Vital Signs: Exports, Productivity Should Boost Growth

On tap: September foreign trade, October service-sector activity, third-quarter labor productivity, November consumer sentiment

Foreign trade was a key player in the strong 3.9% third-quarter economic growth rate, and it will take on added importance in the fourth quarter. That's because the U.S. economy is losing momentum as consumers and businesses dial back spending in response to higher energy prices, a worsening housing market, and ongoing uncertainty in the financial markets.

Economists expect the September trade report, which will be folded into the revised third-quarter GDP figures released at the end of November, to show a slight enlargement in the monthly deficit. However, higher oil prices will fuel a large part of the expected September widening.

The more important number to watch is exports. Many businesses are counting on strong global growth to help offset the anticipated weakness at home. So far this year, exports of consumer goods are up 12.8% vs. the same period last year, while capital equipment purchases abroad are up 7.7%.

So far, the indicators for foreign demand remain positive. The October factory activity report showed a slowdown in overall growth in new orders, but an acceleration in demand from abroad. The October non-manufacturing report on Nov. 5 will show if service-sector businesses are also getting more orders from foreigners.

Before the Nov. 9 trade report, Wall Street will get another important piece of economic information in the third-quarter report on labor productivity. The latest numbers should be good news after a series of disappointing results of late. Productivity growth is expected to exceed an annualized pace of 2% for a second straight quarter. Since the start of 2006, average quarterly productivity growth has been a meager 1.1% at an annualized rate, compared to a 2.8% gain per quarter in the prior five years. Bigger productivity gains should also cause a slowdown in unit labor costs, which would be good news for corporate profits and easing inflation pressures.

Here is the weekly economic calendar, from Action Economics.

Economic Reports
Report Date Time For Median Estimate Last Period
ISM (non-manufacturing) Monday, Nov. 5 10:00 a.m. October 54.6 54.8
Nonfarm Productivity (preliminary) Wednesday, Nov. 7 8:30 a.m. Q3 2.4% 2.6%
Unit Labor Costs (preliminary) Wednesday, Nov. 7 8:30 a.m. Q3 1.7% 1.4%
Wholesale Trade Sales Wednesday, Nov. 7 10:00 a.m. September 0.4% 0.4%
Consumer Credit (billion) Wednesday, Nov. 7 3:00 p.m. September $7.8 $12.2
Trade Balance (billion) Friday, Nov. 9 8:30 a.m. September -$58.3 -$57.6
Export Price Index Friday, Nov. 9 8:30 a.m. October 0.3% 0.3%
Import Price Index Friday, Nov. 9 8:30 a.m. October 0.9% 1.0%
University of Michigan Consumer Sentiment Index (preliminary) Friday, Nov. 9 10:00 a.m. November 81.0 80.9


Monday, Nov. 5, 9 a.m. EST - Federal Reserve Board Governor Frederic Mishkin speaks at Risk Magazine's Risk USA conference on derivatives and risk management in New York.

12 p.m. EST - Federal Reserve Board Governor Randall Kroszner gives a luncheon speech on subprime mortgages at the Consumer Bankers Association's Fair Lending Conference in Arlington, Va.


Monday, Nov. 5, 10 a.m. EST - The Institute for Supply Management's October report on non-manufacturing business activity is expected to ease a little further. The service-sector oriented survey fell to 54.8% in September from 55.8% in both of the prior two months and the recent peak of 60.7% in June. The latest readings are pointing to a deceleration in economic growth similar to the ISM's manufacturing report. The October factory activity report already slipped to 50.9%, from 52% in September.

The non-manufacturing new orders index fell to 53.4%, after a bounce to 57% in August, from 52.8% in July. What's more, orders from abroad did not appear to grow. The inventory index came in at 50%, indicating no change in stockpiles, while the backlog of unfilled orders appeared to shrink, with a September level of 47%. A reading below 50% means more respondents reported a decline vs. a rise in their backlog of orders.


Tuesday, Nov. 6, 12:30 p.m. EST - Federal Reserve Board Chairman Ben Bernanke gives the keynote speech at the Summit on Microfinance in the U.S. in San Antonio, Texas.

ICSC-UBS STORE SALES - Tuesday, Nov. 6, 7:45 a.m. EST

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ended Nov. 3. Sales eked out a 0.1% gain in the week ended Oct. 27, after tumbling 1.5% in the week ended Oct. 20. The yearly pace bounced back up to 2.5%, after cooling off to a growth rate of 2.2% in the prior period.

JOHNSON REDBOOK INDEX - Tuesday, Nov. 6, 8:55 a.m. EST

This weekly measure of retail activity will report on sales for the fourth and final fiscal week of October, ending Nov. 3. During the first three weeks of October, sales were off 0.3% vs. the same period in September. Sales for the entire month of September were up 0.3%.


Wednesday, Nov. 7, 8:45 a.m. EST - Federal Reserve Bank of Richmond President Jeffrey Lacker speaks at the International Association of Credit Portfolio Managers' General Meeting on the role of central banks in credit markets in New York City.

12 p.m. EST - Federal Reserve Board Governor Kevin Warsh speaks at a New York Associtaion for Business Economics luncheon in New York City.

1:10 p.m. EST - Federal Reserve Bank of Atlanta President Dennis Lockhart discusses the U.S. economy before the Huntsville and Greater Huntsville Rotary Clubs in Huntsville, Ala.

MORTGAGE APPLICATIONS - Wednesday, Nov. 7, 7 a.m. EST

The Mortgage Bankers Association releases its mortgage Weekly Mortgage Applications Survey of home buying and refinancing application activity for the week ending Nov. 2. The purchase index inched down to 412.9, from 415.9 in the prior week. Meanwhile, lower interest rates helped stoke a big jump of 9.2% in the refi reading. For the week ended Oct. 26, the level was 2249, after rising to 2059.3 in the previous week.

The four-week moving average for the purchase index edged up to 419.5, from 419.2. The four-week moving average for the refi index was pushed up by the latest weekly result, to 2073.1 from 1998.4 in the week ended Oct. 19.

The average interest rate for a 30-year fixed-rate mortgage kept retreating, to 6.15% from 6.21%.

PRODUCTIVITY AND COSTS - Wednesday, Nov. 7, 8:30 a.m. EDT

Nonfarm productivity probably grew more than 2% on an annualized basis for a second straight quarter. In the second quarter, it improved by 2.6%, after four straight quarters of sub-2% growth, including a 1.6% drop in the third quarter of 2006.

Another solid gain for last quarter could help calm some concerns that the paltry labor productivity growth of late is merely cyclical and not indicative of a medium- to long-term downward trend. When the economy cools off, gains in labor productivity also tend to deteriorate as employers are slow to lay off workers. When the economy is picking up, especially coming out of recessions, productivity growth usually improves because businesses hold off on hiring.

Another key number for the markets is unit labor costs. The annualized rise in the third quarter was likely 1.7%. That would be a little larger than the 1.4% rise in the second quarter, but smaller than the gains in the prior three periods. On a yearly basis, unit labor costs have been on an upswing, with a 4.9% increase in the second quarter, the biggest rise since the third quarter of 2000.


Wholesale sales in September probably duplicated the August gain of 0.4%, following a 0.2% July increase. There was some weakness in the housing related areas of furniture and lumber, while lower oil prices led to a 6.1% drop in August petroleum sales. Since wholesale sales are measured in total value and not volume, shifts in prices can have an impact on monthly sales figures. Petroleum sales should rise in September and October given the surge in oil to more than $90 per barrel.

On a yearly basis, sales growth is still decelerating, with a 6.8% increase in August, from 7.4% in July, and 7.9% in June.

Inventories were well aligned with demand in August but bear watching the rest of the year with signs that the economy is slowing. The August inventory-to-sales ratio was 1.11. That means that stockpiles would cover just over one month of sales, a very lean level.


Consumers probably piled up less debt in September. Installment credit rose by $12.2 billion in August, after increasing $9.6 billion the month before. On a yearly basis, consumers racked up 4.8% more in debt, with credit card and other revolving debt growing by 6.7%.

Meanwhile, the amount of non-revolving debt, which includes auto and student loans, grew 3.7%. Installment credit growth could slow in coming months if the turmoil in financial markets and rising default rates among subprime mortgage borrowers leads banks to tighten lending standards on a broader array of consumer credit products.


Thursday, Nov. 8, 8:30 a.m. EST - Federal Reserve Chairman Ben Bernanke is scheduled to appear before the Joint Economic Committee of the House and Senate in Washington D.C. on Nov. 8 to testify about economic conditions, including housing and the dollar.

JOBLESS CLAIMS - Thursday, Nov. 8, 8:30 a.m. EST

Jobless claims remained above 330,000 for a second straight week. In the week ended Oct. 26, initial claims stood at 327,000, after a reading of 333,000 the week before and 339,000 in the period ended Oct. 13. The four-week moving average climbed to 327,000, from 325,250 for the week ended Oct. 20. Continuing jobless claims, which run a week behind the initial claims figures, jumped to 2.59 million, from 2.52 million the week before.

INTERNATIONAL TRADE - Friday, Nov. 9, 8:30 a.m. EST

The September U.S. trade deficit of goods and services probably widened slightly due in part to higher oil prices. In August, the trade gap narrowed to $57.6 billion, after a $59 billion deficit in July.

The Oct. 31 third-quarter gross domestic product report included a government assumption that the September trade deficit in goods would be $68.6 billion, after a $66.6 billion gap in August. Higher oil prices for petroleum and petroleum products are likely to push up the September deficit.

The nominal measure of trade is the value of exports and imports. If the September gap is smaller than expected, it could led to an upward adjustment in the November update on third-quarter real GDP.

The August trade data showed a small decline in exports of capital goods, but that was caused by a big fall in civilian aircraft shipments, which is a volatile category. Foreign purchases of consumer goods, food, and industrial supplies all rose. The ongoing strength of the global economy and decline in the U.S. dollar should mean healthy foreign demand for U.S. products.

At the same time, U.S. demand for imports looks set to slow further. On a yearly basis, imports of goods and services were up just 3% in August, from 5% in July and 14.3% in August of 2006. There may be a bump up in imports from petroleum in the next couple reports. However, a weaker greenback, which makes imports more expensive, and a wobblier domestic economy this quarter should translate into fewer purchases of other foreign goods and services.

IMPORT AND EXPORT PRICES - Friday, Nov. 9, 8:30 a.m. EST

A further rise in oil prices helped push up the October import price index. During the month, crude oil topped $90 per barrel. In September, a 5.4% surge in the price of petroleum and petroleum products pushed the overall measure up 1%. On a yearly basis, overall import prices soared 5.2%, after cooling down to a pace of 1.9% in August, from 2.8% in July. The September annual increase was the largest in over a year.

Outside of energy, prices of imports edged down 0.2%. The annual pace of non-petroleum imports cooled off a little more in September with a gain of 2%. The yearly rise was 2.3% in August and 2.9% in July. The easing in import prices outside of petroleum, however, is not across the board. Auto prices are gaining steam -- up 0.4% from August and 1.3% from a year ago. Consumer goods prices gains accelerated to 1.5%, from 1.4% in August and 1.3% in July.

Export prices probably rose 0.3% for a second straight month in October, after a 0.2% gain in August, and a 0.1% increase in July. Prices for agricultural goods rose 4.1%, after a 1.1% jump in August. On a yearly basis, prices for agricultural exports are up 23.3%, the biggest yearly gain since April of 2004. In other areas, price increases appear to be ebbing. The yearly increases for industrial supplies, vehicles, and consumer goods have all slipped in recent months.

CONSUMER SENTIMENT - Friday, Nov. 9, 10 a.m. EST

The initial Reuters/University of Michigan consumer sentiment index for November probably held pretty steady after a larger-than-expected slide at the end of October. The final index level for October was 80.9, after easing to 82 in the initial monthly survey, and final September and August readings of 83.4.

Consumers were more downbeat about prospects in the coming months, with a consumer expectations index level of 70.1, from 74.1 in September. Indeed, the index following consumers' economic outlook for the next year fell to 78 in October, from 82 the month before, and 113 a year ago.

One positive number within the report was the index tracking respondents' attitudes on home buying conditions. The final October level of 131 jumped from the September reading of 123, and 118 in August.

Earnings Calendar
Day Companies
Monday Anadarko Petroleum, Entergy
Tuesday Allergan, Archer Daniels Midland, BMC Software, Chesapeake Energy, Citizens Communications, Cognizant Technology Solutions, El Paso, Emerson Electric, Expeditors International WA, Jacobs Engineering, Molson Coors Brewing, Peabody Energy, Spectra Energy, Tenet Healthcare, Valero Energy, Watson Pharmaceuticals
Wednesday AIG, Cisco Systems, Devon Energy, DIRECTV, Expedia, Fluor, Harrah's Entertainment, Integrys Energy Group, News Corp., Polo Ralph Lauren, Sara Lee, Time Warner
Thursday Barr Pharmaceuticals, Clear Channel Communications, Dean Foods, DTE Energy, Dynegy, Hospira, King Pharmaceuticals, Marsh & McLennan, NVIDIA, QUALCOMM, Rockwell Automation, Walt Disney, Windstream Communications
Friday Ameren
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