Vital Signs: Focus Turns to Productivity, Inflation

On tap: Federal Reserve monetary policy meeting, labor productivity, July import prices, June consumer credit

Ongoing tumult in the financial markets is overshadowing recent economic data. However, investors should continue to keep a close eye on what's going on beyond Wall Street. For instance, a piece of economic history will be revised this week and that could have major implications for the economic outlook.

Fresh second-quarter labor productivity figures come out on Aug. 7. Alongside the new data, the Bureau of Labor Statistics will release its annual revisions. Labor productivity is essentially output divided by the amount time workers used to produce the goods and services. The already-released annual revisions to gross domestic product (GDP) showed the economy grew an average of 3.2% instead of 3.5% over the past three years. That means productivity numbers will likely be revised lower.

This could be very important for the outlook. If productivity growth is really trending lower, then the economy can't grow as fast without touching off inflation. What's more, if less was produced with the same amount of labor, then the cost of labor to produce a good or deliver a service is higher.

Weaker productivity and stronger labor costs have potential implications for inflation pressures and monetary policy. It won't likely impact the monetary policy meeting on Aug. 7, but the Federal Reserve will likely feel more justified in reiterating that inflation remains its predominant concern, even if second half economic growth runs slightly below the 3% pace of the last few years, as many economists expect.

Another area of concern on the inflation front will be addressed this week. The weaker dollar and strong global growth has pushed up the pace of import prices. It's not just oil and gasoline. Prices for non-petroleum goods have risen faster over the past year.

While more bad news in the credit markets or weaker profit growth may capture most of the headlines in the coming week, the upcoming economic data could be more significant for the economy and financial markets going forward.

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

Economic Reports
Report Date Time For Median Estimate Last Period
Nonfarm Productivity (preliminary) Tuesday, Aug. 7 8:30 a.m. Q2 2.0% 1.0%
Unit Labor Costs (preliminary) Tuesday, Aug. 7 8:30 a.m. Q2 1.9% 1.8%
Consumer Credit (billion) Tuesday, Aug. 7 3 p.m. June $6.7 $12.9
Wholesale Trade Sales Wednesday, Aug. 8 10 a.m. June 0.7% 1.3%
Export Price Index Friday, Aug. 10 8:30 a.m. July 0.3% 0.3%
Import Price Index Friday, Aug. 10 8:30 a.m. July 1.2% 1.0%
Treasury Budget (billion) Friday, Aug. 10 2 p.m. July -$32.4 $27.5


Tuesday, Aug. 7, 9 a.m. EDT - The Federal Reserve's Federal Open Market Committee meets to discuss monetary policy. An announcement by the Fed will come around 2:15 p.m. Every economist polled by Action Economics fully expects the central bank will keep interest rates at 5.25%.

Economists will once again concentrate on the post-meeting press release to see if the Fed is feeling any different about the economy in light of the mixed economic data and recent financial turmoil. Fed watchers will also be on the lookout to see if the Fed reiterates that "a sustained moderation in inflation pressures has yet to be convincingly demonstrated."

ICSC-UBS STORE SALES - Tuesday, Aug. 7, 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 Aug. 4. Sales stormed back with a 1.1% gain in the week ended July 28, after slipping 0.2% in the prior period. The yearly pace of growth improved to 3.2%, from 3% for the week ended July 21.

JOHNSON REDBOOK INDEX - Tuesday, Aug. 7, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the full month of July ended Aug. 4. In the first three weeks through July 28, sales were up 0.5% compared with the same period in June. For the full month of June, sales were off 1.3%.

PRODUCTIVITY AND COSTS - Tuesday, Aug. 7, 8:30 a.m. EDT

Nonfarm productivity growth probably picked up in the second quarter, after slowing in the first quarter. The consensus estimate among economists queried by Action Economics is for an annualized rise of 2%.

First-quarter productivity growth was 1%. Productivity growth was 1.6% for the entire year of 2006, the first year of sub-2% growth since 1997.

However, data for the past three years will also be revised. The downward revision to real gross domestic product should result in a haircut for labor productivity growth. Some economists expect the reduction could average about 0.3% per year.

Another key number for the markets is unit labor costs. The annualized rise in the second quarter was likely 1.9%. That would be about the same pace as the 1.8% rise in the first quarter. For the full year of 2006, unit labor costs rose 3.3%, the biggest rise since a 4.2% rise in 2000. It appears that rising unit labor costs, easing productivity growth, and slower economic growth in the U.S. are ratcheting up the risk of inflation pressures and starting to weigh on corporate profit margins.


Consumers most likely accrued debt at a tamer pace in June. The May level of outstanding consumer credit swelled by $12.9 billion, the second time in three months. In April, the increase was $2.3 billion, the smallest since October of 2006.

In the past three months, both revolving, made up largely of credit cards, and non-revolving, such as student and auto loans, debt have been increasing at a similar pace. On a yearly basis, however, revolving credit is still increasing at a faster pace at 6.9% in May, compared to 3.5% for non-revolving credit.


Wednesday, Aug. 8, 10 a.m. EDT - Federal Reserve Bank of Minneapolis President Gary Stern speaks on economic education and policy at an annual business luncheon by the National Assessment Governing Board in Washington, D.C.

MORTGAGE APPLICATIONS - Wednesday, Aug. 8, 7 a.m. EDT

The Mortgage Bankers Association releases its mortgage Weekly Mortgage Applications Survey of home buying and refinancing application activity for the week ending Aug 3. In the week ended July 27, the purchase index dropped another 1.8% to 416.6, after a 5% drop to 424.2 the week before. The refi index rebounded to 1724.1, from 1692.9 in the period ended July 20.

The four-week moving average for the purchase index slid lower to 435.3, from 440.5 in the week ended July 27. Meanwhile, the refi index turned slightly higher to 1692.8, from 1683.6 in the period ended July 20. Some easing in the average 30-year fixed-rate mortgage to 6.5%, from 6.59%, partially explains the uptick in refi activity.


Wholesale sales in June probably rose at a slower pace. In May, sales jumped 1.3% after a gain of 1.5% in April and 2.1% in March. The recent spurt of strong demand has driven up the yearly pace over the past three months to around 9%. However, a large part of the recent upswing is driven by higher energy prices. Sales totals are measured in dollars, not volume, so higher oil and gasoline prices are driving the sales figure.

Inventories continue to increase at a modest pace. Wholesalers reported a 0.5% gain for May, after a 0.3% rise in April. The general trend of sales growth outpacing inventory growth is also bringing down many inventory-to-sales ratios. That shows inventories are at more comfortable levels relative to demand.

In the later half of last year, increased output and weaker sales resulted in an unwanted rise in inventories. One troubling area, however, is in autos. The inventory-to-sales ratio jumped to 1.38 months, from 1.29 in April. With more weakness in retail auto sales during June and July, auto makers may scale back on production.


Thursday, Aug. 9, 2 p.m. EDT - Federal Reserve Bank of Minneapolis President Gary Stern speaks on economic education and policy at an annual business luncheon at the Minneapolis Fed's Helena branch in Helena, Mont.

JOBLESS CLAIMS - Thursday, Aug. 9, 8:30 a.m. EDT

Jobless claims moved slightly higher in the week ended July 28. The latest tally was 307,000, from 303,000 in each of the prior two weeks. The four-week moving average dropped to 305,500, from 309,000 in the week ended July 21. Continuing jobless claims for the week ended July 21 edged down to 2.53 million, from 2.54 million.

IMPORT AND EXPORT PRICES - Friday, Aug. 10, 8:30 a.m. EDT

July import prices are expected to have posted another significant increase, most likely led by higher energy costs. The price index jumped by 1% in June, the fourth consecutive monthly increase of 1% or more. Gains of 1.1%, 1.4%, and 1.6% were posted in May, April and March, respectively.

On a yearly basis, import prices are running at a 2.3% pace in June, up from 1.4% in May, but considerably better than the 7.4% yearly increase in June of 2006. Elevated petroleum prices are partially to blame with monthly gains of 4.7% in June and 3.7% in May.

However, it's not all about energy. Excluding petroleum, prices were up just 0.2% in June, but that followed a 0.5% gain in May. And the yearly pace is 2.6%, higher than the overall index. Higher metal and food prices are pushing up non-petroleum import prices. The index tracking iron and steel are up 16.9% from a year ago, with foods and feeds rising 8.1%. Given the weakening dollar, higher oil prices, and strong global demand for commodities and food, there appears to be a limited downside to the pace of import prices.

Export prices probably rose at a moderate pace. In June, the headline index climbed 0.3%, after a 0.2% rise in May, the smallest monthly increase since October of 2006. After rising a benign 0.1% in May, monthly agriculture prices mushroomed 2.9% in June. On a yearly basis, overall export prices are slowing, with a 4.1% gain in June, from 4.5% in May. Agriculture prices were running up at an 18.5% rate, from 18.3% in May and just a 0.2% increase in June of 2006. Grain prices have climbed 30.9% from a year ago in June. Strong demand for corn at home to make ethanol is a big source of the higher export price.

FEDERAL BUDGET - Friday, Aug. 10, 2 p.m. EDT

The federal government probably had its smallest July deficit in five years. In June, the government ran a surplus of $27.5 billion -- the best June overage since 2002. The year ago surplus in June was $20.5 billion.

Through the first three quarters of fiscal year 2007, the budget deficit stands at $121 billion, much smaller than the $248.2 billion shortfall over the same period last fiscal year. The narrowing deficit is due to continued strength in revenues and a slower pace of expenditure growth. Personal income tax receipts were up 11.5% so far this fiscal year vs. the first nine months of fiscal year 2006. Corporate tax receipts stood 11.3% higher. Expenditures over the first three quarters of fiscal year 2007 are up 2.5%. Looking ahead, it appears as if the budget gap will not be narrowing as fast as revenue growth is slowing down.

On a rolling 12-month period, total revenues through June were up 7.8%, compared to 8.6% in May and 13.2% in the period through June of 2006.

Earnings Calendar
Day Companies
Monday BMC Software, Spectra Energy
Tuesday Cincinnati Financial Corp., Cisco Systems, Dean Foods, Duke Energy, El Paso, Emerson Electric, FirstEnergy, Fluor, Harrah's Entertainment, International Flavors & Fragrances, Interpublic Group of Companies, King Pharmaceuticals, Marsh & McLennan, Molson Coors Brewing, PG&E, Tenet Healthcare, TXU
Wednesday American International Group, Barr Pharmaceuticals, Hospira, Integrys Energy Group, Polo Ralph Lauren, Progress Energy, Sprint Nextel, Windstream Communications
Thursday Archstone-Smith Trust, Cardinal Health, Dynegy, Edison International, NVIDIA, DirecTV Group
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