Vital Signs: Will Consumers Hamper Growth?

On tap: September retail sales and producer prices, August foreign trade, and early consumer sentiment readings for October

Consumers dominate the U.S. economy, with personal spending accounting for more than two-thirds of real gross domestic product. So it's not a surprise that economists and the Federal Reserve are paying close attention to how consumers are handling a bevy of challenges running from falling home prices to weaker job growth.

So far consumers have done pretty well. Retail sales this year have increased at an annualized 5.8% clip through August. But that was before the full effect of the credit market squeeze came to bear on the economy. This week's September results and subsequent reports tracking fourth-quarter sales have very important implications for the health of the economy and monetary policy.

Economists expect September sales to hold up pretty well and that view got a boost with better-than-expected vehicle sales for the month. However, weekly chain-store sales results in September were mixed.

Ultimately, the consumers' ability to keep shopping hinges on how businesses are doing. After all, wages and job gains have driven spending growth of late. One area to watch is corporate bottom lines. So far, profit growth and margins have held up fairly well. But given all the turbulence in the financial markets and uncertainty about the economy, it's important to see how companies performed in the third quarter. This week earnings season gets underway.

What's more, strong demand from abroad has been a boon for many U.S. companies. The August trade deficit is expected to come in around $59 billion on strong demand for U.S. goods and services. Through July, exports of capital equipment are up 7.4% vs. the same period last year, while consumer goods shipments are 11.4% higher.

If businesses can recapture some of the confidence they lost in the past month due to the credit crunch, then the outlook for consumer spending and economic growth will brighten.

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

The bond market will be closed on Monday, Oct. 8 in observance of the Columbus Day holiday.

Economic Reports
Report Date For Median Estimate Last Period
Wholesale Trade Sales Wednesday, Oct. 10 August 0.2% 0.1%
Trade Balance (billion) Thursday, Oct. 11 August -$59.1 -$59.2
Export Price Index Thursday, Oct. 11 September 0.2% 0.2%
Import Price Index Thursday, Oct. 11 September 1.0% -0.3%
Treasury Budget (billion) Thursday, Oct. 11 September $100.0 -$117.0
Retail Sales Friday, Oct. 12 September 0.3% 0.3%
Retail Sales (ex-auto) Friday, Oct. 12 September 0.4% -0.4%
PPI Friday, Oct. 12 September 0.5% -1.4%
PPI (ex-food & energy) Friday, Oct. 12 September 0.1% 0.2%
Business Inventories Friday, Oct. 12 August 0.3% 0.5%
University of Michigan Consumer Sentiment Index (preliminary) Friday, Oct. 12 October 83.4 83.4


Tuesday, Oct. 9, 1:30 p.m. EDT - Federal Reserve Bank of St. Louis President William Poole gives a global economic update at the Industrial Asset Management Council's Professional Forum in St. Louis.

3:40 p.m. EDT - Federal Reserve Bank of San Francisco President Janet Yellen discusses the national outlook at the Town Hall-Los Angeles public affairs forum in Los Angeles.

ICSC-UBS STORE SALES - Tuesday, Oct. 9, 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 Oct. 6. Sales held steady in the latest period after posting drops of 1% in the week of Sept. 22 and 1.1% in the period ended Sept. 15. The yearly pace of growth bounced up to 2.7%, from 2.4% in the week ended Sept. 22.

JOHNSON REDBOOK INDEX - Tuesday, Oct. 9, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the fifth week of September, ending Oct. 6. Through the first four fiscal weeks, sales were up 0.3% vs. the same period in August. Sales for the entire month of August through Sept. 1 were down 0.5%.

FOMC MINUTES - Tuesday, Oct. 9, 2 p.m. EDT

The Federal Reserve will release the minutes for the Sept. 18 Federal Open Market Committee meeting. Fed watchers will read the report to see how members of the central bank view the risks of weaker growth and inflation. In addition, views on conditions in the financial market will be important.

Overall, economists will be reviewing the report in the context of what it means for the upcoming Oct. 31 policy meeting. Right now there is a pretty even split among those who see another 25 basis-point cut to bring the target fed funds rate down to 4.5% and those who see the central bank standing pat.


Wednesday, Oct. 10, 8 a.m. EDT - Federal Reserve Bank of Boston President Eric Rosengren speaks about recent developments in the financial and real estate markets in Portland, Me.

9 a.m. EDT - Former Federal Reserve Chairman Alan Greenspan speaks about the global economy at the World Business Forum in New York City.

MORTGAGE APPLICATIONS - Wednesday, Oct. 10, 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 Oct 5. Both the purchase and refi indexes fell in the week ended Sept. 28. The purchase index was 411.4, down from 418.8 in the prior period. The refi measure slipped to 1950.4, from 2026.5 for the week ended Sept. 21.

The four-week moving average for the purchase index hit a 20-week low of 432.6 in the latest period, while the refi index improved to 1953.9, from 1908.8.

The average interest rate for a 30-year fixed-rate mortgage eased to 6.32%. That's still above the rate just before the Federal Reserve's Sept. 18 interest rate cut, but down about a third of a percentage point since the most recent peak of 6.66% in early July.


Wholesale sales in August probably did a little better than the soft July performance. The July 0.1% increase was the weakest since January, with sales held back by drops in computers, following a big June increase, and groceries. On a yearly basis, sales growth is decelerating, coming in at 7.2% in July, from 7.9% in June and 8.7% in May.

The July gain in inventories of 0.2% outpaced sales for the first time since January. And on a yearly basis, inventory growth also slowed, coming in at 5.5%, from 6.1% in June and 6.7% in May. The inventory-to-sales ratio remained at an historically low 1.1 months. Even though economic growth appears to be slowing, the silver lining is that businesses don't appear to be caught flat footed with an unintended pile up of inventories as they were last year.

JOBLESS CLAIMS - Thursday, Oct. 4, 8:30 a.m. EDT

Jobless claims jumped to 317,000 in the week ended Sept. 29. In the prior period, initial claims eased to 301,000, from 313,000 for the week ended Sept. 15. The four-week moving average drifted up to 312,750, from 312,250 for the week ended Sept. 22. Continuing jobless claims, which run a week behind the initial claims figures, fell to 2.54 million, from 2.56 million in the week ended Sept. 15.

IMPORT AND EXPORT PRICES - Thursday, Oct. 11, 8:30 a.m. EDT

A surge in oil prices helped push up September import prices. During the month, oil and gasoline prices increased.

In August, a 1.3% drop in petroleum import prices pulled the overall measure down by 0.3%. On a yearly basis, overall import prices grew by 1.9% in August, down from 2.8% in July. Excluding petroleum, import prices cooled down some with a 2.3% increase, from 2.9% in July.

Outside of energy, prices of imports edged down 0.1%, although prices of capital goods, vehicles, and consumer goods all rose 0.2% for the month. The annual pace of non-energy imports remain pretty subdued, but have picked up a little. Capital goods prices are up 0.4% from a year ago, but were falling through most of 2006.

Prices of consumer goods and vehicles are also rising more quickly now than last year. Some of the increase is due to a weaker dollar. On a trade-weighted basis, the greenback is down 6% vs. a broad basket of currencies.

Export prices probably rose a little more in September. The index showed a 0.2% gain in August due entirely to higher prices for agricultural items. Both grain and meat prices are surging, up 17.6% from a year ago in August. Manufacturers are also getting a boost, with export prices for capital goods rising 1.5% from a year ago, the strongest annual increase since early 1996. The weak dollar is making U.S. goods and services more competitive in the global economy.

INTERNATIONAL TRADE - Thursday, Oct. 11, 8:30 a.m. EDT

The August U.S. trade deficit of goods and services probably didn't change much from the July gap of $59.1 billion. In June, the trade gap was $59.4 billion. So far this year, the deficit is $35.3 billion less vs. the first seven months of 2006.

The smaller shortfall is due to slower import growth and stronger demand for exports. In July, the increase in imports was 5.1% from a year ago, while exports were up 14.8%. Although exports of goods, especially capital equipment, have gotten a lot of the attention, services are doing better. After growing at a high single-digit pace, exports of services were up 12.6% from a year ago in July.

The trend in the trade gap could continue to narrow this year. Softer economic growth in the U.S. and a weaker dollar should continue to dampen import demand while a resilient global economy and more competitively priced U.S. exports should keep international demand strong.

FEDERAL BUDGET - Thursday, Oct. 11, 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 $100 billion surplus in the final month of fiscal year 2007, compared to $56.2 billion a year ago.

In August, the deficit was $117 billion, pushing up the fiscal year total shortfall to $274.4 billion. If the forecast surplus for September is accurate, then the total fiscal year 2007 budget deficit would be the smallest since 2002.

The fiscal improvement is due to solid revenue growth and slower expenditure increases. However, it may be hard for revenues to keep expanding at the current pace with the economy growing at a slower pace and potential weakness in the labor market.


Friday, Oct. 12, 9:10 a.m. EDT - Federal Reserve Board Chairman Ben Bernanke gives the opening remarks via a videoconference at a conference honoring economist and former Under Secretary for International Affairs John Taylor entitled "John Taylor's Contributions to Monetary Theory and Policy," in Dallas.

9:25 a.m. EDT - Federal Reserve Bank of Dallas President Richard Fisher speaks at the Dallas Fed's conference honoring John Taylor.

6 p.m. EDT - Fisher and Federal Reserve Bank of San Francisco President Janet Yellen participate in a policy roundtable at the Dallas Fed conference entitled "John Taylor's Contributions to Monetary Theory and Policy."

8 p.m. EDT - Federal Reserve Board Vice Chairman Donald Kohn speaks at a dinner during the Federal Reserve Bank of Dallas' conference honoring John Taylor.

RETAIL SALES - Friday, Oct. 12, 8:30 a.m. EDT

Retail sales are expected post another modest increase in September as light vehicle sales turned in a decent performance. In August, sales climbed 0.3% on a monthly basis and 3.7% from the same month a year ago.

The pace of retail sales is slowing down. So far through August, sales are up at an annualized rate of 3.3%, vs. a 6.1% rise last year, and the weakest gain since the 2.4% rise in 2002. Sales outside of vehicles are growing at a slightly faster pace but are still a bit softer than the past few years.

The areas to watch again are apparel and electronics sales to see how back-to-school sales did. In August, the performance was mixed, with electronics purchases up 0.4% and apparel off 0.1%. Department store sales were also off 0.2%.

After a tepid second-quarter for consumer spending, economists expect spending to be stronger in the third quarter. However, signs of a softer labor market along with ongoing issues in the credit markets and housing could cause sales to ease up again in the final quarter.

PRODUCER PRICE INDEX - Friday, Oct. 12, 8:30 a.m. EDT

Wholesale prices are expected to rise in September as energy prices likely climbed back a little after a large drop in August. The overall index dropped 1.4% as energy costs plunged 6.6%. Within energy, gasoline prices fell 13.8% in August while natural gas dropped 8.5%.

Outside of energy and food, producer prices were up 0.2% in August. Increased prices for passenger cars and aircraft led core wholesale prices higher.

On a yearly basis, inflation for businesses is easing, standing at 2.2% in August, from 4% in July and 3.8% last August. Core producer price increases have been stickier, with a gain of 2.2% from a year ago in August, from 2.3% in July and 1.2% last August. However, the yearly pace looks set to ebb in the fourth quarter.

BUSINESS INVENTORIES - Friday, Oct. 12, 10:00 a.m. EDT

Business inventories probably grew at a slower clip in August, after climbing 0.5% in July and 0.4% the month before. Already, factory inventories were reported to have eased 0.1%. On a yearly basis, inventories rose 3.5% for a second straight period in July, the smallest increase in over three years.

Meanwhile, sales have been running stronger of late. That's driven the inventory-to-sales ratio back down to 1.26 months after rising to 1.3 months back in January. Business inventory levels are in better shape relative to sales than this time last year. If economic activity does decelerate in the coming months, it shouldn't be exacerbated by attempts to liquidate stockpiles and corresponding cutbacks in production.

CONSUMER SENTIMENT INDEX - Friday, Oct. 12, 10 a.m. EDT

The initial Reuters/University of Michigan consumer sentiment index for October probably held at 83.4. The final reading for September held at 83.4, after falling to that level in August -- marking a 12-month low.

Consumers felt a little less positive about current conditions, but were a little more upbeat about the coming six months. There was also a nice bounce in respondents' view of their current personal financial situation, although more people felt that it was a bad time to buy a big ticket item such as an appliance or furniture.

Earnings Calendar
Day Companies
Monday Yum! Brands
Tuesday Alcoa
Wednesday Host Hotels & Resorts, Monsanto, Progressive
Thursday Costco Wholesale, M&T Bank, PepsiCo, Safeway
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