Vital Signs: Rate Cut Hopes Get Revived

On tap: February figures on retail sales, industrial production, consumer and producer prices, and business inventories

In light of the weaker economic data of late, investors are once again betting heavily that the Federal Reserve will cut interest rates this year. The ongoing housing recession, concerns about additional fallout from subprime mortgage defaults, a weaker manufacturing sector, and a slower pace of hiring are all helping to revive expectations of lower rates.

Based on the central bank's Mar. 7 Beige Book report and recent speeches made by Fed officials, there remains little evidence of an impending move. And the upcoming batch of economic data is expected to show an economy growing at a pace generally in line with Fed expectations.

Consumers remain the mainstay of the U.S. economy and February retail sales figures should show continued strength. On top of that, some signs of life are expected in manufacturing, given the consensus view that industrial output rebounded in February after a weak January. One area to key in on is business equipment, where output tumbled in January. After a big drop in February factory orders, there's concern that businesses are feeling more cautious and cutting back on capital investments.

What's more, the latest batch of inflation figures isn't expected to show much easing in price pressures. Both the consumer and producer price indexes are expected to show moderate increases for February. Some of that will be energy related. But even after the volatile food and energy categories are taken out, economists expect monthly gains of 0.2% in both indexes. That would keep the yearly pace of core CPI near the elevated level of 2.7% registered in January.

If the upcoming data falls short of economist forecasts, it would certainly provide more fodder for those expecting rate cuts. Results in line with the consensus view, however, won't prompt the Fed to change its tune on the economy and monetary policy.

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

Economic Reports
Report Date Time For Median Estimate Last Period
Treasury Budget (Billion) Monday, Mar. 12 2 p.m. February -$112.5 $38.2
Retail Sales Tuesday, Mar. 13 8:30 a.m. February 0.4% 0.0%
Retail Sales (Ex-auto) Tuesday, Mar. 13 8:30 a.m. February 0.4% 0.3%
Business Inventories Tuesday, Mar. 13 10 a.m. January 0.1% 0.0%
Export Price Index Wednesday, Mar. 14 8:30 a.m. February 0.2% 0.3%
Import Price Index Wednesday, Mar. 14 8:30 a.m. February 0.7% -1.2%
Current Account (Billion) Wednesday, Mar. 14 8:30 a.m. Q4 -$204.3 -$225.6
PPI Thursday, Mar. 15 8:30 a.m. February 0.4% -0.6%
PPI (Ex-food & energy) Thursday, Mar. 15 8:30 a.m. February 0.2% 0.2%
Empire State Index Thursday, Mar. 15 8:30 a.m. March 17.5 24.4
Philadelphia Fed Survey Thursday, Mar. 15 12 p.m. March 3.3 0.6
CPI Friday, Mar. 16 8:30 a.m. February 0.3% 0.2%
CPI (Ex-food & energy) Friday, Mar. 16 8:30 a.m. February 0.2% 0.3%
Industrial Production Friday, Mar. 16 9:15 a.m. February 0.3% -0.5%
Capacity Utilization Friday, Mar. 16 9:15 a.m. February 81.2% 81.2%
University of Michigan Consumer Sentiment Index (Preliminary) Friday, Mar. 16 10 a.m. March 91.1 91.3


Monday, Mar. 12, 9:05 a.m. EDT - House Budget Committee Chairman John Spratt will give a speech at the National Association for Business Economics annual policy conference entitled "An Economic Framework for Effective Policymaking" in Washington, D.C.

11:05 a.m. EDT - Congressional Budget Office Director-Designate Peter Orszag takes part in a panel discussion entitled "U.S. Policy and the Changing Global Landscape" at the National Association for Business Economics annual policy conference in Washington, D.C.

12:20 p.m. EDT - Federal Reserve Board Governor Randall Kroszner gives the keynote speech at the National Association for Business Economics annual policy conference in Washington, D.C.

5 p.m. EDT - European Central Bank Executive Board member Gertrude Tumpel-Gugrell and Swedish Riksbank First Deputy Governor Eva Srejber speak about European market competitiveness at the National Association for Business Economics annual policy conference in Washington, D.C.

FEDERAL BUDGET - Monday, Mar. 12, 2 p.m. EDT

The federal government is expected to post a smaller February deficit than a year ago. In February of 2005, the deficit was $119 billion. Meanwhile, so far in fiscal year 2007, the budget gap is running below last year through the first four months. Through January, the overall deficit is $42.2 billion vs. $98.4 billion in fiscal year 2006.

Receipts continue to show surprising strength. Through the first four months of fiscal year 2007, personal income receipts are up 12.6%, and corporate receipts are 21.8% higher compared to the same period in the prior fiscal year. However, the growth rate of corporate tax receipts is slowing as profit growth eases.


Tuesday, Mar. 13, 8 a.m. EDT - Council of Economic Advisers Chairman Edward Lazear speaks about the economic outlook at the National Association for Business Economics annual policy conference entitled "An Economic Framework for Effective Policymaking" in Washington, D.C.

8:30 a.m. EDT - U.S. Treasury Secretary Henry Paulson and Treasury Undersecretary for Domestic Finance Robert Steel host a capital markets competitiveness conference at Georgetown University in Washington, D.C.

2:15 p.m. EDT - U.S. Treasury Secretary for Economic Policy Phillip Swagel speaks about fiscal policy at the National Association for Business Economics annual policy conference in Washington, D.C.

ICSC-UBS STORE SALES - Tuesday, Mar. 13, 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 Mar. 10. Weekly sales for the period ended Mar. 3 slipped 0.4%, after edging up 0.2% in the prior week. The increase from a year ago slowed to 1.5%, from 2.2% in the prior period.

RETAIL SALES - Tuesday, Mar. 13, 8:30 a.m. EDT

Retail sales growth picked up in February. In January, the overall tally of retail sales was flat, after a big 1.2% gain in December. Sales were weighed down by a big drop among auto sales, declining results at electronics and appliance stores, and lower gasoline prices hurt sales at gas stations. Sales at department sales jumped 1.4%, helped by gift cards. On a yearly basis, sales cooled off to a pace of 2.3%, from 5.7% in December.

Sales excluding light vehicles are expected to rise slightly in February. In January, sales rose 0.3%, after a 1.3% surge in December. On a yearly basis, sales slowed to 3.4%, from 6% in December.

JOHNSON REDBOOK INDEX - Tuesday, Mar. 13, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the first fiscal week of March, ended Mar. 10. For the complete month of February sales were off 1.1% from the same period in January. Sales in January were up 1.7% from December.

BUSINESS INVENTORIES - Tuesday, Mar. 13, 10 a.m. EDT

Inventories probably ticked up slightly in January. The amount of unsold goods was unchanged in December, as increases in retail and factory inventories were fully offset by a 0.5% tumble in wholesale stockpiles. Factory inventories were already reported to have fallen 0.2%. As demand cooled, businesses piled up unwanted levels of inventories during the summer and fall of 2006. Since the fourth quarter, businesses scaled back markedly and even trimmed levels. This report will help show if the inventory adjustment is just about finished.

MORTGAGE APPLICATIONS - Wednesday, Mar. 14, 7 a.m. EDT

The Mortgage Bankers Association issues its weekly mortgage application volume data for home buying and refinancing activity during the week ending Mar. 9. For the week ended Mar. 2, both the purchase and refi indexes grew. The purchase index was 405.3, from 401.3 in the week ended Feb. 23. The refi index surged to 2234.3, from 1943.5 in the week ended Feb. 23.

The four-week moving average for the purchase index inched up to 397.2, from 397 in the prior week. The four-week average for the refi index climbed to 2032.6, from 1959.9.

The pickup in activity, especially in refi applications, could be linked to lower interest rates. The average 30-year fixed-rate mortgage fell further, to 6.04% from 6.16% in the week ended Feb. 23.

IMPORT AND EXPORT PRICES - Wednesday, Mar. 14, 8:30 a.m. EDT

Import prices probably picked up a little on the back of increased energy prices. The overall index is forecast to have risen 0.7%, according to economists queried by Action economics. Import prices fell 1.2% in January as energy costs fell 7.3%. Outside of food and energy, the January index was unchanged, after sizeable rises of 0.5% in December and 1% in November.

The overall yearly pace of import prices is easing, with the headline index up 0.1% from January of 2006. However, prices are picking up in some categories. Consumer goods prices were up 1.5% from a year ago in January and are now growing at the fastest pace since the start of 1996.

Export prices continued to edge higher. A 0.2% increase in January is the consensus among economists. On a yearly basis, export prices were up 4.1% in January, down from the 4.6% rate in December but still elevated. The quicker pace of price gains is due in large part to rapidly rising prices for agricultural goods, up 13.5% from a year ago in January. The price of consumer goods exports were up 2.4%, the quickest pace since the end of 1992. A healthier global economy and a softer U.S. dollar are opening the door for price hikes on exported goods.

CURRENT ACCOUNT - Wednesday, Mar. 14, 8:30 a.m. EDT

The current account deficit - a kind of cash flow statement of U.S. international business, including trade in goods and services, net investment income, and foreign transfers - is expected to be $204.3 billion for the fourth quarter. That would be a little smaller than the $225.6 billion gap in the third quarter. Based on the fourth-quarter estimate, the full year current account deficit in 2006 would be about $860 billion, up 8.7% from 2005. That would put the current account at around 6.4% of gross domestic product.

Net trade in goods and services dominates the current account. In the final quarter of 2006, the trade gap averaged $59.4 billion per month, well below the $66.9 billion during the third quarter. The narrowing is due in part to lower energy prices and continued strength in exports.


Thursday, Mar. 15, 12:30 p.m. EDT - Former Federal Reserve Chairman Alan Greenspan will speak at the Futures Industry Association Annual International Conference in Boca Raton, Fla.

JOBLESS CLAIMS - Thursday, Mar. 15, 8:30 a.m. EDT

Jobless claims retreated in the week ended Mar. 3, to 328,000. In the prior week, claims grew to 338,000. The four-week moving average grew to 339,000, from 335,250 in the week ended Feb. 24. Continuing jobless claims for the week ended Mar. 3 moved back to 2.53 million, from 2.62 million in the week ended Feb. 24.

PRODUCER PRICE INDEX - Thursday, Mar. 15, 8:30 a.m. EDT

Climbing energy prices during the month of February pushed up the producer price index. The January index dropped 0.6%, as energy prices fell 4.6%. At the end of January, the price of oil was running near $58 and ended the month of February above $61. Natural gas prices also continued to rise during February as temperatures remained cold.

Excluding food and energy, producer prices probably posted another modest gain similar to the 0.2% gains in both January and December. The yearly pace of wholesale prices for finished goods was 0.2%, from 1.1% in December. Less food and energy, the yearly gain was 1.8%, from 2% in December.

Price pressures appear to be easing further up the pipeline. Compared to the same period a year ago, crude goods products outside of food and energy were up 17.8%, after running above 30% during the summer last year. Intermediate core goods prices have slowed to a yearly clip of 0.7% in January, from 2.7% in January and above 9% last summer.


The New York Federal Reserve Bank's survey of manufacturers is forecast to settle down some after a big February bounce. The February reading was 24.4, after dropping to 9.1 in January from 22.2. The new orders, shipments, and employment readings all improved in February.

The unfilled orders reading hit zero, after negative readings in the prior two months. A negative result means an overall decline in order backlogs. The region's manufacturers also continued to work down inventory levels.

Expectations for the coming six months perked up a little. The general business conditions index grew to 38.5, from 32.5 in the previous month. The shipments reading surged to 42.2, from 28.5. The new orders, backlog orders, employment and inventory indexes all improved as well. The broad gains in the expectations indexes show manufacturers see more light at the end of the tunnel.

PHILADELPHIA FED SURVEY - Thursday, Mar. 15, 12 p.m. EDT

The Philadelphia Federal Reserve Bank's March factory activity index for the mid-Atlantic region should improve a little. The index has been seesawing in the past few months. The general business activity reading was 0.6 in February, after hitting 8.3 in the prior month from -2.3 in December.

Along with a weaker overall reading, the new orders, shipments, and employment indexes slumped. The unfilled orders index improved, but still show that backlogs are shrinking. Manufacturers around the region were just a little less optimistic about the coming six months, and the reading of 20.3 is a bit off from the long-run average of 35. More interesting is that more manufacturers expect an increase in new orders while more see backlogs falling further.

CONSUMER PRICE INDEX - Friday, Mar. 16, 8:30 a.m. EDT

The consumer price index probably grew at a faster pace. Economists queried by Action Economics are forecasting a 0.3% increase in February, led by a resurgence of energy prices.

The index rose 0.2% in January, following a 0.4% jump in December. The January increase was driven by an unexpectedly big 0.8% increase in health care prices. Rents kept growing at a rapid clip of 0.4% for the ninth straight month. The yearly pace of rents grew at a 4.5% rate. On year ago basis, overall inflation fell to a pace of 2.1% after climbing in December to 2.5%, from 2% in November.

Minus food and energy, consumer prices rose a larger-than-expected 0.3% in January, following three straight monthly gains of 0.1%. That surprise January gain pushed the yearly pace of core inflation to 2.7% from 2.6% in the prior two months. The persistence of core inflation is one reason the Federal Reserve has maintained a hawkish tone despite a slower pace economic growth.

REAL EARNINGS - Friday, Mar. 16, 8:30 a.m. EDT

Inflation-adjusted weekly earnings of production workers most likely slipped a little in February. That's based on the consensus forecast of a 0.3% gain in the February consumer price index and a 0.2% increase in average weekly earnings. Real earnings eased 0.3% in January, after a gain of 0.2% in December. Compared to the same period a year ago, inflation-adjusted earnings grew by 2.1% for the second straight month.

INDUSTRIAL PRODUCTION - Friday, Mar. 16, 9:15 a.m. EDT

Economists expect U.S. industrial output to have rebounded in February after a startling weak January result when output fell 0.5%. Among manufacturers, output fell 0.7% in January, after a 0.8% gain in December. A source of concern was the 1.6% drop in business equipment. Some of that decline was due to reduced car and truck output, but the weakness was broad. Machinery and metal production also fell. These declines came along with further fallout from the housing downturn as construction supplies dropped 1%.

The Institute for Supply Management's February factory activity index did improve, offering some optimism for manufacturing production. At the same time, the regional indexes for February were tepid.

The expected February uptick in industrial activity isn't likely to raise the capacity utilization rate, say economists. In December, the rate fell to 81.2%, from 81.8% in December. Right now, the yearly pace of manufacturing output is running below the pace of capacity additions. That will put downward pressure on utilization rates.

CONSUMER SENTIMENT INDEX - Friday, Mar. 16, 10 a.m. EDT

The advanced March Reuters/University of Michigan consumer sentiment index probably eased. The final February index slipped some more to 91.3, from the preliminary February level of 93.3, and the final January reading of 96.9. The final January result was the strongest since December of 2004. In February, consumer sentiment regarding current conditions and future expectations registered declines. Consumers are feeling less certain about their finances and economic conditions.

Earnings Calendar
Day Companies
Tuesday Goldman Sachs, Kroger
Wednesday Lehman Brothers
Thursday Bear Stearns