Vital Signs: Will Inventories, Trade Gap Improve?

On tap: April international trade, factory orders and wholesale sales data, national nonmanufacturing activity survey for May

The economy stalled in the first quarter. The revised figures released on May 31 showed real gross domestic product grew at an annualized rate of 0.6%, from 1.3%. The revised GDP figures revealed a larger trade deficit and a small decline in inventories. Each subtracted a percentage point from first-quarter growth. However, upcoming data is expected to look more positive.

Economists believe the trade gap will narrow in April as exports build on a March rebound. In the April report, exports of capital goods and services deserve attention. Both areas had a tough first-quarter but are expected to bounce back. Also keep an eye on energy imports. Refinery problems in the U.S. have prompted increased imports of gasoline and other petroleum products. Industrial supplies, which include oil and petroleum products, rose by an annualized 3.1% rate in the first quarter after tumbling 10% in the final period of 2006.

Improved demand for capital goods abroad and at home would go a long way toward ending the recent inventory adjustment. The April data on factory and wholesale inventories and sales will help show whether inventories are in better balance with demand. The early take, based on April durable goods figures, does look favorable. Outside of transportation, durable goods inventories have held steady for three straight months, while new orders and shipments turned more positive.

The May report on non-manufacturing business activity from the Institute for Supply Management will garner some attention early in the week. Another solid reading would indicate continued strength in the service sector, which accounts for more than half of the economy. If demand holds up, businesses will likely allow inventories to start growing again.

Improving scenarios in both trade and inventories could more than offset any slowdown in consumer spending growth from higher gasoline prices and help lead a second-quarter rebound in GDP growth.

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

Economic Reports
Report Date Time For Median Estimate Last Period
Factory Orders Monday, June 4 10 a.m. April 0.7% 3.5%
ISM (non-manufacturing) Tuesday, June 5 10 a.m. May 55.6 56.0
Nonfarm Productivity (revised) Wednesday, June 6 8:30 a.m. Q1 1.3% 1.7%
Unit Labor Costs (revised) Wednesday, June 6 8:30 a.m. Q1 0.9% 0.6%
Wholesale Trade Sales Thursday, June 7 10 a.m. April 0.6% 1.8%
Consumer Credit (billion) Thursday, June 7 3 p.m. April $5.0 $13.5
Trade Balance (billion) Friday, June 8 8:30 a.m. April -$62.0 -$63.9


Factory orders in April probably grew a little more after a big rebound during March. The April durable goods results already show that orders rose another 0.5%, following the 5% rise in the prior month. Excluding the volatile civilian aircraft category, orders improved by 1.5% in both April and March.

The latest figures on manufacturing activity show an improvement in demand. Orders, industrial production, and the Institute for Supply Management's manufacturing activity index have all looked more positive of late.

Improved demand has helped alleviate the inventory overhang manufacturers faced in the second half of last year. In the prior three months, inventories outside of transportation have held steady. As a result, the inventory-to-sales ratio among durable goods hit a four-month low in April and an eight-month low when excluding civilian aircraft.

ICSC-UBS STORE SALES - Tuesday, June 5, 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 week ended June 2. Sales held steady in the week ended May 26, after plunging 1.5% in the prior week, and a 0.8% gain for the week ended May 12. The yearly pace of growth improved to 2.9%, from 1.9% for the week ended May 19.


The Institute for Supply Management releases its report on non-manufacturing business activity, made up mostly of service sector operations. The May index is expected to move a touch lower, after a solid improvement in April. The April business activity index was 56%, from 52.4% in March, and 54.3% in February. Besides a rise in the headline reading, the April results showed an improvement in new orders, export orders, and employment.

Among the other indexes, the prices paid reading climbed to 63.5% in April, as 42% of respondents said they're paying more for materials and services. That was the largest share reporting higher prices paid since last August. Higher gasoline costs are a big reason for the jump in the index.

JOHNSON REDBOOK INDEX - Tuesday, June 5, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the four fiscal weeks of May, ended June 2. In the first three fiscal weeks of May sales were 2.2% better than sales in the same period during April. Sales for the full month of April were off 4.1% compared to March.


Wednesday, June 6, 9:50 a.m. EDT - Federal Reserve Bank of Richmond President Jeffrey Lacker will speak about the U.S. economy at the 2007 Mid-Atlantic Economic Symposium in Frederick, Md.

2:45 p.m. EDT - Federal Reserve Bank of Kansas City President Thomas Hoenig speaks on the U.S. economy and monetary policy in Cody, Wyo.

MORTGAGE APPLICATIONS - Wednesday, June 6, 7 a.m. EDT

The Mortgage Bankers Association releases its mortgage application volume data for home buying and refinancing activity for the week ending June 1. In the week ended May 25, the purchase index slipped a little to 427, from 438.1 in the period ended May 18. The refi index dropped 13% to 1874.6, from 2154.7 in the prior period.

The four-week moving average for the purchase index held pretty steady at 433.9, from 434. The four-week average for the refi index cooled to 2065, from 2100.3. The average 30-year fixed-rate mortgage climbed a bit more to 6.32% for the week of May 25, from 6.23%.

PRODUCTIVITY AND COSTS - Wednesday, June 6, 8:30 a.m. EDT

Nonfarm productivity growth for the first quarter will likely be revised down. The downward revision to first-quarter real gross domestic product to 0.6%, from 1.3% will lead to the weaker result. The initial figures showed productivity improved at an annual rate of 1.7%, after increasing 2.1% in the fourth quarter of 2006.

Unit labor costs are expected to be revised up from the originally reported 0.6% annualized gain. In the fourth quarter, unit labor costs surged by an annualized 6.2%. For the full year of 2006, costs rose 3.1%, the biggest rise since a 4.2% rise in 2000.

Besides the revised results, the latest report will also provide first-quarter productivity and labor cost figures for non-financial corporate businesses. These data differ slightly in that they exclude private unincorporated businesses and the financial sector. These figures showed stronger productivity growth and a smaller rise in unit labor costs for 2006 compared to the more widely followed non-farm business figures.

JOBLESS CLAIMS - Thursday, June 7, 8:30 a.m. EDT

Jobless claims for the week ended May 26 dipped to 310,000, from an upwardly revised 314,000 in the prior period. Claims for the week ended May 19 were originally reported to be 311,000. The four-week moving average eased to 304,500, from 303,500 in the week ended May 12. Continuing jobless claims for the week ended May 19 fell to 2.47, from 2.52 million.


Wholesale sales for April are expected to have grown at a slower, but decent clip. In March, sales jumped 1.8%, following a 1% gain in February. The improvement in sales was broad based, with computer sales up 6.1%, machinery rising 3.4%, and metals improving 2.1% in March.

While sales rallied, inventories rose a much smaller 0.3% in March and 0.4% in February. With sales gains outpacing inventory growth, the inventories-to-sales ratio has receded to 1.14 months, from 1.16 back in January and 1.17 last October. With inventories now at more comfortable levels relative to improved sales, the growth rate in stockpiles may begin to rise.


Consumers probably kept piling up debt in April. The level of outstanding consumer credit leapt $13 billion in March. Revolving credit, made up largely of outstanding credit card balances, and non-revolving credit which includes auto and student loans, rose in equal amounts during March.

Growth in revolving debt has picked up steam, now up 7.6% from a year ago, the biggest yearly gain since August of 2001. People appear to be relying on credit cards as higher energy prices erode purchasing power. What's more, they have a reduced ability to tap into home equity as a way to gain extra cash.

INTERNATIONAL TRADE - Friday, June 8, 8:30 a.m. EDT

The U.S. trade deficit of goods and services most likely narrowed in April. According to economists queried by Action Economics, the latest trade gap will likely be $62 billion, after a $63.9 billion deficit in February. After a big rise in March, due to the combination of higher energy prices and increased imports of petroleum products, imports are forecast to ease a little.

At the same time, exports probably kept climbing. Capital and consumer goods, as well as services, are the key components to the export picture, as solid economic growth abroad and a weaker dollar increases demand for many U.S. goods and services.

In the first quarter, shipments of capital goods to other countries fell at an annualized pace of 2.2% in the first three months of 2007, after a big final quarter last year. Economists will be looking for stronger capital goods exports in the second quarter. Meanwhile, service exports grew at a much slower pace in the first quarter, while consumer goods shipments rose at an annualized pace of 19.4%. Better growth around the globe should lift domestic demand in other countries, likely lifting demand for U.S. consumer products and services.

Earnings Calendar
Day Companies
Tuesday Brown-Forman
Wednesday ADC
Thursday National Semiconductor, Smithfield Foods
    Before it's here, it's on the Bloomberg Terminal.