The U.S. economy is relaying mixed messages. The rest of the global economies have shown vibrancy and the dollar has remained weak, which in turn has supported exports from the U.S. An increase in exports is a positive for growth. That said, retail sales growth forebodes troubles on the consumer front. Specifically, spending on high-value consumer discretionary items is on the downhill.
Retail sales fell 0.1% in July, with the decline spearheaded by a 2.4% drop in motor vehicle sales. Sales excluding autos rose 0.4%, partly benefiting from higher gasoline sales. The core retail sales, which exclude autos, gasoline and building materials, rose 0.3%.
Food and gas have used much of the economic stimulus due to the fact that energy and food prices have risen significantly. Wachovia Securities expects consumer spending for the second-half of the year to show a decline, primarily due to a decline in real household income growth and difficult credit market. Nevertheless, consumer sentiment seems to be making a turn for the better. The preliminary reading of the University of Michigan`s consumer sentiment index for August edged up slightly to 61.7, although the increase was less than what many economists were predicting. Wachovia is of the view that the worst of the credit crisis is behind us, although it expects the workout to last for quite some time - at least till the end of the year.
However, one can derive some comfort from the recent steady descent in oil prices. Although falling energy prices could mitigate some downside risks to the economy, their impact on inflation environment is yet to be manifested.
The Labor Department`s inflation report for July showed that consumer prices rose 0.8% on a monthly basis, lifting the annual inflation rate to 5.6% from 5% in the previous month. Energy prices climbed 4% and food prices escalated 0.9%, with the increases in these categories due to higher gasoline prices and prices of food away from home, respectively.
The core consumer price index rose at a monthly rate of 0.3%, marking an annual increase of 2.5%. Meanwhile, another report released by the Labor Department showed that import prices rose at a staggering 21.6% year-over-year rate in July, marking the biggest increase since 1980.
Among the other important economic reports released during the bygone week, the Commerce Department`s trade balance report for June showed a narrower deficit of $56.8 billion compared with a deficit of $59.2 billion in May. Exports increased 4% on a monthly basis due to strong performances of capital goods, industrial supplies and auto-related products. Meanwhile, imports increased 1.8% in nominal terms, with the increase primarily due to an increase in oil prices. In real terms, imports declined 0.6%. The improvement in the trade deficit bodes well for second quarter growth.
Hopes of growth holding up well on the support provided by exports may evaporate, as most economies turned in dismal GDP data in the second quarter. The Japanese as well as the euro area economies showed a contraction in GDP.
The upcoming week`s economic calendar is fairly light, with only a very few market moving economic reports scheduled to be released. Traders are likely to focus their attention on the two housing market report for the week, namely housing starts for July and the National Association of Homebuilders` housing market index for August. Additionally, some interest may be evinced on the results of the Philadelphia Fed`s manufacturing survey for August, the Conference Board`s leading indicators index for July and the producer price index for July.
Housing Starts, which were inflated in June due to a change in the building codes in New York City that forced builders to start multi-family constructions before July 1st, could see a reversal. Likewise, building permits for the month of July are also expected to see weakness.
According to Global Insight`s Brian Bethune, the supply cut in response to still relatively high inventories of unsold homes will continue to generate a large negative drag on overall growth in the second half of 2008.
The producer price inflation report is unlikely to generate much interest, given the fact that it is due to be released after the consumer price inflation report. Producers are not very successful in passing the higher input prices to consumers due to weak domestic demand. Economists expect a modest increase in the producer price index for July, as they expect seasonal factors to nullify much of the increase in gasoline prices. The pullback in gasoline price happened in late July to be reflected in the month`s producer price index.
Meanwhile, the leading indicators index is likely to continue to decline for the third consecutive month due to negative contributions from initial claims for unemployment benefits and stock prices. The coincident index, which measures current economic activity, is expected to remain in the same tight range it has been nestling in.
Monday
The National Association of Homebuilders` is scheduled to release the results of their survey on homebuilders` confidence on Monday.
The housing market index for July declined to a new record low of 16. The component indexes, namely the indexes gauging current sales conditions, sales expectations and buyer traffic also hit record lows.
Tuesday
A report on housing starts, which refer to the number of privately-owned new homes on which construction has been started over some period, and building permits, which is the number of permits issued for new housing units each month, is slated to be released at 8:30 AM ET on Tuesday. Economists estimate housing starts for July of 963,000 units and building permits of 949,000.
Housing starts rose 9.1% in June to a seasonally adjusted annual rate of 1.066 million units from a revised rate of 977,000 units for May. Economists had estimated housing starts to come in at an annual rate of 960,000 units compared to the initially reported reading of 975,000 units.
However, on a year-over-year basis, housing starts declined 26.9%. Building permits, a leading indicator to housing starts, rose at a monthly rate of 11.6%, but they were down at a year-over-year rate of 23.9% to 1.091 million units.
The U.S. Labor Department is scheduled to release a report on the producer price index for July at 8:30 AM ET on Tuesday. The index measures the average change over time in the prices received by domestic producers of goods and services. Economists expect the headline index for July show 0.6% growth and the core reading to show 0.2% growth.
Producer prices for June showed a 1.8% increase, while the core producer price index increased 0.2%. Economists had expected the headline index to show 1.3% growth and the core reading to show 0.3% growth.
Food prices rose 1.5%, while energy prices showed 6% growth. On a year-over-year basis, the producer price index rose an unadjusted 9.2%.
Wednesday
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on Wednesday.
The weekly petroleum inventory report for the week ended August 8th showed a 0.4 million barrel-drop in crude oil inventories to 296.5 million barrels. Crude oil stockpiles are now in the lower half of the average range for this time of the year. Gasoline inventories and distillate inventories also declined by 6.4 million barrels and 1.7 million barrels, respectively. Refinery capacity utilization averaged 86.8% over the four weeks ended August 8th compared to 87.7% in the previous week.
Thursday
The Labor Department is due to release its customary weekly jobless claims report at 8:30 AM ET on Thursday.
The number of individuals claiming unemployment benefits declined 10,000 in the week ended August 9th to 450,000 from the previous week`s revised average of 460,000. Economists had expected claims to have eased to 436,000 from the originally reported 455,000 for the previous week.
The four-week average that removes volatility rose 19,500 in the recent week to 440,500 from the previous week`s revised average of 421,000. Continuing claims, which is calculated with a week`s lag, rose 31,000 in the week ended August 2nd to 3.417 million.
The Conference Board is scheduled to release a report on the U.S. leading index for July at 10 AM ET on Thursday. The consensus estimate calls for a decline of 0.2% for the month.
In June, the U.S. leading index declined 0.1%, in-line with expectations, and marking the second consecutive month of declines. The board revised the May month`s small increase to represent a small decline. While the coincident index rose 0.1%, the lagging index fell 0.3%. Four of the 10 indicators that make up the leading index, namely building permits, interest rate spread, index of supplier deliveries and manufacturer`s new orders for consumer goods and materials contributed positively to growth.
Meanwhile, the largest negative contributors were stock prices, average weekly clams for unemployment benefits, average weekly manufacturing hours, the index of consumer expectations and manufacturers new orders for non-defense capital goods.
The results of the Philadelphia Federal Reserve`s manufacturing survey are due out at 10 AM ET on Thursday. Economists expect the diffusion index of current activity to show a reading of -14.1 for August, an improvement over the previous month`s -16.3.
The July survey showed that the manufacturing sector continued to contract. The diffusion index of current activity rose 0.8 points to -16.3 in July. Among the sub-indexes, the new orders index was unchanged at -12.1 and the shipments index fell 1.3 points to -8. Readings on pricing spelt trouble, with the prices paid index rising 6 points to 75.6, marking its highest level since March 1980. The future business activity index, though declining 3.3 points, remained comfortably in positive territory at 18.
Friday
There is no important economic report due out on Friday.
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