Vital Signs: Recession Risks Rise

On deck: Lots of Fed speakers, consumer credit, pending home sales, international trade, and import prices

It’s a slow week for economic data, but that doesn’t mean the next few days will be boring. On the contrary, attention in the markets is starting to turn increasingly toward the economy, which appears to have entered a more ominous phase of weakness, mainly reflecting the growing squeeze from the credit crunch.

Consumers are finally throwing in the towel, and businesses are pulling back, even as foreign economies, which had been a major support for U.S. growth, are weakening. Economists are starting to revise down their forecasts for growth in the current and following two quarters, with many now expecting declines in real gross domestic product. With recession risks growing rapidly, the Federal Reserve may soon have the justification for more interest rate cuts between now and the end of the year.

Consumer spending in the third quarter, which was expected to be weak, is shaping up to be even worse than expected. Spending data through August imply that, even with a healthy rise in September outlays, real consumer spending is set to drop at close to a 2% annual rate. A September bounce is highly unlikely, though, especially given the month’s dropoff in car sales. Consumer spending has not fallen in any quarter since 1991.

Even more worrisome, there are fresh signs that businesses are stepping up their efforts to rein in their activity. Factory orders in August declined by the most in almost two years, and in September the Institute for Supply Management reported that its index of manufacturing activity posted the largest monthly decline since 1984 and fell to a seven-year low.

Through August, cutbacks in capital spending on new equipment and construction were picking up speed. Third-quarter shipments of capital goods, after taking inflation into account, are far below their second quarter levels. Also, the much anticipated dropoff in business construction, given this year’s sharp tightening of lending standards and credit for commercial mortgages, appears to be unfolding. Business outlays for construction fell in both July and August, the first declines this year.

The markets will be especially interested in the Federal Reserve’s reaction to these growing signs that an outright recession is now developing, and investors will be getting an ear-full of opinions this week. No fewer than nine Fed and Treasury officials will make public appearances, and all will be discussing the financial markets, the bailout package, and the economy. Most notably, Fed Chairman Ben Bernanke will be speaking at a conference on Tuesday.

Given new signs of weakness in the economy, particularly in the labor markets, sentiment within the Fed may well be shifting away from concerns about inflation toward fears of recession. Even the toughest inflation hawks would find it difficult not to accede to a rate cut, if the economy is in a recession with unemployment rising, especially since oil prices are coming down, and the weak economy assures inflation more broadly will stay under control.

Here’s the weekly economic calendar from Action Economics.

Top Economic Reports
Reports Date Time For Median Estimate Last Period
Consumer Credit ($billions) Tuesday, Oct. 7 3 p.m. August $5.0 $4.6
Wholesale Trade Sales Thursday, Oct. 9 10 a.m. August -0.7% -0.3%
Trade Balance ($billions) Friday, Oct. 10 8:30 a.m. August -$59.5 -$62.2
Goods & Services Exports ($billions) Friday, Oct. 10 8:30 a.m. August $166.3 $168.1
Goods & Services Imports ($billions) Friday, Oct. 10 8:30 a.m. August $225.3 $230.3
Export Price Index Friday, Oct. 10 8:30 a.m. September 0.0% -1.7%
Import Price Index Friday, Oct. 10 8:30 a.m. September -2.7% -3.7%
Treasury Budget ($billions) Friday, Oct. 10 2 p.m. September $71.5 -$111.9

Other Reports and Events:

SPEECH: Paul Volcker, Roger Fergeson - Monday, Oct. 6

SPEECH: Treasury Asst. Secretary Ryan - Monday, Oct. 6

SPEECH: Chicago Fed President Evans - Monday, Oct. 6

SPEECH: Dallas Fed President Fisher - Monday, Oct. 6

ICSC-UBS Store Sales - Tuesday, Oct. 7

Johnson Redbook Weekly Store Sales - Tuesday, Oct. 7

Job Openings & Labor Turnover Survey - Tuesday, Oct. 7

SPEECH: Minneapolis Fed President Stern - Tuesday, Oct. 7

SPEECH: Fed Chairman Bernanke - Tuesday, Oct. 7

Federal Resere FOMC meeting minutes - Tuesday, Oct. 7

EARNINGS: Alcoa - Tuesday, Oct. 7

EARNINGS: Safeway - Tuesday, Oct. 7

EARNINGS: Yum! Brands - Tuesday, Oct. 7

Mortgage Applications - Wednesday, Oct. 8

SPEECH: Philadelphia Fed President Plosser - Wednesday, Oct. 8

Pending Sales of Existing Homes - Wednesday, Oct. 8

EARNINGS: Costco Wholesale - Wednesday, Oct. 8

EARNINGS: Monsanto - Wednesday, Oct. 8

Initial Unemployment Claim - Thursday, Oct. 9

SPEECH: Minneapolis Fed President Stern - Thursday, Oct. 9

SPEECH: Boston Fed President Rosengren - Thursday, Oct. 9

EARNINGS: General Electric - Friday, Oct. 10

EARNINGS: Host Hotels & Resorts - Friday, Oct. 10

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