Vital Signs: Getting a Read on the Damage

On tap: August figures for personal income, consumer spending, home sales, home prices, and construction activity

The Federal Reserve cut interest rates aggressively on Sept. 18 to prevent the financial firestorm on Wall Street from roaring into the real economy. However, some economists wonder if the Fed may have been too slow in reacting to contain the damage. So far, there has been very little data to assess the impact of the crisis on economic activity, but a few key reports this week will provide more clues on how much the economy is feeling the heat.

One key question is how consumers are reacting to the turmoil in the financial markets on top of a crumbling housing market and signs of a softer labor market. Most economists expect the overall August personal spending number to look pretty good. But a lot of the gain may have come from a surge in vehicle sales, similar to the August retail sales report. The August report would be more reassuring if consumer spending outside of vehicles and gasoline look better than the 0.1% dip revealed in retail sales data.

If consumers are to persevere through these anxious times and keep shopping, income growth must remain strong. Economists see personal income growth slowing a little in August. Indeed, the August employment numbers cast some doubt on whether the 5.4% annualized growth in wages and salaries through July can be sustained.

It's also important to see what businesses are doing outside of hiring. August durable goods orders could show a big retreat in demand, after a solid July. Some September readings of regional factory activity are also coming out. If manufacturers are seeing demand wane, it's an indication that businesses remain cautious about their investment spending which can lead to further pullbacks in hiring.

One area of the economy already up in flames is housing. The latest batch of housing numbers is expected to show weaker sales. Also, expect the S&P Case Shiller monthly report on home prices to show further declines in the once hot markets such as Los Angeles, Miami and Las Vegas and smaller gains in cities such as Portland (Ore.).

While the Fed's rate cut may prop up investor, business, and consumer confidence, it will likely do little for the housing market anytime soon. Tighter lending standards, not higher interest rates, are reducing the pool of potential buyers. But the Fed's rate cut has touched off concerns about higher inflation down the road, which is causing the 10-year Treasury yield -- the rate generally used to set mortgage rates -- to shoot up in recent days. That could curtail near-term demand even further.

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

Economic Reports
Report Date Time For Median Estimate Last Period
Consumer Confidence Tuesday, Sept. 25 10:00 a.m. September 104.9 105.0
Existing Home Sales (million, annual rate) Tuesday, Sept. 25 10:00 a.m. August 5.50 5.75
Durable Goods Orders Wednesday, Sept. 26 8:30 a.m. August -4.0% 5.9%
Gross Domestic Product (final) Thursday, Sept. 27 8:30 a.m. Q2 3.8% 4.0%
New Home Sales (million, annual rate) Thursday, Sept. 27 10:00 a.m. August 0.80 0.87
Personal Income Friday, Sept. 28 8:30 a.m. August 0.3% 0.5%
Personal Consumption Expenditures Friday, Sept. 28 8:30 a.m. August 0.4% 0.4%
Chicago PMI Friday, Sept. 28 10:00 a.m. September 53.0 53.8
Construction Spending Friday, Sept. 28 10:00 a.m. August -0.1% -0.4%
University of Michigan Consumer Sentiment Index (final) Friday, Sept. 28 10:00 a.m. September 83.8 83.8


Monday, Sept. 24, 9 a.m. EDT - Federal Reserve Bank of Dallas President Richard Fisher speaks on the benefits of higher education at the North Dallas Chamber of Commerce's annual real estate symposium entitled "The Changing Face of Real Estate in the Metroplex" in Dallas.

9:30 a.m. EDT - The Federal Reserve Board of Governors holds a public meeting on the final joint rules implementing the "broker" exceptions for banks under the Gramm-Leach-Bliley Act in Washington, D.C.

12:30 p.m. EDT - Federal Reserve Bank of Chicago President Charles Evans gives the introductory remarks for the Chicago Fed's luncheon speaker at the bank's conference entitled "Role of R&D in Agriculture" in Chicago.


Tuesday, Sept. 25, 7:45 a.m. EDT - Federal Reserve Bank of Philadelphia President Charles Plosser gives a speech on "Invention, Productivity, and the Economy" to the New Jersey Technology Council in Mount Laurel, N.J.

ICSC-UBS STORE SALES - Tuesday, Sept. 25, 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 Sept. 22. Sales fell a dramatic 1.1% in the week ended Sept. 15, after a four straight increases. Despite the big drop, the yearly pace of growth remained at 2.9%.

S&P/CASE SHILLER HOME PRICE INDEX - Tuesday, Sept. 25, 7:45 a.m. EDT

The S&P/Case Shiller Home Price Index measures changes in home prices on a monthly basis in 20 major metropolitan areas. Price changes are tracked by using repeat sales data. When a house is resold, the latest sales price is paired up to the amount from the prior purchase.

In July, the monthly home price index for the entire group of 20 cities fell for an eleventh straight period with a 0.4% dip. In May, prices were off 0.3% and were down 3.5% from June of 2006. The biggest monthly drops occurred in Miami, Tampa, Las Vegas and New York. But several markets remain fairly healthy, with yearly price gains still above 6% in Seattle and Charlotte and home values up 4.5% in Portland (Ore.).

JOHNSON REDBOOK INDEX - Tuesday, Sept. 25, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the second week of September, ending Sept. 22. In the second fiscal week, sales were up 0.8% vs. the same period in August. Sales for the entire month of August through Sept. 1 were down 0.5%.

EXISTING HOME SALES - Tuesday, Sept. 25, 10 a.m. EDT

Existing homes kept falling in August. Economists polled by Action Economics see sales running at an annual pace of 5.5 million units, from 5.75 million in July. The yearly pace of the decline is easing, with a 9% drop in July from 11.2% in June. Overall, sales topped out at a pace of 7.21 million in September of 2005, which brings the overall drop so far to 20.2%.

And sales are expected to keep falling. The pending home sales index, which tracks signed contracts for existing single-family homes, condos and co-ops, registered a 12.2% monthly fall in July and is off 16.1% from a year ago.

At the same time, the number of homes up for sale keeps climbing, hitting 4.59 million in July, up 18.9% from a year ago. That's equivalent to 9.6 months worth of sales, a level not seen since the early 1990s.

Falling demand and rising supply is putting pressure on home prices, as shown in several home price measures. The National Association of Realtor's median price of existing homes sold in July was off 0.6% from a year ago, although shifts in the mix (the number of luxury homes sold relative to less expensive units) may be leading to an understatement of the actual fall in sales prices.

CONSUMER CONFIDENCE INDEX - Tuesday, Sept. 25, 10 a.m. EDT

The Conference Board's index of consumer confidence probably held pretty steady in September. The index fell to 105 in August, from 111.9 in July. It was the lowest reading since August of 2006.

The deterioration in sentiment was driven by a less optimistic view of the labor market. Consumers are likely responding to the turmoil in the credit market and the drops in stock prices. One encouraging sign of consumer resilience is the small increase in the initial September reading of consumer sentiment put out by Reuters and the University of Michigan.

RICHMOND FED SURVEY - Tuesday, Sept. 25, 10 a.m. EDT

The Richmond Federal Reserve Bank issues its September survey of manufacturing activity. The seasonally adjusted composite index looked a little better in August. The latest reading was 7, vs. 4 in both July and June.

However, activity could slow a little in coming months. The August reading of shipments bounced up to 10, from 5 in July, and negative readings from last December through May of 2007. At the same time, the new orders and unfilled orders readings moderated. With production ramped up and orders books not filling up as fast, manufacturers may need to scale back a little over the coming months.

Expectations for the following six months were unchanged when it came to shipments. The August level of 25 is also a bit below the long-term average going back to late 1993. Fewer manufacturers also saw new orders picking up, although they do feel that backlogs will grow at a quicker pace.


Wednesday, Sept. 26, 8:30 a.m. EDT - Federal Reserve Bank of St. Louis President William Poole speaks at the Forum for Small Business Owners in Washington, D.C.

MORTGAGE APPLICATIONS - Wednesday, Sept. 26, 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 Sep. 21. The purchase index moved up 0.9% to 452 in the latest week, following a 5.2% rise to 448 in the prior period. The refi index hit its highest level since May, reaching 1962 from 1876.6 in the previous period.

The four-week moving average for the purchase index was 437.5, from 434.8 in the week ended Sept. 7. The refi index also climbed, with a reading of 1834.6, from 1795.7.

There's no guarantee that the Federal Reserve's Sept. 18 rate cut will lead to lower mortgage rates and stronger application volume. The average interest rate for a 30-year fixed-rate mortgage moved up to 6.29% from 6.25%.

DURABLE GOODS ORDERS - Wednesday, Sept. 26, 8:30 a.m. EDT

Durable goods orders probably fell sizably in August. There was a broad improvement in demand, leading to a substantial 6% increase in the dollar value of orders for July. Notably, construction machinery orders roared up 58.5%, after a 28.4% rise in June. Orders for industrial machinery, communications gear, and transportation equipment also rose solidly, while demand for computers fell for a second straight month.

An area to watch is capital goods orders minus defense equipment and civilian aircraft. Striping out defense and volatile aircraft orders gives a good sense of business investment. In July, orders rose 1.7%, after declines of 0.2% in June and 1.5% in May. If companies pull back to see how issues in the credit market play out, it could lead to a slowdown in capital spending and factory activity.


Thursday, Sept. 27, 10:40 a.m. EDT - Federal Reserve Bank of Chicago President Charles Evans gives opening remarks at the Federal Reserve bank of Chicago's Globalization and Systemic Risk conference Chicago.

5:30 a.m. EDT - Federal Reserve Board Governor Frederic Mishkin speaks about "Domestic Prices in an Integrated World Economy" at a conference sponsored by the Fed's Board of Governors and the Journal of Money, Credit and Banking in Washington, D.C.

JOBLESS CLAIMS - Thursday, Sept. 27, 8:30 a.m. EDT

Jobless claims slid to 311,000 in the week ended Sept. 15. In the prior week, initial claims stood at a downwardly revised 320,000, from the originally reported level of 315,000. The four-week moving average fell to 320,750, from 324,250 in the week ended Sept. 8. Continuing jobless claims, which run a week behind the initial claims figures, dropped to 2.54 million, from 2.6 million in the week ended Sep. 1.

GROSS DOMESTIC PRODUCT - Thursday, Sept. 27, 8:30 a.m. EDT

Economic growth during the second quarter will probably be revised down slightly. The final reading of second-quarter gross domestic product is expected to show an annualized pace of growth of 3.8%. The preliminary report lifted the growth rate to 4% on upward revisions to capital and consumer spending as well as a bigger positive contribution from foreign trade. Real GDP was first reported to have increased at an annual pace of 3.4% during the quarter.

NEW RESIDENTIAL SALES - Thursday, Sept. 27, 10 a.m. EDT

New single-family homes sales are expected to fall in August, after a surprising improvement in July. Sales increased 2.8%, to an annual pace of 870,000. That gain pushed the yearly rate of decline to 10.2%, from 21.2% in June. Tougher lending standards could restrict the number of potential home buyers in the short term and hurt demand.

Further declines in sales and high level of inventories will put more pressure on builders to cut prices and rein in construction even further. As the pace of sales have slowed, the level of unsold homes remained very high. The July number of unsold homes was 533,000, or 7.5 months worth of sales. That's a little better than the 7.7 months in June, but still quite elevated.

July home prices were up 0.6% from a year ago, but similar to existing home sales, the mix of homes sold affects the monthly median price. In July, the share of homes sold for more than $500,000 rose in July, while the share of those sold for less than $200,000 declined.

HELP-WANTED INDEX - Thursday, Sept. 27, 10 a.m. EDT

The Conference Board issues its August index of help-wanted ads, based on ads gathered from major newspapers across the nation. The index kept falling in July. The latest reading was 25, from 26 in June, and 31 a year ago.

Help-wanted ads once again declined in all nine of the U.S. regions during the three month period ended in July, but that should improve in August because the percentage of markets with rising want-ad volumes moved up to 49%, from 35% in June and 20% in May.

The Conference Board's tracking of online job ads rebounded a little in August, rising 0.5% or 20,600 ads. However, the rise was not viewed too positively since "August is typically a month when businesses step up hiring," according to Gad Levanon, an economist at The Conference Board. One caveat to these figures is that they are not seasonally adjusted and this report is still relatively new. The number of advertised vacancies online for every 100 persons in the labor force held steady at 2.65.


Friday, Sept. 28, 10 a.m. EDT - Federal Reserve Bank of Atlanta President Dennis Lockhart speaks at Middle Tennessee University's Economic Outlook Conference in Murfreesboro (Tenn.).

10:15 a.m. EDT - Federal Reserve Bank of San Francisco President Janet Yellen speaks on a panel about behavioral economics and economic policy at a two-day economic conference in Boston.

1:15 p.m. EDT - Federal Reserve Board Governor Frederic Mishkin gives a keynote address at the Chicago Fed's tenth annual international banking conference on Globalization and Systemic Risk in Chicago.

5 p.m. EDT - Federal Reserve Bank of St. Louis President William Poole gives a speech entitled "Thinking Like a Central Banker" in New York City.


Personal income is expected to grow at a slightly more modest pace. In July, overall personal income rose 0.5%, after gains of 0.4% in each of the prior two months. On a yearly basis, income picked up to 6.6%, from 6.1% the month before.

A solid labor market has been a key driver, with wages and salaries improving 0.5% in July and June, pushing up the annual gain to 7.2% in July. Healthy income gains have allowed consumers to keep spending despite the troubles in housing and elevated gasoline prices. If businesses are turning cautious and not hiring workers, as the August fall in payrolls suggests, then it could have a big impact on income and spending going forward.

So far, spending has been doing pretty well, with a 0.3% rise in July. However, the yearly pace of growth did slow to a 4.7% pace, the softest rate in four years. Economists were looking for a repeat of last year, when gasoline prices dropped sharply in the second half of the year as a potential source of extra money to spend on other good and services. However, oil prices have soared to above $80 per barrel and gasoline prices in the week of Sep. 17 were up 11.6% from a year ago.

This report also includes inflation data that's closely watched by the Federal Reserve. The personal consumption expenditures (PCE) price indexes are in fact the preferred price gauge by the central bank. The headline index ticked up 0.1% in July, after a 0.2% rise the month before and a 0.5% energy-driven surge in May. On a yearly basis, headline inflation for July cooled down to 2.1%, from 2.3%. Excluding food and energy, prices also edged up 0.1%, keeping the annual pace at 1.9% for a second straight period. The current pace is also within the Fed's inflation "comfort zone" of 1% to 2%.


The Chicago-area purchasing managers' industrial activity index likely edged a little lower in September. Struggles among domestic vehicle producers are likely weighing on the readings. The seasonally adjusted headline Business Barometer index was 53.8% in August and 53.4% in July. Fewer respondents reported increases in production and employment.

There was a little good news in the new orders index, which rose to 58.4% in July, from 53.4% in June, although the levels in May and June were considerably higher.

CONSTRUCTION SPENDING - Friday, Sept. 28, 10 a.m. EDT

Construction outlays probably contracted a little more in August. Spending fell 0.4% in July as home builders continue to adjust to ongoing weakness in demand. Private residential outlays fell 1.4% on a monthly basis. The yearly pace of decline has been gradually improving, with the July fall of 16.1%, compared to 16.8% in June and a low of 20% in March.

Tighter lending standards will keep applying some downward pressure on demand for new homes and residential construction. That also means residential construction will continue to be a big drag on economic growth for at least the remainder of the year.

Outside of housing, private nonresidential outlays rose 0.4% in July for a second straight month. Activity continues to be brisk in the lodging, office, and commercial areas. However, if the credit markets make it harder to raise money for new non-residential construction projects, activity could moderate. Government spending is also holding up well, with growth of 0.7% in July and 12.7% from a year ago.

CONSUMER SENTIMENT INDEX - Friday, Sept. 28, 10 a.m. EDT

The University of Michigan and Reuters will release the final reading of consumer sentiment for September. The index probably remained close to the preliminary reading of 83.8.

The preliminary results for September showed that respondents remain a little downbeat about current conditions, but have some hope that the situation will improve in the coming months. The index of consumer expectations rose to 74.4, from 73.7 in August. The final August level plunged to 83.4, from 90.4 in July.

Earnings Calendar
Day Companies
Tuesday Lennar
Wednesday Bed Bath & Beyond, Paychex
Thursday Jabil Circuit, KB Home, McCormick & Co.
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