobs and a drop in the unemployment rate to 5.5%, from 5.6% in June.

The jobs data did show that the June weakness in consumer spending may be lingering. Retailers cut 19,000 jobs in July, while the leisure and hospitality sector also trimmed their workforce. On top of that, July chain store sales were also soft. The final verdict on spending will be the July retail sales report.

Stubborn oil prices are partly to blame for the recent softness. Even though gasoline prices have eased, news of new highs for crude oil seems to come daily. If oil prices remain at current levels near $44 per barrel, prices at the gas pumps could soon head north again. That could restrain consumer spending as higher energy prices lead households to delay purchases of other goods and services in order to accommodate the bigger hit from energy and the uncertainty of possible future price increases.

Persistently high oil prices will also have some additional impact on inflation. Both producer prices and import prices are expected to have rebounded in July.

At the Fed's prior monetary policy meeting in June and during subsequent testimony before Congress by Greenspan, the Fed has stressed it will raise interest rates at a "measured" pace. The goal is to move rates back up to a more normal level without disrupting the economy.

However, there's a caveat attached by the Fed stating it would not be afraid to act more aggressively to keep a lid on inflation. If oil prices show no sign of weakening as the summer ends, the Fed may have a tough decision. Hold off on rate hikes and risk more inflation, or act more aggressively at the risk of putting the brakes on the economy.

Here's the weekly economic calendar.


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Monday, Aug. 9, 10 a.m. EDT

Wholesale sales most likely grew 0.3% in June. That's the median forecast of economists surveyed by Action Economics. In May, sales increased 0.5%, after a 0.9% gain in April. Based on the June forecast, sales likely came in at an annual pace of 14.4%, from 16.1% in May.

Wholesale inventories grew by 1.2% in May, following a 0.2% increase in April. The latest figures pushed the inventory-to-sales ratio up slightly, to 1.13, from 1.12 in April. Inventories continue to grow, but not at the pace some economists had expected. However, businesses may increasingly feel the need to ratchet up warehouse restocking if the economy reaccelerates after a sluggish second quarter.


Tuesday, Aug. 10

The Federal Reserve's Federal Open Market Committee meets to discuss monetary policy. An announcement by the Fed will come around 2:15 p.m.

Economists expect the FOMC to raise the federal funds rate once again. Those surveyed by Action Economics unanimously forecast a 25 basis point increase, to 1.50%. Since the previous two-day meeting in late June, Fed Chairman Alan Greenspan has continued to wax optimistic about the economy and inflation.

Beyond the anticipated increase in interest rates, Fed watchers will be interested in the post-meeting press release to get additional insight into whether the Fed's view of the economy and inflation is changing.


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Tuesday, Aug. 10, 7:45 a.m. EDT

This weekly tracking of retail sales, assembled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ending Aug. 7. In the week ended July 31, seasonally adjusted sales improved by 0.2% for a third consecutive week. Sales appear to have improved in July, following shaky figures in June.


Tuesday, Aug. 10, 8:30 a.m. EDT

Productivity growth in the second quarter, measured as output per hour worked, is expected to have increased by an annual rate of 2.0%, after a first quarter gain of 3.8%, and a fourth-quarter increase of 2.5%. That's based on the median forecast of economists surveyed by Action Economics. Productivity growth in 2003 was 4.4%, following a 5.0% increase in 2002, and a 2.1% improvement in 2001.

Second-quarter unit labor costs most likely grew by 2%, following a 0.8% gain in the first quarter, and a 1.7% increase in the final period of 2003. In both 2003 and 2004, unit labor costs fell.


Tuesday, Aug. 10, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the first fiscal week of August, ended Aug. 7. For the full month of July, sales were down 0.1% from June. Overall June sales were off 0.2% compared with May.


Tuesday, Aug. 10, 10 a.m. EDT

The Richmond Federal Reserve Bank will release its July survey of business conditions in the Richmond Fed district. The manufacturing activity index gave back its May gain, falling to 14 in June. In May, the index moved up to 22, from 13 in April. The new orders index continued to show a deceleration in order growth. The June reading slipped to 1, from 12 in May, and 17 in April. Unfilled orders fell deeper into negative territory, implying the region's manufacturers have seen their backlogs shrink. The index fell to -12, from -1 in May, and 9 in April.

The region's manufacturers also toned down their expectations for the second half of the year. The shipments reading declined to 10, from 16 in May. The unfilled orders expectations index turned negative, falling to -3, from 12 in May. Even so, respondents indicated that a pick up in hiring was likely.

Also of interest is the movement in inflation expectations. In May, respondents said they expected prices for inputs such as raw materials to increase by an annualized pace of 2.6% over the next six months. However, prices received for goods sold by the region's manufacturers are seen growing at a 2% clip.


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Wednesday, Aug. 11, 7 a.m. EDT

The Mortgage Bankers Association releases its tally of mortgage applications for both home buying and refinancing for the week ending Aug. 6. In the week ended July 30, the purchase index moved up to 452, from 444.8 in the prior week, and 440.3 in the week ended July 16. The latest reading of the four-week moving average, however, slipped to 451.5, from 463.7 in the period ended July 23.

The average rate on a conventional 30-year mortgage, according to HSH Associates, bounced back up to 6.2% for the week of July 30, from 6.13% in the week ended July 23.

The refi index posted a small decline in the week ended July 30, coming in at 1600.3, from 1648.8 in the prior week, and 1651.1 in the week ended July 16. The refi index four-week moving average, however, slowed to 1640.7, from 1683 in the period ended July 23.


Wednesday, Aug. 11, 2 p.m. EDT

The federal deficit probably kept growing in July. The Treasury Dept. releases the details on the government's budget for the tenth month of fiscal year 2004, and the consensus forecast among economists surveyed by Action Economics is for a deficit of $60 billion. In June, the Treasury reported a $19.1 billion surplus following a $62.5 billion deficit in May. In July of 2003, the government rang up a $54.2 billion deficit, and a $29.2 billion shortfall in July of 2002. So far, the fiscal 2004 budget deficit stands at $326.6 billion, compared to 269.7 billion through June of fiscal 2003.

Tax receipts this fiscal year are up compared with fiscal 2003. Through June, net receipts stood at $1.4 trillion, compared to just under $1.35 trillion through the same period in fiscal 2003. The economic upturn has led to a surge in corporate receipts, up 43% so far this fiscal year compared with the same period in the previous budget year.

However, spending has risen at a faster clip. Outlays through June of this year are at $1.73 trillion, compared with 1.62 trillion in the same period of the previous fiscal year. Increased military and defense spending account for about a third of the difference.


Thursday, Aug. 12, 1:15 p.m. EDT

Federal Reserve Board Governor Edward Gramlich speaks on rules for assessing Social Security reform to the Retirement Research Consortium Conference at the National Press Club in Washington, D.C.


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Thursday, Aug. 12, 8:30 a.m. EDT

First-time claims for jobless benefits for the week ended Aug. 7 are expected to tick up to 360,000, according to the median forecast of economists surveyed by Action Economics. Jobless claims posted a bigger than expected fall in the week ended July 31, down to 336,000. In the period ended July 24, claims were revised up to 347,000.

The four-week moving average moved up to 343,500, from 336,750 in the week ended July 24. In the week of July 24, continuing jobless eased to 2.91 million filings, after rising to 2.94 million in the prior period, from 2.89 million.


Thursday, Aug. 12, 8:30 a.m. EDT

Consumers hit the malls again in July. According to the median forecast of economists queried by Action Economics, retail sales probably improved by 1.1%. In June, sales fell 1.1%, driven lower by weak auto sales. Excluding autos, sales are expected to be up 0.4% in July. Sales minus vehicles were off by just 0.2% in June. Light vehicle sales slumped to an annual pace of 15.4 million in June, from 17.8 million in May. However, sweeter incentives by Detroit helped push sales back up to an annual pace of 17.3 million in July.

Another factor has been sales at gasoline stations. Since sales are measured in dollars and not in volume terms, gasoline prices have an impact. In June, gasoline sales dipped by 1.2%. In the prior twelve months through June, overall retail sales expanded by 6.3%. Excluding sales at gas stations, sales grew by a slower 5.1%.


Thursday, Aug. 12, 8:30 a.m. EDT

Higher energy prices probably helped push up import prices. Economists queried by Action Economics expect a 0.4% increase in import prices during July. In June, prices slipped by 0.2% largely due to a retreat in energy prices. Excluding petroleum, import prices were unchanged. May prices of foreign made goods shot up 1.4%. Excluding petroleum, however, May prices grew by a more subdued 0.3%.

Export prices are forecast to remain unchanged, after falling by 0.6% in June. For exports, a 4.6% drop in prices of agricultural commodities dragged the overall figure lower. Compared to a year ago, export prices were up 4%, vs. a gain of 4.4% in May. Export prices had been trending higher, aided by increasing agricultural prices. But the June figures showed prices of capital goods may have turned the corner. For the first time since 2001, the index tracking capital goods was up from its year ago period, rising 0.5% in June.


Thursday, Aug. 12, 8:30 a.m. EDT

Inventories held by manufacturers, wholesalers, and retailers probably grew by 0.5% in June, according to Action Economics. Inventories also increased by 0.4% in May, after gains of 0.7% in both April and March. The Commerce Dept. already released factory inventory numbers. Manufacturers' reported that their inventories increased by 0.7% in June.


Friday, Aug. 13, 8:30 a.m. EDT

Prices for goods and commodities sold by U.S. businesses are expected to have rebounded. The consensus among economists surveyed by Action Economics is for a 0.2% gain in the prices of finished goods in July. June producer prices slipped by 0.3%, dragged down by a 1.6% monthly decline in prices of energy products. In May, the index rose 0.8%, and expanded by 0.7% in April. Using the July consensus figure, producer prices would be up 4.1% from a year ago, after slowing to a yearly gain of 4% in June.

Excluding food and energy costs, core prices probably rose by 0.1%. For June, core producer prices moved up 0.2%, after a 0.3% increase in May. Based on the June forecast, core producer prices would be up 1.8% from the same period a year ago for the second straight month.

It appears that producers are passing along some of the higher costs that they continue to face. During the second quarter, prices of finished goods grew at an annual rate of 6.3%, after a 3.8% increase in the first quarter. The core index posted an annualized gain of 2.6% in the second period, following a 1.2% gain in the prior quarter. Even so, businesses appear to be a big piece of higher commodity and materials costs. Prices for raw goods, such as timber and metals, grew by an annualized pace of 24.6% in the second quarter.


Friday, Aug. 13, 8:30 a.m. EDT

The trade gap probably got fatter in July. The U.S. trade deficit for goods and services most likely reached $47 billion. That's the median estimate of economists surveyed by Action Economics. The deficit in May narrowed to $46 billion, following a record difference of $48.1 billion during April, and a gap of $46.6 billion in March.

In June, exports hit a record level of $97.1 billion. The decline in the dollar over the past couple of years could be providing a tailwind for exports. In addition, our biggest export markets, such as Canada, Mexico, and the euro zone, are experiencing stronger economic growth. Those positive factors should stay in place for a while.

Nonetheless, U.S. demand is still being met by higher levels of imports. In June, imports also touched a new high, hitting $143.1 billion. Given that the monthly flow of imports is almost 50% greater than exports, foreign demand will have to consistently grow at a faster clip in order to whittle away the gap. As it stands now, economists surveyed by Blue Chip Economic Indicators do expect some improvement, with a forecast deficit of $538.4 billion for all of 2004, but a slightly smaller $524.4 billion gap for 2005.


Friday, Aug. 13, 10 a.m. EDT

The University of Michigan's Survey Research Center will report its initial index reading of consumer sentiment for August. According to economists surveyed by Action Economics, the preliminary August reading probably improved to 98. In July, the final report showed a rise to 96.7, from 95.6 in June, and 90.2 in May. The index now sits at its ten-year average of 96.8.

With the stock market treading water, and crude-oil prices still at historically high prices, there would appear to be a limited chance for an upside surprise.

By James Mehring

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