Vital Signs for the Week of June 7

On tap: May producer price data, April figures on international trade, May import and export price indexes, and more

Prices are percolating. Strong economic growth, Iraq, and higher commodity prices are all contributing to the apparent reemergence of inflation. According to the median forecast of economists surveyed by Action Economics, May producer prices are expected to have risen by 0.5%, while import prices most likely jumped 0.8% over the same period. That would put the yearly rates at 4.5% and 6.1%, respectively.

There may be another factor affecting prices of goods and services beyond just higher input costs. Regional and national business activity surveys show that deliveries of goods from suppliers are taking longer. The Federal Reserve Bank of Richmond's April manufacturing activity report showed a slowdown in vendor lead times, a sign of lengthening delivery times. That trend is likely to continue to be reflected in the May report. The Institute for Supply Management's national May factory and non-manufacturing activity surveys already show slower delivery performance.

The trend may mean more commodities are in short supply. However, slower delivery times may be a function of overtaxed suppliers and a swamped transportation system. The Transportation Dept.'s transportation services index stood at 120.4 for March, just under the December record of 120.5. The index tracks transportation services such as railroad freight, trucking, and air freight. The Assoc. of American Railroads also reported a record level of trailers and containers shipped for the week of May 22, breaking the previous high set just four weeks prior.

Indeed, respondents to the ISM non-manufacturing survey, which came out on June 3, reported trucking problems and issues with suppliers keeping up with demand. If bottlenecks are occurring, it could lead to higher prices for some goods and services. Some companies may be willing to pay more for materials if the alternative is not being able produce their products or offer their services.

There is good news, however. Such a scenario is likely to be temporary. As signs that demand will remain strong, more transportation capacity should come on line fairly easily.

In addition, there are signs that commodity and oil prices may be peaking. The Organization of Petroleum Exporting Countries (OPEC) announced it will increase output in July, although less than anticipated, in an attempt to lower oil prices. Oil prices are now back below $40 per barrel and gasoline pices could also ease as a result. Oil is a big source of higher producer prices. Excluding food and energy, producer prices were up just 1.4% from a year ago in April.

The Commodities Research Bureau's indexes tracking commodities is encouraging as well. The index tracking raw industrial goods, such as copper scrap, rubber, cotton, and zinc, is down nearly 3% from its recent high in April. Further relief may come this year if the Chinese government is successful in slowing its economy. China's voracious appetite for raw materials such as metals and crude oil is a big contributor to higher commodity prices.

Overall, inflation looks set to tick higher this year. However, it shouldn't jeopardize the economic recovery, especially if the main factors contributing to higher inflation turn out to be transient. For the time being, that's how consumers view the situation. While the University of Michigan's consumer sentiment survey shows inflation expectations of 3.3% in the coming 12 months, respondents believe it will be a temporary increase. That's a positive sign for consumer spending and the economy overall.

Here's the weekly economic calendar.


Monday, June 7

Blythe, Dave & Buster's, Offshore Logistics, and more.


Monday, June 7, 3 p.m. EDT

Consumers most likely accumulated another $6.7 billion in debt during March. That's the median forecast of economists surveyed by Action Economics. Total credit outstanding bumped up by $5.7 billion in March, following a scant $0.9 billion increase in February, and a $17.4 billion surge in January.

Acceleration in debt accumulation in 2004 looks likely given the economic scenario. As the economy continues to strengthen, consumer demand will keep growing. Indeed, revolving debt, made up mostly of credit card debt, was up by 4.3% from a year ago. That's a healthy pickup from the recent low of 1.5% over the twelve month period ended August, 2003. Second, as the Federal Reserve starts to raise rates, home refinancings will no longer be a source of cash for consumer spending.


Tuesday-Thursday, June 8-10

Leaders from the Group of Eight industrial countries will attend a summit. Among the topics to be discussed are President George Bush's Middle East policies. The summit will be held in Sea Island, Georgia.

9:15 a.m. EDT

Federal Reserve Board Chairman Alan Greenspan participates on a central bank panel, via satellite, at an International Monetary Conference in London.


Tuesday, June 8, 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 June 5. In the week ended May 29, seasonally adjusted sales fell by 0.5% for a second straight week, following a 0.8% slide for the week ended May 15.


Tuesday, June 8, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the first fiscal week of June, ended June 5. Over the month of May, sales stood 0.5% higher when compared with April. For the full month of April, sales were off 2.3% vs. to March.


Tuesday, June 8, 10 a.m. EDT

The Richmond Federal Reserve Bank will release its May survey of business conditions in the Richmond Fed district. The manufacturing activity index retreated to 13 in April, from 30 for March, 19 in February, and 18 in January. However, the April level was still above the December level of 8.

The new orders and unfilled orders indexes showed a slowdown in the pace of growth. The new orders reading fell to 17, from 28 in March, while the April unfilled orders index slipped to 9, from 11 a month earlier.

The results still indicate orders and shipments are rising. Indeed, respondents were more optimistic about conditions six months from now. The expectations index for new orders jumped back up to 27, from 20 in March. And manufacturers see the backlog of unfilled orders also increasing. Not surprisingly, those surveyed foresee greater capacity utilization.


Wednesday, June 9, 1:15 p.m. EDT

Federal Reserve Bank of New York President Timothy Geithner speaks before an Institute of International Bankers luncheon in New York City.

4 p.m. EDT

Federal Reserve Bank of Kansas City President Thomas Hoenig takes part in a roundtable discussion with wire service and regional reporters in Denver, Colorado.


H&R Block, Smithfield Foods, Tommy Hilfiger, and more.


Wednesday, June 9, 7 a.m. EDT

The Mortgage Bankers Assoc. releases its tally of mortgage applications for both home buying and refinancing for the week ending June 4. In the week ended May 28, the purchase index posted rose to 459.8. In the previous period, applications slipped to 449.8, from 454.2 for the week ended May 14. The latest reading of the four-week moving average dropped to 464.5, from 470.2 for the week of May 28.

The average rate on a conventional 30-year mortgage, according to HSH Assoc., held at 6.41% for the week of May 28.

The refi index dropped to its lowest level since mid-2002. In the week ended May 28, the index stood at 1583.6, from 1694.9 in the previous period, and 1816.9 in the week ended May 14. The refi index four-week moving average plunged to 1820, from 2053.1 for the week ended May 21.


Wednesday, June 9, 10 a.m. EDT

Wholesale sales most likely grew 0.7% in April. That's the median forecast of economists queried by Action Economics. In March, sales increased by a stout 2.7%, following a similarly large 2.1% rise in February. Based on the March forecast, sales likely came in at a strong an annual pace of 14.1%, from 12% in March.

March wholesale inventories grew by 0.6%, after a 1.2% increase over February. The lopsided pace of sales compared to inventories pushed the inventory to sales ratio down to 1.13. That's a new record low. Inventories are rising moderately. However, with demand continuing to strengthen at a robust pace, businesses will increasingly feel the need to ratchet up their warehouse restocking efforts in order to avoid supply shortages.


Thursday, June 10, 10 a.m. EDT

Federal Reserve Board Chairman Alan Greenspan testifies before a Senate banking Committee hearing on his nomination for a fifth term as Federal Reserve Chairman in Washington, D.C.

5 p.m. EDT

Federal Reserve Bank of New York President Timothy Geithner speaks at a symposium of the Bretton Woods Committee in New York City.


National Semiconductor, and more.


Thursday, June 10, 8:30 a.m. EDT

First-time claims for jobless benefits for the week ended May 29 probably slipped to 335,000. That's the median forecast of economists surveyed by Action Economics. Jobless claims slowed to 339,000 for the week ended May 29, after easing to an upwardly revised 345,000 inr the week ended May 22, from 347,000 in the previous week.

The four-week moving average, however, moved up to 341,000. In the week ended May 22, the four-week average inched up to 335,800. During the week ended May 22, continuing jobless barely broke back above the 3 million level, after remaining below the level for four straight weeks.

Despite the small increases, the overall trend for jobless claims is a steady decline. The current levels point towards relatively strong job growth in the coming months.


Thursday, June 10, 8:30 a.m. EDT

Import prices in April are expected to have increased by 0.8%, say economists surveyed by Action Economics. In April, import prices grew 0.2%, following a 0.8% surge during March. Excluding petroleum imports, March import prices grew 0.3% in April, following a 0.2% gain over March, and a 0.4% rise during February.

Export prices very likely rose 0.4%, after growing by 0.6% in April and 0.9% in March. Export prices are trending higher. Price gains are most noticeable in the agricultural sector. Export prices for agricultural items are up 23% from a year ago in April, led by higher prices for meat and animal feed products.

However, even prices for capital goods were off just 0.2% from a year ago in April, the smallest decline since September of 2001. Prices of consumer goods picked up to a yearly pace of 0.9%, from a recent low of 0.1% in September.


Thursday, June 10, 2 p.m. EDT

The Treasury Dept. releases the details on the government's budget for May, the eighth month of fiscal year 2004. The median forecast of economists surveyed by Action Economics is for a deficit of $69.3 billion. In April, the Treasury reported a $17.6 billion surplus, following a deficit of $72.7 billion in the previous period. In May of 2003, the government rang up an $88.9 billion deficit.

Tax receipts this fiscal year are up compared to fiscal year 2003. Through April, net receipts stood at $1.07 trillion, compared to just under $1.06 trillion through the same period in fiscal 2003. However, spending has risen at a faster clip. Outlays through April of fiscal 2004 are $1.34 trillion, compared with 1.26 trillion in the same period in fiscal 2003.

In addition, the widely expected surge in tax refunds resulting from last year's tax cuts haven't materialized. Through the final week of May, the Internal Revenue Service reports the total amount of tax refund this season is up 7.3%, or a little under $14 billion. Heading into 2004, many economists expected the total to exceed $30 billion.


Friday, June 11, 8:40 a.m. EDT

Federal Reserve Bank of Atlanta President Jack Guynn discusses the U.S. economic outlook at a Databank Real Estate Conference in Atlanta.


Friday, June 11, 8:30 a.m. EDT

The median forecast of economists queried by Action Economics has producer prices of finished goods rising by 0.5% in May, after a 0.7% gain in April, and a 0.5% increase in March. Using the May forecast, producer prices would be up 4.5% from a year ago, compared with a yearly gain of 3.6% in March.

Excluding food and energy costs, core prices in May most likely increased by a slower pace of 0.2%. It would be the third straight monthly gain of 0.2%. Based on the May forecast, core producer prices would be up a much slimmer 1.5% from the same period a year ago.


Friday, June 11, 8:30 a.m. EDT

The U.S. trade deficit for goods and services during April most likely narrowed to $44.9 billion. That's the consensus forecast of economists surveyed by Action Economics. The trade gap in March widened to $46 billion, after posting a $42.1 billion deficit in February. Oil played a significant role in the March leap. Crude oil imports jumped 13%, to nearly $10 billion, while imports of other petroleum products surged by 41%, to $1.9 billion.

The latest topline figures hide the fact that exports are picking up. In March, goods shipped abroad were up 15.2% from a year ago, while exports of services were up 13.1% in the same period. Indeed, exports are growing at a faster clip than imports, which grew by 12% from a year ago in March.

The trade gap has been steadily widening because exports are only two-thirds as big as imports. Thus, exports would have to grow at a faster clip than imports for a sustained period of time in order to trim the trade gap. Such a scenario looks increasingly less likely given the strength of the U.S. economy. Rising demand will be met not just with U.S. goods and services, but also plenty of imports.


Friday, June 11, 10 a.m. EDT

The University of Michigan's Survey Research Center will report its initial index reading of consumer sentiment for June. Respondents to the Action Economics economic survey expect the first look at consumer sentiment for May inched up to 91. In May, the index slipped to 90.2, from 94.2 in April, and 95.8 in March. The recent softening in sentiment is now being blamed on expectations of rising inflation and interest rates.

The May survey showed that 85% of respondents -- a record level -- expect the Federal Reserve to hike rates shortly. In addition, consumers expect inflation to hit 3.3% in the coming year. According to the University of Michigan, inflation expectations are dampening consumers' outlook for future living standards.

However, consumers believe the rise in inflation should be temporary. In addition, respondents believe the economy will continue to grow at a fast enough clip to accommodate healthy gains in job growth. That's a good sign for consumer spending, even if it doesn't translate into big gains in consumer confidence readings.


Sunday, June 13, 8 p.m. EDT

Federal Reserve Bank of Minneapolis President Gary Stern gives the opening remarks at the University of Minnesota's workshop on economics in Minneapolis.

By James Mehring

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