Corporate America is regaining its stride just in time for a strong run in the second half of the year. Capital spending is looking better, inventories are back down to more suitable levels, and even job growth looks set to improve.
In the first half of 2005, companies appeared to lose some confidence, as surging energy prices left executives nervous about the economy's health. The renewed corporate caution and a slowdown in equipment demand after the demise of the accelerated depreciation tax break dampened business spending and made inventories swell to uncomfortable levels. The ultimate effect was a 4.9% drop in overall private investment during the second quarter as companies pared down inventories and took a wait-and-see attitude.
It now looks like businesses are done waiting. Economists expect more good news from manufacturers this week, especially given the Chicago area purchasing managers' index. The Institute for Supply Management's July survey of factory activity will provide the first national snapshot of third-quarter conditions. Economists expect some further improvement in the headline reading. The new orders and unfilled orders indexes will also be important.
The June factory orders report is expected to reinforce the positive news from the Commerce Dept.'s durable goods report. June durable goods orders grew 1.4% and unfilled orders rose 2.6%. The latest factory order data also showed a broad improvement in demand, a good sign for capital spending.
The July labor report will also be important in gauging business sentiment. Economists are forecasting payroll gains of 180,000, after a June increase of 146,000. If businesses really do feel more comfortable about the second half of the year, payrolls could surprise to the upside.
Jobless claims have been quite low in July even with the annual auto changeover. What's more, the second-quarter employment cost data showed companies are doing a good job on restraining benefits costs. During the period, benefits costs were up 5.1% from a year ago, the slowest pace in three years.
Of course, the benefit of stronger job growth is better consumer spending. And with households showing few signs of letting high energy prices get them down, the economy looks well placed for a solid second half.
Here's the weekly economic calendar.
Monday, Aug. 1
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Monday, Aug. 1July sales of domestic and imported cars and light trucks probably surged to an annual pace of around 19 million vehicles, according to WardsAuto.com.
In June, sales improved to a pace of 17.5 million, from 16.5 million in May. The General Motors (GM ) employee pricing incentive helped fuel the monthly gain.
Ford (F ) and Chrysler (C ) now have similar programs expected to drive the July sales totals higher.
The risk to such a response is that these incentives are primarily bringing forward buying decisions. The repercussion is likely to be weaker sales figures in the latter part of the year, once the deep discounting is discontinued.
Monday, Aug. 1, 10 a.m. EDTThe Institute for Supply Management's July index of industrial activity probably showed some improvement. The consensus estimate from Action Economics is for a May reading of 54.9%. The June ISM index rose to 53.8%, from 51.4% in May. The June gain snapped a six-month string of declines in the ISM index.
The new orders index bounced back to 57.2%, from to 51.7% in May and 53.7% in the prior month. The number of respondents reporting that order levels worsened in June retreated back to 18%, from 24% in May. However, the index tracking new orders from abroad did weaken to 50.4%, from 54.9% in May. Slower economic growth abroad, particularly in Europe, is likely having an effect on foreign order levels.
Monday, Aug. 1, 10 a.m. EDTConstruction outlays rebounded in June, according to Action Economics. The consensus forecast is for a 0.7% gain, after a 0.9% tumble in May. Construction spending fell 1.1% in April, after a 0.2% slip in March, and a 7.5% jump in February. Compared to the same period a year ago, construction outlays were up 7%, the smallest yearly gain since a 6.3% rise in January.
Private construction spending fell for a third straight month in May. The 1.6% drop followed a 1.5% fall in April, and a 0.5% decline in March. Residential construction has dragged down overall private construction outlays. However, the downward trend in residential construction outlays looks unlikely to persist. New home sales and housing starts figures remain quite robust.
Tuesday, Aug. 2
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ICSC-UBS STORE SALES
Tuesday, Aug. 2, 7:45 a.m. EDT
This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the period ending July 30. During the holiday week ended July 23, sales grew 0.4%. In the prior week, sales rose 0.3%, after a 0.1% increase in the period ended July 9.
PERSONAL INCOME AND CONSUMER SPENDING
Tuesday, Aug. 2, 8:30 a.m. EDT
June personal income kept growing at a healthy pace. Economists polled by Action Economics expect a 0.4% increase for the month.
In May, income rose 0.2%, after gains of 0.6% in April and 0.5% in both March and February. Compared to a year ago, income was up 6.7% in May. Income is outpacing inflation, allowing consumers to endure higher energy prices with only a little effect on spending patterns elsewhere.
Outlays on goods and services most likely jumped 0.8% in June. A rebound in vehicle sales should account for a good chunk of the improved June performance. Consumer spending in May was unchanged, following a 0.6% increase in April, and a 0.8% leap during March. The yearly growth rate of consumer spending did ease to 5.8%, from 6.8% in May, and 6.2% in April.
Also keep an eye on the price index for personal consumption expenditures (PCE). The May PCE index stood 2.2% above the year ago level, after pushing up to a pace of 2.6% in April. The Federal Reserve's preferred inflation gauge, the PCE price index excluding food and energy, remains range bound.
In May, the change from a year ago was 1.6%, after coming in at 1.5% in April and 1.6% in March. Since February, 2004, the year-ago percentage change for the core PCE index has resided between 1.4% and 1.7%. These inflation measures show why the Fed believes inflation remains contained.
INSTINET REDBOOK RESEARCH STORE SALES
Tuesday, Aug. 2, 8:55 a.m. EDT
This weekly measure of retail activity will report on sales for the fourth fiscal week of July, ended July 30. During the first three weeks of the month, sales were up 0.3%. For the entire month of June sales grew 0.5% compared to May.
MANUFACTURERS' SHIPMENTS, INVENTORIES, AND ORDERS
Tuesday, Aug. 2, 10 a.m. EDT
Factory orders probably expanded 1.1% in June, say economists polled by Action Economics. New orders are yet another sign that U.S. manufacturers are looking at a brighter second half of the year. In May, factory orders jumped 2.9% on a 167% surge in civilian aircraft orders. Orders in both April and March rose 0.7%. The recently published data on durable goods orders showed a surprising 1.4% gain for June, in spite of some payback in nondefense aircraft orders, which fell 24.2%. The best news in the durable goods report were the broad based gains. Computers and machinery posted solid rebounds in June, after falling in May.
Wednesday, Aug. 3
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Wednesday, Aug. 3, 7 a.m. EDT
The Mortgage Bankers Association releases its numbers on mortgage applications for both home buying and refinancing for the week ending July 29. The purchase index stood at 485.1 over the week ended July 22, down from 488.7 in the previous week, and 489 in the week ended July 8. The four-week moving average, inched up to 495.9, from 494 for the week ended July 15. The average rate on a conventional 30-year fixed mortgage, according to HSH Associates, moved up to 5.9% during the week ended July 22. For the week ended July 15, the mortgage rate stood at 5.84%.
The MBA's refi index rose as well. In the period of July 22, the index fell to 2320.3, from 2618.2 in the week ended July 15 and 2554.3 in the week ended July 8. The four-week moving average also reversed direction. In the week ended July 22, the average stood at 2570.3, down a bit from 2622.5 for the period ended July 15.
ISM NON-MANUFACTURING SURVEY
Wednesday, Aug. 3, 10 a.m. EDT
The Institute for Supply Management releases its latest index of business activity in the mostly services, non-manufacturing sector. The consensus among economists surveyed by Action Economics is that the July reading will slip to 61.3%. In June, the index rebounded to 62.2%, after easing to 58.5% in May, from an April level of 61.7%, and 63.1% in March.
Most of the June survey showed signs of brisker activity. A greater share of respondents reported slower delivery times from suppliers, a sign of stronger demand and possible bottlenecks. More businesses also added workers. The new orders index remained strong, coming in at 59.5%, from 59.7%. However, new orders from abroad did retreat sharply in June, falling back to 50%. The May foreign orders index jumped to 62% in May, from 52.5% in April.
Thursday, Aug. 4
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CHAIN STORE SALES
Thursday, Aug. 4
The International Council of Shopping Centers will release its July same-store sales figures for major U.S. chain retailers. According to the ICSC, July sales most likely grew 4% from the same period a year ago. And the outlook for the remainder of the summer look positive as well.
In an ICSC survey conducted with Citigroup Smith Barney, back-to-school sales this August and September are likely to outpace last year's sales by 5% to 6%.
In June, same-store sales were improved by 5.3% from a year ago. The stellar June results were due in part to more summer like weather during the month and a soft June in 2004.
Thursday, Aug. 4, 8:30 a.m. EDT
First-time claims for jobless benefits for the week ended July 30 most likely rose to 315,000. Jobless claims came in at 310,000 for the week ended July 23, from 305,000 in the week ended July 16, and 337,000 in the prior week.
The four-week moving average held at 318,300, from 318,500 for the week ended July 16. Continuing jobless claims for the week ended July 16 moved up to 2.6 million, from 2.57 million in the previous week.
Friday, Aug. 5
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Friday, Aug. 5, 8:30 a.m. EDT
Economists are once again feeling more optimistic about the job market. According to the consensus estimate from Action Economics, payrolls expanded by 180,000 workers in July.
In June, 146,000 new jobs were created, after payrolls increased by 104,000 in May and 292,000 in April. The jobless rate is expected to have held at 5.0% for a second straight month, after slipping to 5.1% in May, from 5.2% in April. Average hourly pay is forecast to have increased 0.2% in July for a third straight month.
The improving labor market is skipping the factory sector. Manufacturers are expected top have trimmed their payrolls by another 5,000, after cutting 24,000 jobs in June, and 6,000 in May. This year, the only monthly gain in manufacturing jobs came in February when 14,000 workers were hired.
CONSUMER INSTALLMENT CREDIT
Friday, Aug. 5, 3 p.m. EDT
Consumers paid off $3 billion of debt in May, after an April gain of $1.2 billion, and an increase of $6.7 billion during March. The May reversal was due to a $3.7 billion decline in non-revolving credit.
Auto loans make up a big chunk of this category. Vehicle sales slowed a bit in May, and the average interest rate charged on a new car loan rose to 5.25%, from 4.75% in April. During April and March, consumers paid down their credit card bills. The level of revolving credit fell $0.6 billion each month. In May, revolving credit grew $0.7 billion.