Vital Signs: Will Economic Growth Hold Up?

On deck: April ISM nonmanufacturing index, first-quarter productivity, and March reports on pending home sales and international trade

With only a couple of key reports to go, the books on the economy's first-quarter performance are almost closed. The surprise from last quarter was that, on balance, overall economic growth held up a little better than expected, and most reports still do not suggest a severe recession. The question now: How much buoyancy can we expect from the economy in the current quarter?

The only second-quarter report due this week is the Institute for Supply Management's index of nonmanufacturing activity. The index has held close to 50, the dividing line between expansion and contraction, in both February and March. The update on productivity will be interesting for what it says about business efforts to control costs, especially labor costs, and the March data on pending home sales will foreshadow the report on sales of existing homes, due in two weeks.

Finally, the markets will be looking at Friday's update on foreign trade for what it might imply for a possible revision to the government's initial estimate of first-quarter GDP, which was put together before those March data were in hand.

Clearly, last quarter's 0.6% growth rate for real GDP was weaker than it looked. Overall demand actually slipped 0.2%, something that rarely happens outside of a recession, and a swing in the growth of inventories accounted for the positive top-line reading. It's tempting to read that pattern as an involuntary accumulation of stockpiles due to weak demand that might require sharp cutbacks in output in the second quarter.

However, that inventory swing occurred because businesses had cut their stockpiles by a sharp $18.3 billion in the fourth quarter, the largest liquidation in six years. In the first quarter, the level of inventories rose only by a scant $1.8 billion. Stockpiles are actually down from their third quarter level, and over the past year inventories have increased only 0.3%, while overall demand is up 2.4%. This picture suggests inventories entered the second quarter in fairly good alignment with sales, and that efforts to eliminate excessive stockpiles will not be a major source of weakness for second quarter GDP.

The bigger worry for the second quarter is spending, especially by consumers and businesses. Last quarter, 44% of the increase in consumer spending went to two items: food and energy. Despite all the other headwinds consumers face, this drain on purchasing power remains the biggest problem for household spending, as it cuts into purchases of other more discretionary items. That drag will be persistent in the second quarter.

Moreover, businesses cut back on outlays for both equipment and construction in the first quarter, suggesting companies are pulling back on their hiring and expansion plans. There's a good chance that domestic spending in the second quarter will be even weaker than it was in the first quarter.

Here's the weekly economic calendar, from Action Economics.

Top Economic Reports
Reports Date Time For Median Estimate Last Period
ISM Index (Nonmanufacturing) Monday, May 5 10:00 a.m. April 49.5 49.6
Nonfarm Productivity Wednesday, May 7 8:30 a.m. Q1 1.1% 1.9%
Unit Labor Costs Wednesday, May 7 8:30 a.m. Q1 2.9% 2.6%
Consumer Credit ($Billions) Wednesday, May 7 3:00 p.m. March 6.0 5.2
Wholesale Trade Sales Thursday, May 8 10:00 a.m. March 0.6% -0.8%
International Trade Balance ($Billions) Friday, May 9 8:30 a.m. March -61.2 -62.3
Exports, Goods and Services ($Billions) Friday, May 9 8:30 a.m. March 153.0 151.4
Imports, Goods and Services ($Billions) Friday, May 9 8:30 a.m. March 214.1 213.7
Other Reports and Events
Reports Date Time For
ICSC-UBS Store Sales Tuesday, May 6 7:45 a.m. Apr. 27-May 3
Johnson Redbook Weekly Store Sales Tuesday, May 6 8:55 a.m. Apr. 27-May 3
SPEECH: Kansas City Fed President Hoenig Tuesday, May 6 9:30 a.m.
Mortgage Applications Wednesday, May 7 7:00 a.m. Apr. 27-May 3
Pending Home Sales Wednesday, May 7 10:00 a.m. March
Initial Unemployment Claims Thursday, May 8 8:30 a.m. Apr. 27-May 3
SPEECH: Former Fed Chairman Greenspan Thursday, May 8 12:30 p.m.
Earnings Calendar
Company Report Date
Citizens Communications Monday, May 5
McKesson Monday, May 5
Principal Financial Group Monday, May 5
Vulcan Materials Monday, May 5
Anadarko Petroleum Monday, May 5
Liz Claiborne Monday, May 5
CMS Energy Monday, May 5
NYSE Euronext Tuesday, May 6
Covidien Tuesday, May 6
Tenet Healthcare Tuesday, May 6
Emerson Electric Tuesday, May 6
DR Horton Tuesday, May 6
Spectra Energy Tuesday, May 6
RR Donnelly & Sons Tuesday, May 6
Qwest Communications International Tuesday, May 6
Public Service Enterprise Group Tuesday, May 6
Walt Disney Co. Tuesday, May 6
Cisco Systems Tuesday, May 6
Precision Castparts Tuesday, May 6
American Capital Strategies Tuesday, May 6
Vornado Realty Trust Tuesday, May 6
Estee Lauder Cos. Tuesday, May 6
PG&E Tuesday, May 6
Molson Coors Brewing Tuesday, May 6
Federal National Mortgage Association Tuesday, May 6
Pitney Bowes Tuesday, May 6
Sara Lee Tuesday, May 6
Harman International Industries Tuesday, May 6
Marsh & McMennan Wednesday, May 7
Transocean Wednesday, May 7
Hospira Wednesday, May 7
Cognizant Technology Solutions Wednesday, May 7
News Corp. Wednesday, May 7
Allergan (U.S.) Wednesday, May 7
Titanium Metals Wednesday, May 7
DIRECTTV Group Wednesday, May 7
Teradata Thursday, May 8
King Pharmaceuticals Thursday, May 8
Dynegy Thursday, May 8
Celgene Thursday, May 8
VeriSign Thursday, May 8
American International Group Thursday, May 8
Progress Energy Thursday, May 8
Barr Pharmaceuticals Thursday, May 8
Nvidia Thursday, May 8
El Paso Thursday, May 8
Tesoro Thursday, May 8
Edison International Thursday, May 8
Pepco Holdings Thursday, May 8
Clear Channel Communications Friday, May 9
Legg Mason Friday, May 9
Leucadia National Friday, May 9
Windstream Friday, May 9
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