Vital Signs: Slower Inventory Cuts Can Help Boost Growth

The raft of key data coming this week will help economists put the finishing touches on their forecasts for third-quarter economic growth. Recent weaker-than-expected readings from the labor markets, factory orders, and the Institute for Supply Management's manufacturing survey have quelled some of the more enthusiastic expectations for what will be the recovery's first advance in GDP. Those projections had been running generally between 3% and 4%. Now, forecasts are beginning to settle toward the lower end of that range.

For the purposes of forecasting third-quarter GDP, August business inventories will be the week's most important report. Companies are expected to have greatly reduced their rate of liquidation, after cutting their stockpiles at a record $160 billion annual rate in the second quarter. Every reduction of $30 billion in the rate of liquidation adds about one percentage point to GDP growth. Economists expect the slower rate of inventory cutting to boost GDP by about 2 percentage points, but the August data will help to refine those expectations.

As always, consumers will also play a key role in the quarter's growth. September retail sales will offer guidance there. August sales soared 2.7% on the back of the cash-for-clunkers boost to car sales. However, the surprise was the breadth of the gain, as purchases excluding autos and gasoline rose a healthy 0.6%. September buying is certain to plunge, given that the annual rate of car sales fell to 9.2 million from 14.1 million in August, but economists will be most interested in how non-auto sales fared.

In fact, autos have played a big role in the rebound in industrial production. Manufacturing output rose in both July and August, the first gains in nine months, with auto production accounting for more than half of the July advance and about a third of the August gain. Some economists fear that the rebound in manufacturing may be fading as the auto boost wears off. September industrial production, along with October business surveys from the New York and Philadelphia Federal Reserve districts, will shed light on the strength of the industrial sector heading into the fourth quarter.

Finally, the week offers a look at the minutes of the Fed's Sept. 22-23 policy meeting, along with an update on consumer price inflation, the outlook for which has sharply divided both economists and policymakers. The question is when the Fed should begin withdrawing its flood of monetary stimulus before it sets off an unwanted pickup in inflation.

However, many economists are concerned about the opposite problem: deflation. The consumer price index is expected to show the overall CPI continued to decline from a year ago, but that drop is entirely due to lower gasoline prices. Analysts are more interested in the declining trend in core inflation, which excludes energy and food. The core inflation rate had fallen to 1.5% in August, from 2.5% a year ago. With so much slack in the labor markets and overall production capacity, the decline seems likely to continue to levels below the 1% lower bound of the Fed's comfort zone. The stronger the gain in third-quarter GDP, though, the more those fears will be allayed.

Here's the weekly calendar, from Action Economics.

  Top Economic Reports Reports Date Time For Median Estimate Last Period Treasury Budget ($Billions) Not Yet Announced 2:00 p.m. September -$67.5 -$111.4 Retail Sales Wednesday, Oct. 14 8:30 a.m. September -1.6% 2.7% Retail Sales (Excluding Autos) Wednesday, Oct. 14 8:30 a.m. September 0.2% 1.1% Export Price Index Wednesday, Oct. 14 8:30 a.m. September 0.1% 0.7% Import Price Index Wednesday, Oct. 14 8:30 a.m. September 0.0% 2.0% Business Inventories Wednesday, Oct. 14 10:00 a.m. August -0.7% -1.0% Consumer Price Index Thursday, Oct. 15 8:30 a.m. September 0.3% 0.4% Consumer Price Index (Excluding Food & Energy) Thursday, Oct. 15 8:30 a.m. September 0.2% 0.1% Empire State Index Thursday, Oct. 15 8:30 a.m. October 17.5 18.9 Philadelphia Fed Index Thursday, Oct. 15 10:00 a.m. October 12.0 14.1 Industrial Production Friday, Oct. 16 9:15 a.m. September -0.3% 0.8% Capacity Utilization Rate Friday, Oct. 16 9:15 a.m. September 69.6% 69.6% Consumer Sentiment Index (Preliminary) Friday, Oct. 16 9:55 a.m. October 73.5 73.5 Source: Action Economics

  Other Reports and Events Report/ Event Date Time For NFIB Survey (Small Business) Tuesday, Oct. 13 7:30 a.m. September ICSC-UBS Store Sales Tuesday, Oct. 13 7:45 a.m. Oct. 4-10 Johnson Redbook Weekly Store Sales Tuesday, Oct. 13 8:55 a.m. Oct. 4-10 SPEECH: New York Fed President Dudley Tuesday, Oct. 13 1:00 p.m. SPEECH: Fed Vice-Chairman Kohn Tuesday, Oct. 13 1:15 p.m. Mortgage Applications Wednesday, Oct. 14 7:00 a.m. Oct. 4-10 FOMC Meeting Minutes Wednesday, Oct. 14 2:00 p.m. Sept. 22-23 Initial Unemployment Claims Thursday, Oct. 15 8:30 a.m. Oct. 4-10 Treasury International Capital Data Friday, Oct. 16 9:00 a.m. August

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