business

Vital Signs: Sealing the Deal for a Rate Cut

On tap: August retail sales and industrial production, July foreign trade, and speeches by several Federal Reserve officials

Suddenly the U.S. economy is looking vulnerable. Confidence that economic activity could handle the one-two punch of a housing recession and the interconnected blowup in subprime loans is giving way to palpable concerns of a full-blown credit squeeze that could push the economy up against the ropes or even knock it into a recession.

That's why Wall Street economists believe the Federal Reserve will lower the federal funds target rate, now at 5.25%, during its Sept. 18 monetary policy meeting.

Further deterioration in housing, hints of labor market softening, and no end to the liquidity squeeze, which is making it tougher for businesses to borrow money, only strengthened the case for further Fed action. A few economic reports due out this week could virtually seal the deal for Fed officials if the figures come in below economists quite modest expectations.

August government reports on retail sales and industrial production will show if consumers and businesses are feeling any of the pain from housing and tighter credit. For retailers, August is a big month as families gear up for school, and early readings of back-to-school sales appear upbeat. One positive factor is that lower gasoline prices should free up cash for other goods. The top-line number for retail sales should also get a boost from the increase in August auto sales.

Yet a drop in the fresher September report on consumer sentiment could largely offset any sense of reassurance that the older August retail sales data might elicit.

Industrial production has picked up in the past couple months but there appears to be some downside risk for August and future months. Vehicle production pulled up overall factory output in the past two months, but that isn't likely to be repeated in the near future. Vehicle producers have been cutting production plans for the third and fourth quarters.

Fed watchers will also listen closely to several central bank officials' speeches, including one by chairman Bernanke in Berlin, for any clues on what the central bank will do on Sept. 18. However, with such a strong belief on Wall Street that a rate cut is coming, the upcoming data will be likely be viewed in the context of whether a quarter-point or half-point cut is most appropriate.

And what if the Fed stands pat? It could very well cause a nasty backlash on the financial markets that could make matters worse.

Here's the lineup of reports for the next week, from Action Economics.

Economic Reports
Report Date Time For Median Estimate Last Period
Consumer Credit (billion) Monday, Sept. 10 3 p.m. July $8.7 $13.2
Trade Balance (billion) Tuesday, Sept. 11 8:30 a.m. July -$59.3 -$58.1
Treasury Budget (billion) Thursday, Sept. 13 2 p.m. August -$53.0 -$36.3
Retail Sales Friday, Sept. 14 8:30 a.m. August 0.3% 0.3%
Retail Sales (ex-auto) Friday, Sept. 14 8:30 a.m. August 0.3% 0.4%
Export Price Index Friday, Sept. 14 8:30 a.m. August 0.2% 0.2%
Import Price Index Friday, Sept. 14 8:30 a.m. August 0.4% 1.5%
Current Account (billion) Friday, Sept. 14 8:30 a.m. Q2 -$191.7 -$192.6
Industrial Production Friday, Sept. 14 9:15 a.m. August 0.3% 0.3%
Capacity Utilization Friday, Sept. 14 9:15 a.m. August 81.9% 81.9%
Business Inventories Friday, Sept. 14 10 a.m. July 0.3% 0.4%
University of Michigan Consumer Sentiment Index (preliminary) Friday, Sept. 14 10 a.m. September 83.5 83.4

MEETINGS OF NOTE - Monday, Sept. 10, 8:30 a.m. EDT

Federal Reserve Bank of Atlanta President Jack Guynn speaks about the U.S. economy at a breakfast in Atlanta.

11 a.m. EDT - Federal Reserve Bank of San Francisco President Janet Yellen gives a speech entitled "A View from the Federal Reserve" at the National Association for Business Economics annual meeting in San Francisco.

11:45 a.m. EDT - Council of Economic Advisers chairman Edward Lazear discusses the U.S. economy at the National Association for Business Economics annual meeting in San Francisco.

1 p.m. EDT - Federal Reserve Bank of Dallas President Richard Fisher speaks at a community forum hosted by the Dallas Fed's San Antonio branch in Laredo, Texas.

1 p.m. EDT - Assistant Treasury Secretary for Economic Policy Phillip Swagel speaks on the Homeowners Defense Act of 2007 before the House Committee on Financial Services Subcommittee on Housing and Community Opportunity and Subcommittee on Capital Markets in Washington, D.C.

7:30 p.m. EDT - Federal Reserve Board Governor Frederic Mishkin speaks at the New York University Money Marketeers Club in New York City.

CONSUMER INSTALLMENT CREDIT - Monday, Sept. 10, 3 p.m. EDT

Consumers most likely reined in their use of credit cards in July. Consumer debt jumped $13.2 billion in June, following an addition of $15.9 billion in May. The recent increases have been pretty evenly split between revolving, made up mostly of credit cards, and non-revolving debt, which includes auto and student loans.

Even so, the yearly pace of growth in consumer credit appears to be plateauing. In each of the past three months, consumer credit has been registering a 5% gain from a year ago.

MEETINGS OF NOTE

Tuesday, Sept. 11, 11 a.m. EDT - Federal Reserve Board Chairman Ben Bernanke delivers an annual Bundesbank lecture entitled "Global Imbalances: Recent Developments and Their Implications" in Berlin.

11 a.m. EDT - Federal Reserve Bank of Dallas Executive Vice President Harvey Rosenblum moderates a panel on security issues at the National Association for Business Economics annual meeting in San Francisco.

ICSC-UBS STORE SALES - Tuesday, Sept. 11, 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 Sep. 8. Sales increased 0.2% in the week ended Sept. 1, after a 0.3% gain in the week ended Aug. 25. The yearly pace of growth cooled a little more, to 2.3% over the latest week, from 2.5% in the prior period and 2.7% for the week ended Aug. 18.

INTERNATIONAL TRADE - Tuesday, Sept. 11, 8:30 a.m. EDT

The U.S. trade deficit of goods and services probably widened a little bit in July. The June trade gap was less than expected, coming in at $58.1 billion from $59.2 billion in May. Exports continued to grow at a solid clip on strong economic growth abroad. In June, foreigners bought $134.5 billion worth of goods and services, up 1.5% from May and 11.2% from a year ago.

The jump in June exports was helped out a bit by higher energy prices. Petroleum shipments abroad surged $323 million. Meanwhile, capital goods purchases rose 0.2%, or $71 million.

Economists expect the trade gap will widen in July due to a pick up in imports. However, softer economic growth and a weaker dollar have lessened demand for foreign goods and services. In June, import growth slowed to a yearly pace of 3.8%, from 3.9% in May, and 4.9% in April.

JOHNSON REDBOOK INDEX - Tuesday, Sept. 11, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the first week of September, ending Sept. 8. Sales for the entire month of August through Sept. 1 were down 0.5% after July sales climbed 0.6%.

MORTGAGE APPLICATIONS - Wednesday, Sept. 12, 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 Sept. 7. After posting drops in bids in the week ended Aug. 24, application volume improved. In the week ended Aug. 31, the purchase index edged up to 425.8 from 424 in the prior week. The refi index bounced to 1770.2 from 1729.6 in the week ended Aug. 24.

The four-week moving average for the purchase index fell for the first time in four weeks to 439, after rising to 444.4 in the week ended Aug. 24. The refi index also trailed off, with a four-week average of 1808.9, after the index rose a little to 1836.6 for the period ended Aug. 24, from 1835.3.

The average interest rate for a 30-year fixed-rate mortgage ticked up to 6.42%, from 6.41%.

The decline in application volume is concentrated in the adjustable-rate mortgage area. Applications for adjustable-rate mortgages fell to 12.6% of all applications submitted from 15.0% in the previous week.

JOBLESS CLAIMS - Thursday, Sept. 13, 8:30 a.m. EDT

Jobless claims fell in the week ending Sept. 1 to 318,000. In the week ended Aug. 25, claims rose to 337,000, from 325,000 in the prior period. The four-week moving average rose to 325,250, from 324,500 in the week ended Aug. 18. Continuing jobless claims, which run a week behind the initial claims figures, rose to 2.60 million, from 2.57 million in the week ended Aug. 18.

FEDERAL BUDGET

Thursday, Sept. 13, 2 p.m. EDT

Solid gains in tax revenues should continue to keep the federal deficit down for this fiscal year. The federal government is expected to run a $53 billion deficit in August. That's the consensus among economists queried by Action Economics. Last August, the monthly shortfall was $64.7 billion. In July, the government posted a $36.3 billion surplus, vs. $33.2 billion in 2006.

Through the first ten months of fiscal year 2007, revenues are up 7.4%, vs. a 2.9% rise in expenditures. Looking ahead to fiscal year 2008, it will be tougher for the budget deficit to shrink again as economic growth in the past few quarters has slowed while risks to growth going forward have risen due to the deepening housing recession and tighter credit markets.

RETAIL SALES - Friday, Sept. 14, 8:30 a.m. EDT

Retail sales are expected post another modest increase in August. In July, sales rebounded with a 0.3% increase, after tumbling 0.7% in June on a large drop in auto sales. Purchases of motor vehicles also eased in July, but it appears as if big incentives by auto makers and lower gasoline prices helped attract more people into showrooms in August. According to WardsAuto.com, sales improved to an annual rate of 16.2 million vehicles, from 15.5 million in July.

A further decline in gasoline station sales is likely as well due to lower gasoline prices. That's good news as it frees up money to be spent on other items and services. The areas to watch are apparel and electronics sales, as this August is prime back-to-school sales time.

After a very weak second-quarter for consumer spending, on a price adjusted basis, economists expect spending to pick up. However, there's increased uncertainty about how people and consumer spending will respond to falling stock prices, lower home values, and higher lending standards.

IMPORT AND EXPORT PRICES - Friday, Sept. 14, 8:30 a.m. EDT

After several months of hefty increases in import prices, August is expected to bring a more subdued rise. A 7% surge in petroleum prices pushed the overall index to jump 1.5% in July. However, gasoline prices eased in August, while the price for a barrel of oil held pretty steady.

Outside of energy, import prices rose 0.2% in July, after edging up 0.1% the month before and 0.6% in May. And on a yearly basis, the costs of non-petroleum goods rose by 2.8% in August -- equal to the yearly increase for all goods. The similar increase partially reflects the impact of a weaker dollar, which makes foreign goods more expensive in dollar terms. What's more, prices of goods from China are no longer falling. In July, prices for Chinese imports rose 0.4% and were up 0.9% from a year ago.

Export prices probably rose a little more in August. The index showed a 0.2% gain in July due entirely to higher prices for agricultural items. Both grain and meat prices are galloping higher due in part to increased demand for corn to make ethanol fuel. However, energy exports have not surged in recent months as imports have. Led by falling natural gas prices, prices for oil and gas dropped 10.4%. Lower energy prices have held down overall export prices outside of agriculture.

CURRENT ACCOUNT - Friday, Sept. 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 -- was probably smaller than the first quarter gap. In the first three months, the deficit increased to $192.6 billion, after a $187.9 billion gap in the fourth quarter of 2006. Strength in exports and softer demand for imports are the underlying reasons for economists' expectations of a smaller deficit. At the same time, a softer dollar and rallies in foreign stock markets could help boost investment income from abroad.

In the first quarter, the deficit was about 5.7% of gross domestic product. That's still an historically large level, especially for a developed country. However, there's a clear trend of improvement occurring. In 2006, the current account deficit was 6.2% of GDP.

INDUSTRIAL PRODUCTION - Friday, Sept. 14, 9:15 a.m. EDT

August factory activity probably expanded modestly, although some downside risks exist. In July, the Federal Reserve's index of industrial production rose 0.3%, after an upwardly revised increase of 0.6%. A large chunk of the July rise came from a 0.6% surge in factory production, which in turn was driven by a big increase in motor vehicles. August vehicle sales were better than expected due to large incentive packages, but that may not last. Consumers may begin to pull back on spending for big ticket items such as vehicles due to the housing downturn and rising unease over the job market.

The forecast increase in August production is expected to be enough to keep the capacity utilization rate at 81.9%. Over the past year, capacity has increased at a faster pace than output. That lowered the utilization rate from a recent high of 82.4% in August and July of 2006.

BUSINESS INVENTORIES - Friday, Sept. 14, 10:00 a.m. EDT

Business inventories probably grew by 0.3% in July, say economists surveyed by Action Economics. Already, factory inventories were reported to have risen 0.2%. In the prior two months of June and May, inventories grew by 0.4% and 0.5%, respectively. Businesses have been filling up their warehouses because of stronger demand. However, total sales for manufacturers, wholesalers, and retailers slipped 0.3% in June and even if demand snaps back in July, there are concerns that turmoil in the financial markets could lead businesses and consumers to hold back on spending in the upcoming months.

Two indicators to watch in this report going forward are the inventory-to sales ratio and the yearly growth rate in inventories vs. sales. Both are used as barometers for future factory production and overall economic activity. If demand softens and businesses find themselves with too much inventory relative to demand, it is captured in a higher inventory-to-sales ratio and a growth rate in inventories exceeding demand.

CONSUMER SENTIMENT INDEX - Friday, Sept. 14, 10 a.m. EDT

The preliminary Reuters/University of Michigan consumer sentiment index for September probably held pretty steady after dropping sharply in August. The final reading for August hit a 12-month low of 83.4, from 90.4 in July. Increased turbulence in the financial markets is making consumers more nervous about current economic conditions and the outlook. That in turn has respondents feeling very uncomfortable about their personal finances. A caveat to flagging consumer confidence indices such as this one is that they are often poor indicators of actual consumer spending.

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